Trust

aaronbest.jpgI think that lack of trust between buyers/sellers & Realtors in the Real Estate industry is a major problem, both for consumers and the Realtors.  This lack of trust is caused by many factors.  Consumers may pay too much or sell for too little. They may not understand what happens in a transaction or why, and conclude that they’ve suffered.  They may sell and find that the house has been flipped soon after.  They may buy and discover that there are hidden costs.  Realtors, on the other hand, are often burned by clients who don’t reveal their true intentions, don’t take advice, or who buy/sell with the competition. 

As a result Realtors and the industry are commonly raked over the coals by the general public. Some people claim Realtors are the cause for high prices, and generalize that all Realtors are untrustworthy and out only for themselves.

On the Realtors’ side of things, there is a common saying: “Buyers are liars & Sellers are worse!”  This is rooted in the common observation that a buyer will come to a Realtor wanting to buy a condo for $100,000 in Coquitlam. After spending lots of time and energy the Realtor gets a Monday morning call advising him the the Buyer stopped in an open house in Kits on the weekend and is now the proud owner of a duplex!

The distrust is a double edged sword. A client that does not trust his/her Realtor might ignore genuine advice, potentially leading to a missed opportunity or a loss of money. A Realtor that does not trust his/her client may put them on the back burner in order to help more qualified clients. Either way nobody wins, and everybody leaves with a bad taste in their mouth.

Trust is probably one of the most important factors in building a successful relationship with your Realtor. It is important to establish trust before you begin buying or selling real estate. It would seem that this step goes without saying, but I cannot stress this point enough. Trust is the foundation that everything else is built on, and its in the client’s interest to deal only with a Realtor that he/she trusts.  Some of the best client/agent relationships emerge from pre-existing relationships where trust had lots of time to develop. The challenge in most cases, however, is to build the trust in a compressed time frame. Again, it is in the client’s interest to deal with a Realtor that he/she trusts.

From a first hand point of view, my most successful clients trust that I give them the best advice I can, and which I think is best for them.  Even if they disagree with me, we can have an frank & open conversation to come to a consensus on what the course of action will be.  Pricing is a great example.  I can suggest, for example, a price of $265,000, only to find my client is set on $295,000.  I’ll share my research and my thoughts.  We may agree to disagree on value, and list at $295,000, but I’ll register my reasons with the seller.  Being frank and open means that I admit that I could be wrong about the price.  It may sell in the first week for $295,000.  However, if it doesn’t the trust between myself and the seller will allow me to ask for a price reduction and will allow him/her to understand why he should give it to me.  A smart client will realize that my idea of value is very objective and market based, while his/her diea of value is emotionally based, and has a substantial dose of greed (which isn’t always a bad thing).  In that conversation the owner often admits that my value may be more realistic, but that his/her greed may pay off.  We both realize that its a little more work for me, but if he/she gets lucky he/she benefits, and sometimes by a substantial amount. His/her benefit, after all, is the goal, and if we come to that conclusion through frank and open discussion I’m happy to commit myself.

Good clients understand the market and the risks. They are reasonable and realistic about values. They understand that an ongoing client relationship can bring a stream of benefits. Most importantly they honour the relationship because the trust was established from the beginning.  The proof that the client honours the relationship is proven when difficult challenges arise: the sophisticated client works through the challenge with the Realtor, and maintains the relationship into the future.

Clients who employ numerous Realtors and commit to none of them often experience failed ventures, and end up blaming the Realtors. The real reason the client is left unsatisfied is because he/she plays the field and commits to nobody. Realtors either aren’t stupid, and realize that the client is employing other Realtors for the same job, and so they don’t put forth a 100% for that client, or they are stupid, don’t realize anything is amiss, but are poorly equipped to accomplish anything anyway.  The result is the same.

Unrealistic clients selling their home think their home is worth more than the market does. They’ll employ the first Realtor that tells them what they want to hear. Of course this scenario usually turns into multiple price reductions, and/or an expired listing, but with a deep distrust of Realtors.  This is due to a misunderstanding of the process.  This is understandable: some pros would say that the Realtor lied to the client. Not because they are dishonest, but because he/she knew that they were only going to get the listing by telling the client what they want to hear.

Sometimes I run into unrealistic buyers who are recent ‘get rich quick’ grads.  They expect to find  investment property that is cash flow positive in the Lower Mainland with 10% down. In theory that’s a great plan. In the reality it’s not going to happen.

What does happen is that the client will view a million properties and write low ball offers based on their misguided perception of value. When the Realtor tries to explain true market value, or why the Seller countered their offer at full price, the Buyer begins to think that his/her Realtor is not representing their best interests, and maybe just trying to push them into a deal for the commission. The Realtor is left in a difficult position, trying to negotiate with the Seller, and left to convince his/her client that they are getting a good deal. It is not the Realtor’s job to convince the client of value. It is the Realtor’s job to advise on value. It is pretty tough to advise if there is no trust.

 A sophisticated client will look at the numbers that the market supplies (and which are provided by the Realtor), do the math and recognize things as they are.  They will work with the Realtor to maximize the upside, but won’t waste time trying to achieve the impossible.  In contrast to the unrealistic client they will actually do business and build wealth.

In summary, a trusting relationship with a Realtor can deliver a lot of benefits to a client, whether the client is a repeat investor or someone who buys or sells very rarely.  As a client you should make establishing trust your first goal. This brings us to the question of the incompetent Realtor that you absolutely adore because of his or her personality.  If you know that they can’t sell your house, but you really like them, will you give them the listing?  Traditional wisdom says that you will 🙂 My advice is make trust very important, but have competence follow close behind.  A trusting relationship with a competent Realtor can be great.

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26 Comments

Filed under Aaron Best, Investment Approach, Uncategorized

26 responses to “Trust

  1. null

    Fantastic advice, for the 99% of the general public that don’t read the local real estate blogs, or take the time to educate themselves properly. But, this is essentially preaching to the choir.

    I agree that trust is integral to a buyer/seller & realtor relationship- but with so much information at hand, I can become easily as educated on nearly any topic as the person selling it. The dealership I bought my car from admited as much. How is this so different when buying or selling real estate? Where is the value-add in hiring a realtor then? Trust surely isn’t enough.

    At what point do you say ‘what service(s) are you really providing me?’ if you already know what properties are available, what the trends were/are in a neighbourhood; when it sold last, and for how much; what to look for in a home inspection and how to have one done on a property, how to stage a home, when would be a good time to sell and for how much, arrange financing, etc.?

    6% seems like a steep price to pay for paperwork, regardless of whether you’re the buyer or the seller.

  2. whybuywhenucanrent

    It’s nice to say “we should all be sophisticated clients and professional agents.” Or that “we should all trust each other”, but there are some structural problems in the way RE works that make trust impossible.

    For instance:
    * No incentive to keep closing price down
    The buyer’s agent benefits financially by running the price up. If the commission structure were changed so the seller’s agent benefitted from a high price and the buyer’s agent from a low price, then you could actually trust your buying agent. As it is, there’s some serious mental gymnastics that a buyer’s agent must perform to warrant trust.

    * Playing Dumb.
    RE agents benefit by “playing dumb.” You hear it all the time if you go to open houses. Newby buyers ask “do you think I could put a second floor on this place?” and the RE agent says “Oh, I’m sure you could do that without any trouble.” Now, the RE isn’t expected to be an engineer and planner, but they should be smart enough to know what the basic restrictons are, and convey that, rather than a smile, an affiremative answer, and a “hagve another cookie!” Go to 10 open houses, and you’ll hear 9 RE agents “playing dumb.”

    * Exclusivity.
    Once you sign up with an agent, you can’t switch out, you can’t buy a FSBO, etc. If you find out your agent is a jerk or an idiot (a full 10% of the population and jerks and 30% are idiots), you can’t switch out. A family member left $50,000 on the table because their selling agent was an idiot. I missed a hot deal on a house because my buyer’s agent sat on my offer for a day.

    Fix these problems and you’ll automatically have trust. Leave the problems there and it’s a “buyer beware” and “client gets screwed” environment. You can work on building trust, but it will always be eroded by these structural circumstances which incentivize misrepresentation and fail to reward excellent performance.

    Whybuywhenucanrent!

  3. Snick

    My gawd you look YOUNG! How old ARE you?

  4. Skeptic

    whybuywhenyoucanrent has some good points. I think most of the mistrust stems from the way realtors are paid.

    From the realtor’s perspective, there’s probably tons of futile effort poured into deals that don’t work out, so when they get paid it needs to cover this otherwise unpaid effort.

    From the buyers and sellers perspective, the realtors on a transaction make a bunch of money, often without a huge visible effort. I’d like to know how it works out as $/hour for a deal successfully closed. The way realtors are paid doesn’t align with the buyer’s interests or the sellers interests.

    As a seller, I’d prefer to cover the agent’s true costs with a nominal profit for achieving the agreed listing price and then give them 30% of each dollar over or something like that. Realtors would probably figure this game out though and provide much more realistic (lower) list prices.

    As a buyer, I’d prefer to pay an hourly rate for effort and costs and this would remove the risk for the buyer’s agent.

    The way it is now, the buyer and seller in a transaction are both subsidizing all the time wasters that realtors are dealing with.

    There’s no incentive for a selling agent to get a high price for a seller and no incentive for a buyer’s agent to get a low price for a buyer. Until that changes, people will have their doubts about realtor’s intentions.

  5. jim

    Well I was a trusting supporter, and reader of you and your blog. I had even recommended some business to you. But a simple question revealed your true stripes. Good luck.

  6. R.E. TARD ED

    Aaron, a good client is one that has a conscience. A good agent also has to have a conscience.

    IT TAKES ONE TO KNOW ONE.

    From what I gather, Rob expects clients to be honest and to come to him. C’mon get real, I ain’t gonna build a relationship that is one sided. You want a commission then be equally willing to befriend your clients. Cut the crap. Arrogance gets you nowhere. Commissions are potentially waiting.

  7. Anonymous

    jim, don’t be a spaz.

  8. Skeptic

    Jim, what’s your point. And does ‘good luck’ mean you are leaving us ?

  9. dingus

    Normally, I don’t bother posting here, but this post seems disingenuous. Advocating ‘trust’ where there is no incentive is either naive or the pointless ramblings of a salesperson.

    The commission structure does not reward ‘trust’. Clients are not on the hook for the agent’s time if it does not result in a sale. The agent is never disciplined for not advancing the agent’s interests adequately. The ‘trust’ you seek would be advanced if clients paid you for your time and were bound to you via an agency agreement. Why not get a retainer for services and perform those services for which you would receive payment? As it is it is very unclear what the relationship between the client and agent is and what the mutual obligations are. In turn, it is hard to know what the recourse if those poorly understood obligations are unfulfilled or the ‘trust’ violated. All the client knows is that the realtor gets paid on closing. The agent’s interests and the clients are not synonymous.

    The whole industry needs structural reform. Hoping for better clients and agents is absurd.

  10. mike

    Agreed. Realtors are being disintermediated and until they accept that, I can only trust them to be self serving individuals with a tenous at best grasp of reality

    Some realtors have accepted the new way things are being done, and I trust them a great deal.

  11. LesserApe

    I’d agree with Aaron that trust can be incredibly important in business relationships. However, I’d disagree that it’s possible to establish trust before one begins buying or selling real estate.

    Trust is built over time, and shouldn’t be the default position that people begin a business transaction with someone they’ve just met. Instead, I think an open mind is what both parties need when forming the relationship. Trust will grow with time as the relationship matures and people start to understanding the other peoples’ points of view.

    One of the advantages Rob might gain from this blog is trust. After reading it for a year or so, I can understand his perspectives better than if I had met him for the first time.

  12. jim

    skeptic : Rob deleated a couple of posts of mine. so why should I put any effort into this blog?

  13. dingus

    ‘skeptic : Rob deleated a couple of posts of mine. so why should I put any effort into this blog?’

    Ah, trust. Warm and fuzzy, as only a salesperson can be.

  14. robchipman

    Jim:

    I didn’t delete any posts that I could identify as yours. I have deleted a few of one particular person’s posts when he gets a little off base and offensive. Over the life of this blog I’ve deleted probably less than 20 posts altogether, and 80% of those were from the same guy. I haven’t deleted any posts in the last few weeks. If you posted something with your name and its missing I can’t explain why. Feel free to post the substance of them again.

    The problem you and I have right now is that I clearly think you expressed some pretty offside comments directed at me. It may not have been your intent. If not, and if I misread you, I’m all ears. My feeling is that you’ve ignored a lot of what I’ve said and you’ve made some stupid assumptions. Its easy for you to clear that up.

    In regard to this post, I’m very impressed with the comments. I like the sentiment (there seems to be a desire for information) but I’m also surprised at the lack of understanding of this business. When Aaron and I talked about the post I mentioned to him a US Realtor blogger who’s theme is transparency. I think there is a lot of room for expansion on some of the things that have come up here.

  15. aaronbest

    ***whybuywhenucanrent***

    “No incentive to keep closing price down”…”The buyer’s agent benefits financially by running the price up.”

    How about the incentive of a long term relationship? Or referrals to that client’s co-workers, friends & family?

    Financially? If we look at the commission structure. A buyers agent would “benefit” a whopping $11 for every extra $1000. Let’s just say the buyers agent “runs” the price up by $10,000. That’s an extra $116! What penalties and legal fees do you think this Realtor will incur, should the buyer find out that they over paid?

    ***Playing Dumb.***

    If a Realtor confirms that something can be done, but in fact it cannot be done. That Realtor will face some serious penalties and/or suspensions & re-education. If the Realtor does not know. He should state the fact, and tell his client that he will find out the right answer. There is way too many headaches and consequences to just sluff through, or “play dumb.”

    *** Exclusivity*** “Once you sign up with an agent, you can’t switch out…”

    Actually you can fire your agent at anytime. If your agent isn’t living up to your standards, then you just cancel the contract. The purpose of the contract is to outline what your Realtor will be doing for you, and to ensure that you work with only one Realtor at a time.

    “Fix these problems and you’ll automatically have trust. Leave the problems there and it’s a “buyer beware” and “client gets screwed” environment.”

    I think what needs to be fixed is the lack of understanding. It has been said, “people fear what they don’t understand.” The lack of understanding leads to a general dis-liking & dis-trust. Misinformation stated as fact is the real problem.

  16. jesse

    “No incentive to keep closing price down”

    You are right the economics are not working in the client’s favour. However bumping the price up by something like $10,000 would translate to only $100-200 more commission, the risk the deal may fall through with the client walking away, and the risk to reputation. The problem is you never know if you have a Realtor that has long-term business interests on his/her radar or is speculating on how desperate the client is. Trust.

    I would use referral when choosing a Realtor, letting them know who referred you so at least the knowledge that future clients are networked together is on the table. Also I would choose carefully the source of referrals: some family or friends may refer but want to save face by showing they made a good choice, so the referral is suspect.

  17. jesse

    “Actually you can fire your agent at anytime”

    This is often misunderstood and frankly often miscommunicated by Realtors. You can stop working with a Realtor any time. Correct me if I’m wrong but you can terminate the contract without cause on the buyer’s end anytime, though I’m not so certain on the seller’s end. Termination with cause (agent does not keep appointments, does not return calls, does not present offers, has small number of showings, etc.) is always possible but should be done in writing.

    Often a good seller’s contract will lay out what you can expect (listing on MLS, X number of open houses, appointment commitments, time lines for returning calls to buyers, signage, etc.) so there are fewer misunderstandings and less to quarrel over when the uncomfortable phone call happens.

  18. jesse

    “The whole industry needs structural reform. Hoping for better clients and agents is absurd.”

    dingus: There are many parallels: car mechanics and dentists come to mind. I know there are dishonest car mechanics but there are also good ones. Painting a profession with one brush is not fair. From my experience there are professional and honest Realtors around. The trouble is determining who is and who isn’t.

    I believe you have a valid case: certainly the Realtor’s overseeing body needs a major PR overhaul, needs to be more transparent, and will likely need to be more diligent in dealing with the problem members. Until these happen, Realtors should not be surprised there is mistrust.

  19. dingus

    ”…”The buyer’s agent benefits financially by running the price up.”

    It’s not so much that, but they have no interest in advancing the buyers interest in holding out for a lower price, as it jeopardizes getting the commission. How many versions of “sometimes you just have to stretch” have realtors used to sell properties to their buyer clients?

    But the issue is also about value. Presenting clients with a bill for the services performed and having to defend it goes a long way to enforcing value for service. Commissions don’t work that way. As far as I can see it, realtors do less due to intermediation and earn more due to rising prices. Nice work, if you can get it.

    If the industry wants to be seen as ‘professional’ and not leeches, get better barriers to entry to the profession and get a better complaints and discipline structure. Reform the commission structure, and provide fee for service based on time or itemized tasks selected by the client (eg $x an hour to attend open houses, $x monthly subscription to new listings feeds, subscription to info such as closing prices and market data, $x to present an offer, $x bonus for getting accepted offer, $x for handling closing. )

    No need for the soft focus pap about trust. The client pays for what it gets and gets what it pays for.

  20. Anonymous

    “Correct me if I’m wrong but you can terminate the contract without cause on the buyer’s end anytime, though I’m not so certain on the seller’s end.”

    There’s no written contract until you make an offer anyways. The blue sheet isn’t a contract, its just spelling out realtor’s responsibilities.

  21. aaronbest

    “There’s no written contract until you make an offer anyways. The blue sheet isn’t a contract, its just spelling out realtor’s responsibilities.”

    Actually there is a contract called an “exclusive buyer’s agent agreement”. It sets out the responsibilities of both the buyer & the Realtor, and how long the relationship will last. (I’ll post a link to the form in a later post.

    The blue brochure (Working with a Realtor) is not a contract. It is an information brochure explaining how agency works. The client signs the brochure to acknowledge that they have had the brochure explained to them.

  22. 'Lil ole Me

    aaronbest said

    “That’s an extra $116! What penalties and legal fees do you think this Realtor will incur, should the buyer find out that they over paid?”

    That is hopelessly naive. “over pay” is entirely relative, therefore unless the agent is GROSSLY negligent or he actually goes around telling people how he’s screwing clients out of money nobody could ever prove anything.

    I think a more common problem is agents pressuring their clients to take an offer that’s too low/high (depending on buying or selling) just so they can get the commission and move on.

  23. whybuywhenucanrent

    aaronbest wrote:

    >> “No incentive to keep closing price down”…”The buyer’s agent benefits financially by
    >> running the price up.”

    > How about the incentive of a long term relationship? Or referrals to that client’s co-
    > workers, friends & family?

    Most folks don’t buy or sell houses very often. It’s a real foreign procedure to most members of the public. The point of having RE agents is so that Joe Sixpack doesn’t need to know all the ins and outs of RE transactions, and has someone acting on his behalf. If folks only buy houses once every 5-10 years, they’re not going to have a clear idea of whether their getting screwed or not, and won’t be in a position to advise their friends of the quality of their representation.

    > Financially? If we look at the commission structure. A buyers agent would “benefit” a
    > whopping $11 for every extra $1000. Let’s just say the buyers agent “runs” the price up
    > by $10,000. That’s an extra $116! What penalties and legal fees do you think this Realtor
    > will incur, should the buyer find out that they over paid?

    How would anyone ever know? Sellers agent might have passed on a comment that “seller will be lucky to get $500K for the place” listed at $550. Buyers agent knows buyer likes the place and can pay up to $600K for the place. Where’s the incentive to represent the buyer’s interests? Goes the other way, too. And don’t agents get 3% each in BC? That $50K is a whopping $1500.

    > If a Realtor confirms that something can be done, but in fact it cannot be done. That
    > Realtor will face some serious penalties and/or suspensions & re-education. If the Realtor
    > does not know. He should state the fact, and tell his client that he will find out the right
    > answer. There is way too many headaches and consequences to just sluff through, or “play dumb.”

    It’s not always malicious, not always overt. How is anyone supposed to prove that the RE agent actually knew that there was a 10′ utility easement across the back of the property? Maybe I’ll go to some open houses and make notes of all the dumb things that RE agents are passing on to potential buyers.

    > Actually you can fire your agent at anytime. If your agent isn’t living up to your
    > standards, then you just cancel the contract. The purpose of the contract is to outline
    > what your Realtor will be doing for you, and to ensure that you work with only one
    > Realtor at a time.

    The last time I signed an RE contract it said that “if the agent shows you a house, and you later buy it after this contract has expired, etc., you owe Mr. Agent his 3% commission.” This wasn’t in BC. If the BC laws don’t have this “feature”, then all the better. But there must still be something to keep buyers from using an agent for a while, finding the place they want, then scampering off to a different agent to close the deal, right? I’m curious as to how this works in BC.

    Jesse wrote

    > There are many parallels: car mechanics and dentists come to mind.
    > I know there are dishonest car mechanics but there are also good ones.

    Yeah, but with a mechanic or dentist, you conduct business on a regular basis, it’s easy to comparison-shop, and the results are immediately telling. If your teeth hurt, you’re not going to refer the dentist. Same if your car breaks down. And if you pay an extra $400 for a car repair, it’s not going to have a lifetime financial impact. But if your buyer’s agent lets the price run up $25K on you, you’re not going to know it. Only way you’d know it is if you happened upon a couple nearby places that sold for less. Maybe in a condo tower, but not in the SF market.

    Again, you can’t expect Joe Sixpack to know squat about buying/selling a house, the RE agent agreement should be structured to provide better rewards for the selling agent to get a high price, the buying agent to get a low price, and minimum requirements for service and expertise.

    ********

    Another issue on this “trust” business

    –RE agents inflating the bubble–
    Since buyers and sellers agents both have an incentive to see prices go up, a lot of them are going to push for higher prices. You see the whole industry excited about higher prices. What does this result in? Higher prices. There’s no reason for RE to cost so much, the inflation benefits the older generation and investors, and saps the livelihood of upcoming generations. Is that a good thing? Is it equitable? Why don’t we restructure the incentives so 50% of RE agents income comes from seeing prices stay low, and 50% from seeing prices go up?

    Whybuywhenucanrent?

  24. aaronbest

    “That is hopelessly naive. “over pay” is entirely relative, therefore unless the agent is GROSSLY negligent or he actually goes around telling people how he’s screwing clients out of money nobody could ever prove anything.

    I think a more common problem is agents pressuring their clients to take an offer that’s too low/high (depending on buying or selling) just so they can get the commission and move on.”

    While I’ll agree it can be difficult to prove if you have over paid, or accepted too little. It is not impossible, especially if the client felt pressured. Your agent should never pressure you. His job is to advise you on the facts. The final decision lies with the client. A good clue that you are working with the wrong Realtor, would be feeling pressure.

  25. aaronbest

    whybuy said…”And don’t agents get 3% each in BC? That $50K is a whopping $1500.”

    A buyer’s agent typically gets paid roughly 3.22% on the first $100,000 & 1.15% on the reminder. That extra $50,000 pays an extra $750.

    Which brings up a good point. The only reason someone may pay $50,000 over asking would be due to a heated multiple offer, and an emotional whim. Otherwise, if it is just a single offer, stats will & should play a major role in negotiations.

  26. jesse

    whybuy… said: “the RE agent agreement should be structured to provide better rewards for the selling agent to get a high price, the buying agent to get a low price…”

    This sounds reasonable. ‘Lil ole Me hit it on the head: pressure to raise asking prices to close the deal can be huge — it means all or nothing for the agent. But that works for buyer, seller, and agents alike, as long as all are rational.

    In a seller’s market, emotion and fear can lead to bad buying decisions but how do you prevent such stresses if supply is limited? I certainly see the point that a Realtor, out of desperation or greed, will turn the screws and play off emotion to get a deal done. In a buyer’s market (if we ever see one…), emotion and fear work the other way if that’s any consolation. Probably not. Perhaps aaronbest can provide some insight on how to handle agents who start playing to emotions.

    In any case you need firm control over your emotions when doing high stakes deals like these. It’s a business deal. I don’t know if another level of regulation is the answer but you have good points.

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