Are property buyers’ agents worth the money?

By August 14, 2019 Property Investing

Buyers agent

A buyers’ agent is a real estate professional that will help you identify and negotiate the purchase of a property according to your specifications. They typically work for property investors but can also be engaged to purchase owner-occupier homes. This blog discussed whether you should use a buyers’ agent and if they are worth the money?

Don’t forget, I’m independent!

I have no vested interest in whether my clients engage a buyers’ agent or not. I am completely independent.

The advantage I have is that over the past 18 years since starting ProSolution, I have seen the performance of many property purchases resulting from advice provided by many different buyers’ agents. Also, like in many industries, the buyers’ agent industry is small. You quickly learn what types of properties different agents are buying, and what the outcomes have been. In short, I have the perspective of being an “independent umpire” for over nearly the past two decades.

These are my musings – hopefully they help you and give you some insight.

Mostly used by investor

Most buyers’ agents aim their services at investors. There are a few buyers’ agents that will work for home buyers. However, buying a home can be a more difficult brief because there are many considerations to take into account as it tends to be a more of an emotional purchase. For the sake of this blog, I’ll focus on investors only.

It’s what you don’t know (or can’t see) that could hurt you

Selecting an investment-grade property can appear deceptively easy. You would be excused for thinking that all you need is a checklist of items/characteristics to run each property through. However, as I have written about previously, identifying a quality investment-grade property is part-art and part-science. A good checklist and some financial analysis should satisfy the ‘science’ bit. However, you typically need years of experience to fulfil the ‘art’ component.

I recall discussing a property with a reputable buyers’ agent a few years ago. The property seemed (to me) to tick all the boxes. However, the buyers’ agent didn’t like the property because the street was renowned for car break-ins. As such, tenant turnover was higher than usual. No checklist will ever tell you that. Similarly, buyers’ agents have previously told me that sometimes a particular side of the street just won’t work from an investment perspective. Sometimes there’s no logical reason for an anomaly such as this – it comes down to experience.

A professional advisors ‘experience’ should never be underestimated. In fact, as an independent financial advisor, I know it’s the most valuable attribute that I have to share with my clients. Of course, technical knowledge such as tax and super laws are important. But experience, such as knowing what strategies work in what situations, how markets behave, when to act and when to sit tight and so on are invaluable.

It is far cheaper to learn from people’s experience than learn from your own (i.e. trial and error).

You only have to be a little bit wrong to miss out on a lot of the investment return

The difference in investment returns between an average property and an investment-grade property can be significant, especially over the long run. That is, making a few compromises on a property’s quality/attributes will likely result in a lower capital growth rate. A lot of property in Australia exhibits a growth rate at, or slightly above the inflation rate. So, a $750,000 property today might be worth $1 million to $1.85 million in 30 years’ time as illustrated in the table below. However, an investment-grade property should be worth in the range of $3 million to $4.3 million. That is a growth gap of circa $2 million to today’s dollars! That’s massive.

Value of a $750,000 property in 30 years

Annual growth rate above inflation

Projected value in 30 years

1%

$1,010,000

2%

$1,350,000

3%

$1,820,000

4%

$2,430,000

5%

$3,240,000

6%

$4,300,000

Even the difference between a 4% and 5% p.a. growth rate is significant. When it comes to investing in property and selecting the right asset, you should never make any compromises!

What value do buyers’ agents provide?

A buyers’ agent might advertise certain benefits such as negotiation skills, access to off-market properties, time savings because they do all the leg work and so on. Of course, these are all benefits but not the main reason you would engage their services in my opinion.

The main reason to engage a buyers’ agent is to reduce your investment risk. That is, reduce the risk of investing in a less-than-perfect property. Of course, it’s an investment, so it can never be risk-free. There are no guarantees. However, a reputable buyers’ agent with many years of experience is more likely to select an investment-grade asset.

Investing is all about obtaining he highest return for the lowest risk. It is evident from the table above that a small difference in growth rate will make a big difference to the amount of equity you have. A relatively small investment in professional advice to reduce your investment risk could prove to be one of your best investment decisions.

How to select a good buyers’ agent

Get a referral from someone that you trust and that knows what they are talking about e.g. have used the buyers’ agents’ services previously. Of course, there is lots of research you can do including reading Google, client testimonials, looking at professional recognition and qualifications, meeting in person and so on. However, this is weak evidence compared to a referral in my opinion.

You are putting a lot of faith and trust in a buyers’ agent and paying them a lot of money. You must choose very wisely. You need someone that truly understand what makes an investment property work – not a salesman!

Make sure that the buyers’ agent can articulate exactly what makes a property investment-grade. That is, they must have a fundamentally sound, evidence-based investment philosophy and methodology that they strictly follow.

How are their fees structured?

In the main, buyers’ agents will charge to you a percentage of the property’s purchase price after a successful acquisition is completed. This percentage typically ranges from 2.2% to 2.75%, depending on the purchase price. Some buyers’ agents charge a fixed fee. Often, they will also charge a small “commitment fee” when you first engage them – so they know you are serious.

A lower fee might seem like better value but be careful. The reality is, there aren’t that many investment-grade properties on the market – particularly this market where stock levels are very thin. So, if I’m charging a much lower fee than my competitors, I need to buy more properties, in less time. As such, there is commercial pressure to compromise on asset selection i.e. buy an imperfect property. However, if I’m charging a higher fee, there is less to no commercial pressure to compromise – it can be a lot more selective. I would rather pay a fee of $25,000 to get a 10/10 property, than a fee of $10,000 to get a 7/10 property (quality wise). A notional $15,000 saving in fee might end up costing me millions of dollars in missed capital growth – just something to be mindful of.

Are fees tax deductible?

No, unfortunately. Buyers’ agent fees are considered a capital cost and as such are added onto the cost base (so it reduces your eventual capital gains tax liability). Of course, you can add acquisition costs into the loan and the interest is tax deductible.

How to instruct them

When you appoint a buyers’ agent you need to brief them about what type of investment property you want? Sometimes people include their own personal preferences in terms of locations, architectural style and so forth. I advise against this. I believe you should only set two parameters:

  1. Your purchase price budget; and
  2. That you want to invest in a property that has the most compelling fundamentals that will drive the higher capital growth in the long run. Everything else is secondary.

These are the only two factors you need to be concerned with. Fall in love with the property’s capital growth prospects, not its location or appearance. Remember, it’s a pure financial decision.

Selecting the right property is fundamental to your success

It is tempting to try and select an investment property yourself so that you can avoid paying a buyers’ agent a fee. However, in many situations, it’s a false economy. An experienced and reputable buyers’ agent will pay for themselves in improved investment returns and/or lower investment risk. Quality and astute professional advice (be it tax, property, financial, etc.) often seems expensive in the short-run but very cheap in the long-run.