How to incentivize a real-estate broker to find me a cheap house

Question

I am looking for a house to buy. Most real-estate brokers that I know of represent the sellers. This means that they get a certain percentage of the selling price. This means that they have an incentive to offer more expensive houses, and for a specific house, they have an incentive to offer the most expensive price that the buyer is willing to pay.

As a buyer, I want to make a deal with a real-estate broker, that will incentivize them to find me a cheap house (in the neighbourhood and size that I want, of course).

I can tell them something like "I want a house in location X and size Y that costs at most Z", but then they will have an incentive to offer me houses that cost exactly Z - they will not try to negotiate with the seller to get a cheaper price.

I thought to maybe offer the broker, that instead of paying them e.g. 2% of the total selling price, I will pay them e.g. 20% of the difference between Z and the selling price, where Z is my maximum budget. Legally, it is possible to make such agreements. My question is: is such a deal reasonable? Do you have an experience making such deals as buyers? Maybe there is another agreement that is better for the buyer?

Answer 1

Here in the U.S., a realtor can act as a "seller's agent" or a "buyer's agent". I think what you are calling a "broker" in the U.S. we call a "buyer's agent", and this may just be a difference in terminology, from your post it sounds like the concept is the same. I am answering from a U.S. perspective, please let me know if something doesn't make sense in the Israeli context.

Here, each typically gets 3% to 3.5% of the sale price (at least in my part of the country). So yes, the buyer's agent has an incentive to get a higher price, even though this is contrary to the interests of the person he is supposed to represent.

On the other hand, the buyer's agent has a strong incentive to find a house at a price that you consider acceptable. If the absolute most you are willing to pay is, say, ₪1,000,000, and he keeps showing you houses that cost ₪1,500,000, he's just wasting his time. (He's wasting your time too, of course, but let's assume he doesn't care about that.) (I don't know what housing prices are in Israel today, just making up numbers.)

Suppose he has two houses that he can show you, one in your price range and one not. If he shows you the first you may buy it and we will very quickly get his commission. If he shows you the second, you probably won't buy it and he'll get zero. If he keeps showing you houses above your price range, he's doing a bunch of work for which he will never be paid.

The worst case from your point of view is if you're thinking that you're expecting and prepared to pay, say, ₪1,000,000 to ₪1,300,000, and you tell the broker that, his incentive is to concentrate on the upper end, maybe even push it a little. But still, if he shows a house that's well within your range so you'll quickly buy, he can get ₪30,000 today, versus trying to push you to go higher so he can maybe get ₪39,000 in a few months. Is the extra ₪9,000 worth several months of extra work? Probably not.

Personally, I've never had a problem with a realtor trying to push me to buy a house more expensive than I said I was prepared to pay. At least not that I noticed. Maybe they were very skillful at it and I didn't realize they were doing it, like showing me houses that were totally run-down dumps until I decided I was willing to pay more.

As to your specific suggestion: I don't know if a realtor would be willing to negotiate an alternative deal from their standard contract. I've never tried to do such a thing. Yes, this would give him an incentive to find the lowest possible price. Arguably this would create a perverse incentive to show you houses of very low quality just because they're cheap. And there would be the problem that he'd have no incentive to show you houses at or just over your stated maximum, as his commission would be zero. (Negative if it goes over slightly?)

What I did on my last house was tell the realtor, I want to start by looking at houses costing under \$X. If I can't find anything I like, I'll go a little higher. By not telling the realtor my maximum, I discouraged her from immediately going for the maximum. At least that was my theory.

Answer 2

From your profile, I see you are in Israel. The process is probably different from in the US.

In the US, an agent is usually happy to work with a buyer. After all, When I list a house, there are potential buyers all over my state and elsewhere. The best thing you can do is first, have your financing in order. A bank will be able to tell you how much you can afford and how much they'll lend you. If you approach an agent and tell them the exact range of price, area you're interested in, and other specifics such as number of bedrooms, etc, that agent should be happy to find houses to fit your request.

Obviously, an agent listing million dollar homes, busy with those all day, is not going to want to handle a buyer looking for a $200K home. But in the end, the real estate agents aren't all listing high end, and someone is moving the smaller houses as well. Often, an office will have a call center where agents who are less busy will answer the phone hoping to get a client that will bring a sale. That's one way to go. The other is word of mouth. Just ask others who you work with or socialize with if they know a good agent. In my case, I'd be happy to get such a referral.

Answer 3

Having just gone through this process as a buyer via broker in Israel, here are my thoughts:

Tl;dr: An incentive such as you are suggesting would not be particularly helpful. In this case, your best option is to spend your efforts shopping for a broker that you can trust.

The rest:

Your main concern is that the broker will find you a place at the top of your budget and will not negotiate aggressively.

The main person responsible for negotiation is YOU. You are paying for the property, and you are putting in bids: not your agent. The agent should advise you, but in the end should pass along your bids directly. The real problem is that you, as the buyer, generally do not have as close a feel for the pulse of the market as the broker, who should be quite aware of recent closings in the neighborhood. Therefore, there are a few things that you can do to help arm yourself:

1. Look at the Tax Authority's listing of real estate transactions in your neighborhood. All sales are listed by date, price, type of home, square meters, and number of rooms. Theoretically, all sales should be available, although I have my suspicions. Still, it's a place to start. Always search via גוש/חלקה (lot/section) rather than address, as the address search seems to do something strange with finding a "representative" address for a given גוש/חלקה. Even better, Madlan has the same info with a much nicer interface (you can safely search by address), and also shows property listings right alongside. As noted, I don't think this info is complete or totally up-to-date, and of course can't give you the nuance of each home (condition, pressures on seller, etc.), but it can give you a feel for what similar properties have sold for and what people are currently asking.
2. If you are very serious about a particular home, you can hire a mortgage assessor to evaluate the home before even agreeing to buy it. The report is very detailed, and should list similar local properties that have been sold, and their closing prices. Some caveats:
   • The seller would need to allow the assessor into their house. Depending on where you are in the negotiation, this may or may not be in their best interest, so certainly ask first. Of course, you could tell them that he is your brother/cousin/friend coming to help you decide...
   • This costs significantly more (around 2000-3000₪) than doing it as part of the mortgage application (under 1000₪ I believe). However, doing it before you sign may bring you peace of mind, and it is a drop in the bucket compared to the price of your property.
   • Since the purpose of the evaluation is primarily for the mortgage, they will intentionally value it very conservatively which will likely be lower than a typical buyer would pay.
   • If you plan on using the same report for your mortgage (so you don't need to pay for it again), ensure that the assessor you have chosen is acceptable by the bank or banks that you intend to use for your mortgage.
3. Look at listings on common classified boards. In Israel, yad2 and Madlan (as mentioned above) are pretty good, and there are others as well. This will not help you to understand closing prices, but you can get an idea of asking prices. Even better, make appointments to see some of those by-owner places to get a feel for the nuance. However, if they are listed by agents, you probably won't want to call them directly, because then you will still pay the finder's fee, but it will go to the seller's agent who does not have your interests in mind at all. In that case, it would be best to have your broker make the contact.

4. At the end of the day, if you have decided to use a broker, you are making a large financial commitment to hire someone to find you the best place, and therefore it may be more important at this point to spend your efforts shopping around for the best broker, rather than trying to figure out how to outsmart her. You are correct: buyers' agents DO have incentives to sell you on places that may not be right or good for you. For example:

   • Higher commission. This seems to be your main concern. In my mind though, the difference in commission between the lower and higher end of a person's budget is not likely to sway the broker too much.
   • Speed of making the sale. The faster they can sell you, the faster they can get their check and head off to the next customer.
   • Helping out the selling agent. This is really wrong ethically, and possibly illegal, but definitely happens, especially with larger realtors where both the buyer and seller's agents may be working for the same company. But there can be quid-pro-quos between competing agents as well.

   Although your scheme may help a bit with the first concern, it will not help at all with the other two, which I assume to be much more likely problems in any event. Instead, find recommendations for brokers from others. Have the broker show you a few properties and put in some low bids to get a feel for how she handles them. Discuss the properties together and try to assess if they really have your interests in mind. You are paying a lot for their service, and you should make sure, as much as possible, that they really are working honestly and in your best interest. A good broker who knows his market and is trying to help you can be a great asset in the opaque, cutthroat real estate market.

הבל הבלים, הכל הבל.

סוף דבר הכל נשמע, את האלוהים יירא ואת מצוותיו שמור כי זה כל האדם.

Good luck!

Answer 4

Shop lots of houses. Find at least three you want and start by offering a low price and working your way up. Your risk is that houses you would have liked get bought by someone else while you are negotiating, that is how you discover how much you actually have to pay to get a house.

Brokers only get paid if a deal closes. That is their incentive to get you a better price. If they know you will buy a different house unless the one they are selling gets your business, then they will work to make that happen.