• George Kruse

Buyer Reps Are Being Cut Out and You May Be Getting Screwed

Updated: Jun 10, 2019

You're Gonna Feel Very Lonely on this Investment Journey

I was recently talking to a potential client and he mentioned that he had brought up using a Buyer Representative to a listing agent and was specifically told that showing up with a buyer rep could limit his ability to make offers on properties or even see deals. This posed the question – why, in today's market, are listing agents insisting on working both sides of the transaction? If I was the buyer, and potentially risking millions of dollars, this would certainly give me pause.

To start, inventory, at least in our market, is becoming scarcer. Listing agents are competing for properties and the right to market opportunities. While many are getting agreements signed through relationships, past track record and reputation, a good handful are essentially buying listings. This can be done in two ways. The first is to cut the proposed commission structure as an incentive to the seller. However, as fees get cut lower, that doesn’t always result in that listing agent getting compensated less. Rather, the co-brokerage fee gets slashed, or eliminated entirely, to keep them nearly-whole.

As a seller, agreeing to a listing that excludes co-brokerage fees is problematic in three ways unless you’re 100% sure your agent is finding the absolute best buyer via their database (in which, case, why bother listing online).

First, this is inherently limiting potential buyers. By eliminating other agents’ clients, you may be eliminating a buyer that can provide you with a higher price, faster close or all-around better deal. A listing agent getting 100% of the commission on an $8,000,000 purchase is personally better off than an agent getting 50% of the commission on a $10,000,000 purchase. I can tell you who’s not personally better off – the seller.

Second, are you certain the agent is finding the best buyer for YOU and not the best buyer for themselves? I recently saw a property trade locally to a buyer that in no way would have been the highest offer if taken to market. I know because I had previously spoken to buyers that would pay more. This buyer, however, is an active sellers in their own right. I’ll be interested to see who lists their next property.

Third, if there is a buyer rep on the other side, and you, as the seller, “are not paying their commission” because there’s no co-brokerage, guess what, you are. I don’t care what you were told. A property buyer, if they’re being properly represented, only cares about their overall basis in a transaction. Whether it’s a $1,000,000 purchase with the fee paid by the selling agent or it’s a $980,000 purchase and the buyer is paying a $20,000 fee, it’s all the same to them. All the seller will see is the lower offer price and they’ll net the same at the closing table. In that case, why risk the other issues above if you, the seller, are paying the fee anyway?

Now that we’ve quickly covered the problems from the seller’s perspective, let’s get into what I’ll be talking about in the coming weeks – the risk to the buyer…

As I mentioned, there are two ways listing agents are potentially buying listings. The first is the lowered fee. The second is by wowing the seller with inflated listing prices higher than other brokers are willing to propose. Everyone wants to think their property is valued more than other’s in the market, just like everyone wants to think their kids are the smartest, best-looking kids in the school. By laws of averages, however, neither is typically true.

That seller has inevitably had every other agent in town knock on their door to offer to list their property at “fair market value”. Now a shiny new agent comes along and throws out some overly-inflated list price with a fancy Broker Opinion of Value package whipped up by a team of underpaid analysts. The seller envisions new boats, piles of cash and envious looks at the club and signs them up. One problem, an inflated listing price doesn’t mean a damn thing other than a protracted marketing period and eventual disappointment. Sometimes, the listing agent truly believes their value but usually that number either serves to win the listing or get a foot in the door for the eventual “price adjustment”.

The risk to the buyer, however, is that now the listing agent must double-down with an Offering Memorandum that supports this ridiculous valuation. You can’t go to market at $3,600,000 with numbers that reflect a value of $3,000,000. That agent has a fiduciary responsibility to the seller to market and support this value; which we will get to in a minute. If you’re an unrepresented buyer, what are you seeing and trusting?

How easy is it to inflate a valuation? You may be looking at a package showing comparable sales (or just finger in the wind guesses) showing a sub-6.0% capitalization rate in the market when the property actually supports a 7.0%. Look at that, a $3,600,000 valuation that’s now 20% higher than actual market value. Good luck with that financing and exit strategy.

More critical to a buyer’s property review, however, are the numbers. A buyer may see through the above simply by wanting a higher yield. It’s tougher, however, to quickly adjust when you’re digging deep into a proforma without proper market knowledge or insights. Below is the same $3,600,000 valuation:

Now the listing package is acknowledging the market capitalization rate of 7.0% so you, as the buyer, are happy. Looking closer, however, that yield is being assessed to a “proforma” Net Operating Income $42,000 higher than the actual cash flow at the property.

Now you’re telling yourself – I’d see right through that inflated number. It’s a 20% increase; it would be noticeable. I’ll tell you right now, it’s not. From “market vacancy” to “below market rents” to non-reassessed real estate taxes, a proforma can show whatever it is you want it to reflect. The above is only $117/unit/mo. I could personally find that “improvement” in five different line items if I needed to justify a value. Unfortunately for a buyer reviewing a package, every Memo will state that everything you see in there is not to be relied upon and to be independently verified. Going in with blind-trust will be a rude awakening when reality sets into the actual numbers down the road while you’re the new owner and have no recourse to claim.

If you’re to “independently verify” what’s contained in the selling agent’s package, who’s verifying it for you? As we started with above, most agent’s today will insist that it’s THEM. Let me ask you, if you wrote a Memo that said the roofs are in great shape, are you finding the best inspector to prove yourself wrong? If you claimed rents are “$100 below market”, are you seeking out the comps to show they’re only $50 below market? If you underwrote a 5% management fee in the proforma are you calling around and determining the fee is closer to 8% (or even worse, assisting in placing a budget management company at the 5% that will run the property to the ground but confirm the fee)?

Anyone that has a fiduciary responsibility to one party at the onset cannot truly take on a dual role in the same transaction. Even if you trust the seller agent implicitly, does it ever hurt to have a second set of eyes on the underwriting when we’re talking about a major investment?

Anybody that adamantly refuses to allow anyone else to check their work is the very person you should be checking.

If you’re an institutional investor, this series isn’t necessarily for you. You most likely have a team to do the work of an agent and make sure you’re covered. If you’ve underwritten countless deals in the market you’re actively looking, or you own comparable properties to verify metrics, this may not be for you as you know when you’re being bullshitted.

However, if you’re a small or independent investor, or if you’re entering a new market with its own set of metrics and quirks, you need to either insist on having independent representation or know how to cover your own ass when reviewing the shiny Offering Memorandums that cross your desk. I would (albeit selfishly) encourage you to insist on representation.

A proper buyer representative will not only ensure the numbers, comparables and assumptions are accurate but will further ensure the inspections, legal and financing are all properly vetted to protect you and your capital.

This series we’ll be doing will cover the latter – covering your own ass. We will be digging into the numbers, the presentations and the assumptions to show you where the extra $117/unit/mo could be hidden, why the cap rate on that recent purchase from a 1031 exchange is not the right comparable for your underwriting and why you better not take a “market rent” assumption at face value.

Related Video: LINK

Next week: What’s market rent and why doesn’t the current owner want it?

{Quick disclaimer: A vast majority of selling agents are listing properties at somewhat reasonable values and will look out for a buyer’s interests. At no point have I ever thought anyone was doing anything fraudulently wrong; I just believe that agents need to justify numbers and there’s a lot of flexibility in how that’s accomplished. There are also brokerages that are willing to back that up and encourage proper representation. While I don’t work there and never have, SVN ( does a great job for both buyers and sellers. Any brokerage that sets their entirely philosophy on “50% Commission. 100% of the Time.” is willing to welcome outside representation and stand behind their work. Hopefully more firms take that to heart in the future.}

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