Buyer's Agent - Surprised At Their Fee Structure!!!

No worries at all @kierank and no offence taken with your use of exclamation marks
We clearly have different outlooks.

Im more open to hearing your suggestion but could you just explain to me how you calculate the "price reduction bonus" if nothing more than a price guide is given (majority of listings)?
There are many times when not even the REA knows the reserve price, they need to ask the vendor "are we on the market"?
This is the part I am having the hardest time understanding.

 

Correct - Market price is the price for that time being.
I went to a auction the house was only valued at 380K in my eyes and from research. Home sold for 455K. Makes no sense to why it went that much but some one wanted it.

 

Read that site before my initial meeting.

I assumed a BA wouldn't agree to this as they would lose control of the transaction. What sort of fee structure would be appropriate in this situation?

Initially, it was 2%, no matter the outcome, no sliding scale. When I asked them rethink their fee structure, they came back with a fixed fee (equal to 1.9% of my budget), no sliding scale.

Fixed fee on a sliding scale would make sense to me; still not as good as a price reduction bonus .

I am just opposite. I am a big believer in incentive schemes (and I don't understand why they would offend anyone). As you took the trouble to write a very detailed post, I am happy to share an example with you:

I was involved in two business which sold the same software, consulting and training. I owned one by myself and was based in Brisbane. I was one of three owners in the other and it operated in Sydney and Melbourne. Training was our highest gross profit product stream but I was disappointed with the training revenue in all three centres. In Brisbane, I put the Training Co-ordinator on an incentive scheme (while still paying the Account Managers their full commission on training sales). I couldn't convince my two partners to put the same scheme in Sydney and Melbourne. Within a couple of years, the Brisbane training revenue rose to $1M; for the same financial year, Sydney and Melbourne were around $400K each. That is, Brisbane was doing 2.5 times the training revenue of Sydney and Melbourne even though the software sales in these two cities was a lot greater than Brisbane.

The right incentive scheme rewarded the right behaviour.

We will have to politely disagree here. The BA is trying to get me to buy a property from their researched shortlist of properties that meet my criteria. That is, they are doing a 'sell job' on me. They also have to do a 'sell job' on the vendor REA/vendor as well. By 'sell job', I mean it in the nicest sense of the word.

I believe everyone in business is selling from the receptionist to the CEO. Unfortunately, not all employees are rewarded for how well they do this role; typically, only Account Managers/Salespeople. That is why I am a big believer of profit sharing schemes, the hardest thing to do is to ensure they reward the right behaviour.

I am surprised that a BA, especially a 'professional' BA, would do this. As I stated in a previous post, if a BA pulled this stunt, the total cost of buying such a property (including the Success Fee and Bonus) would most likely turn this transaction in a no-goer, from a financial perspective when one does one's DD with comparable recent sales

Agreed. Based on previous feedback, I have edited my OP and changed 'advertised price' to 'independent valuation'. I believe this improvement to my suggested fee structure will make the Bonus easier to calculate, verify and agree between the BA and the buyer. Your thoughts?

I felt the same, and dare I say it, no incentive to get me the best price.

No apology required. I really appreciated your constructive feedback and I trust you will continue to contribute to this thread.

As 'punishment', I have replied to your long-winded post with another long-winded post. I trust you appreciate my effort to explain my case.

 

Good.

When I did my OP, I wasn't too sure how the Price Reduction Bonus was going to work in practice either but, I thought it was a good idea as it aligned the BA and buyer's objectives, namely get the best property for the best price. So, I threw it out there, hoping someone would help me.

Since my OP, another poster has suggested independent valuation as the basis for the calculation. Based on this feedback, I have place an edit at the end of my OP and asked readers to replace 'advertised price' with 'independent valuation' in the 3 examples I gave. I won't rewrite the examples here but I am happy to re-post the examples with this change if people believe it assists the discussion.

I believe this improvement to my suggested fee structure will make the Bonus easier to calculate, verify and agree between the BA and the buyer. Your thoughts?

 

The incentive for the BA is to do a great job... and get referrals for being a fantastic BA.

Any 'saving' by having financial incentives aligned (somehow) would be negligible in comparison to a fantastic referral from a very happy customer.

 

Hi Kieran

We will need to politely agree to disagree on some points, including our differences of opinion on incentive scheme payments and what constitutes "rewarding the right behaviour" but that's fine as I'm very comfortable with the way we service clients and our results (and happy clients) for the last decade. As my colleague @Lisa Parker- Buyers Agent has so eloquently pointed out in her post, there are far more benefits to using a BA and you can lose good deals just chasing perceived savings in certain markets.

Some problems that I see with your theory in relying on independent vals:

* Ascertaining fair market value is not an exact science and I fail to see how the practical application of acquiring written independent valuations (assuming the BA is not providing these, unless they are a qualified practitioner in this field) for each and every shortlisted property that you are interested in is going to work. By the time your BA locates and assesses a suitable property, you inspect, concur and then engage an independent valuer every time (spending more $$$) the opportunity to buy well may have passed. Granted, the timeframe will depend on the type of market you're buying in, but it's unusual and not at all common for the majority of investors to hire independent valuers for each and every property they consider. Onerous, unnecessary and expensive in most cases.

* An independent valuation won't be accepted (in the majority of cases) by your financier for borrowing purposes. As you would be aware, lenders send out their own valuers and the overwhelming majority of the time (well in our experience anyway) these turn out to be the same as the agreed purchase price or auction result. In some rare cases (in a rising market or with unique properties) vals can return under agreed purchase price. Banks won't usually rely on independent valuations as it's their risk and thus common practice to use their own valuers.

Anyway best of luck with your 41 point search and BA quest. Be very interested to hear of the final outcome or if you decide to conduct the search yourself....

 

Since my OP, another poster has suggested independent valuation as the basis for the calculation. Based on this feedback, I have place an edit at the end of my OP and asked readers to replace 'advertised price' with 'independent valuation' in the 3 examples I gave.

I believe this improvement to my suggested fee structure will make the Bonus easier to calculate, verify and agree between the BA and the buyer.

Your thoughts?

We will have to politely disagree here. While some might see a BA engagement as a service transaction, I see it as a sales transaction. To me, an example of a service transaction is a plumber fixing your blocked toilet. Bit hard to come up with a commission structure for that. If/when I engage a BA, I am expecting to buy a property and I am expecting the BA to 'sell' it to me, based on my requirements and their research.

 

There are several issues with an independent valuer:

Firstly it will cost you, I would guess rough price for a Val is going to be about $500. I am 90% positive a bank will not value a property until contracts have been signed. This would be an out of pocket expense.

Second problem is time. If the BA has done a good job and found you something hot. Say not listed yet, got word from REA and said you have a day or two to make an offer before listing. You now have to order a Val, wait for them to inspect which may be a hassle depending on who lives there and then prepare there report. This process could take a week and by then house could be sold.

Lastly and most importantly a valuation is very subjective. I just had my land valued, a piece of land, no house! By 4 valuers, came in at 320, 350, 375 and 400.
So what happens if you got the last valuation in your independent? You could be screwing yourself over. What happens if you get the first valuation, then the BA would get screwed over. A system based on luck of the dice with the valuer you get would be a disaster.

 

Happy to do that and please don't take any of my comments as criticism or otherwise against BA in general or yourself in particular. I am just road-testing a proposal prior to submission and I appreciate all constructive feedback.

Some mis-understanding here. The only time I would getting an independent valuation would be when the contract on the property put forward by the BA goes unconditional. I would organise and pay for the independent valuation so that Bonus could be calculated and paid on settlement. I can't see why one would do for all properties on the list and, of course, one wouldn't use the BA valuations as they would fail the 'independent' test.

So, no impact on the BA process. Just an extra step between going unconditional and settlement. Hopefully, I have cleared that up.

As advised above, independent valuation will be done after the bank has approved the loan. No point doing it before then as the loan might not be approved and the contract falls through.

 

@kierank
In almost all cases the valuer will value the property at contract price. They use comparables to ascertain sales prices for similar properties. What's a better comparable than the house that just sold and what the market paid for it.

 

I am buying a $1M property and you see this as a issue. After paying S/D, legal fees, BA fees, mortgage fees, etc, I don't think this is an issue. Besides, I thought the BA would have saved me a lot more than their fees + $500.

The Bonus is payable at settlement. Why would you run off and get a independent valuation to calculate the Bonus when you don't a contract, your loan is not approved, and so on. You would only get the Val when the contract is unconditional. So, no issue here.

I don't understand why this is a 'disaster'.

Using my $1M purchase, if the Val comes in at say $900K, no Bonus payable. If the BA objects and we get a 2nd Val and it comes in at $1M. Still, no Bonus. Let's say, we get a 3rd Val and it comes in at $1.1M. If one takes the average of the 3 Val's, still no Bonus. The BA still objects, we get a 4th Val and it comes in $1.3M. Average of 4 Val's is $1.075M. This means a $75,000 or nearly a 7% price reduction. This would mean that the BA is owed 7% of the $75,000 saving or around $5,200.

We could continue to get Val's ad nauseum but sooner or later, you reach the point of dimishing returns. Hopefully, common sense comes to the fore after a couple of Val's at worst.

If all the Val's come in below the purchase price, then no Bonus. Same applies if the average of all the Val's is under purchase price. Although one might be tempted to question the value of the BA, it is pointless as the contract is unconditional.

If all the Val's come in above the purchase price, a Bonus is payable. Same applies if the average of all the Val's is above purchase price. One might suspect that you bought undervalue which is good as the property is yours. Hopefully, you are happy to pay the BA the Bonus for a job well done.

Still can't see a disaster.

 

Apart from this thread

 

Took the words out of my mouth.

I don't really understand what the end game is here. ..to go back to the BA and tell them they have got it all wrong?

 

To me, this thread is great.

If you feel it is a disaster, why are you contributing to it?

 

I have already explain this in previous posts.

 

It appears on face value that you are here just to argue and not take onboard any of the points raised by BA's and experienced investors alike.

 

Wrong but I am not going to argue.

 

So the end goal is to go back to the BA and tell them they have got it all wrong? Has the BA indicated they are open to this?

 

I come from an industry where the higher the deal size, the bigger the fee. Huge conflict of course.

 

What are you talking about? OP has asked for discussion on an alternate BA fee model and why it would/wouldn't work.

People are raising points and he's addressing them (as he just did with my own input and albanga above). That's the idea of the thread and of discussion boards in general.

If you don't like his model, that's fine. But calling someone argumentative for having a reasoned discussion (he's hardly being rude or abusive) on a forum is pretty dumb.

Does there really have to be an 'endgame' for you here? There's 20 other threads on PC that serve zero purpose outside of starting a discussion and you don't seem to take issue with them.