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Property Investment Philosophies
Is it better to to pay a fee or for the agent to take a commission when buying property?
Property agents have to make money somewhere for the services they provide. There are two main ways they do this:
1. take a commission from the seller
2. charge a fee to the buyer
But as an investor how do you decide which is best?
advantage - investors need less cash upfront for an investment
advantage - this money can be mortgaged as is part of the purchase price
disadvantage - they are not transparent and the agent is more likely to be working on behalf of the seller not the buyer
disadvantage - less likely to be offered investments in cities where developers give little or no commissions to agents, thus investors miss out on quality investments
disadvantage - investors need to pay the cash upfront
disadvantage - this money cannot be mortgaged
advantage - agent works on behalf of you the buyer as you are paying them
advantage - you get access to investments that you would not get via a commission agent
advantage - fees are often much lower than commissions taken, hence you get a better deal
The above assumes that the fees and commissions charged/taken are at the same level!
Naturally if it is better to pay a 3% fee for a property and get a discount of 10% than to pay no fee and the agent take a 10% commission and you get no discount.
Unfortunately with commission based agents this is often the case - particularly in coastal / ski locations, the commission are very high indeed (often 5-20%) and thus as an investor you really are not getting a good deal.
But if the fees / commissions are at the same level which is better from a return on investment point of view?
In low or high growth markets the fee based deal (with a good discount) outperforms the commission based one slightly.
The exact answer depends on how much discount is achieved and at what rate the market is growing at - see downloadable spreadsheet.
Overall, the conclusion we draw (when fees and commissions are the same) is that it does not really matter too much.
The important thing is the deal is a good one - good price, good market, good location etc.