It may be a coincidence, but the rise of buyer’s advocates has coincided with the continued inflation of Australia’s residential housing bubble. While advocates cannot bear entire responsibility for the ever-increasing house prices (attributable largely to low interest rates and government interference), their presence in recent years has been pronounced. Especially when the colourful head of the Real Estate Institute of Victoria, Enzo Raimondo, starts singing their praises.
Buyer’s advocates should serve a very useful purpose. While vendors are guided by estate agents, many buyers, especially younger purchasers, have little experience or knowledge of the property market and its processes (similarly, high-level executives may have commercial experience but lack industry knowledge or time to purchase a property). Raimondo did make some valid points in his weekly column in The Age last Saturday when he noted:
Buyer’s agents can be a good idea simply because most people don’t buy homes often, As a result, they are not experienced in the market, don’t know immediately the prevailing market conditions … not have the benefit of day-to-day monitoring of an area that a buyer’s agent does…
A buyer’s agent can take the emotion out of the auction and negotiation process … they engage in auctions every week and know when and how to bid to help deliver the best result.
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While in theory, buyer’s advocates are useful or even essential tool for property purchasers — the reality is not always so rosy. That is because buyer’s advocates face a pronounced conflict (much like financial planners). That is, the majority of advocates are paid based on the price of the property eventually purchased by their client (most commonly, buyer’s advocates will collect a fee of between 1-2% of the purchase price).
This may cause two things to happen: First, the buyer’s advocate may be keen to complete the purchase (this is because the advocate is paid to purchase a property, not on an hourly basis, and would be paid no more to bid at 10 auctions rather than one auction). Further, because the advocate is paid based on the purchase price, it is in their interests for their client to pay more for the property. For example, if their client pays $400,000, the advocate would usually receive $8000. Should their client perhaps overpay and spend say $450,000 the advocates’ fee will rise to $9000 even though in reality, they have done a worse job for their client.
It is, of course, unfair to be critical of all advocates — leading buyer’s advocate Morrell & Koren, which effectively created the industry in Australia, has a long-standing reputation for delivering value for its often well-heeled clients. Morrell & Koren was largely responsible for the push to outlaw the nefarious practices of dummy budding and under-quoting. A former agent himself, David Morrell told Crikey that it is not possible to be a successful advocate “unless you’ve seen the other side”. More pertinently, more than half of Morrell and Koren’s work is done “off-market”, rather than at auctions.
Unfortunately, many advocates not only lack industry experience, but do not always act in the best interests of their clients. This writer has witnessed several auctions in recent months in which a buyer’s advocate, spending their clients’ money, pursued highly aggressive bidding practices. In several instances, the advocate’s attitude appeared to cause the bidding to accelerate at a greater pace than would otherwise be expected. While in each case the advocate’s client “won” the property — the price paid was more than any other purchaser, without the helpful assistance of their advocate was willing or able to pay. This was suitable for the advocate, of course, who not only received their commission, but was paid more due to the higher selling price.
While advocates can play a vital role in negotiating and bidding on behalf of inexperienced or “time-poor” property purchasers, like the financial planning sector, the industry is prone to conflict and incompetence. In some ways, picking the right advocate can almost be more important than choosing the perfect property.