How to choose a buyers agent

Mar 2023Karen Millers

The pros and cons of local specialists versus borderless buyers agents.

In recent years there has been a proliferation of new buyers agents across Australia. You’d think this would be good for consumers, but that’s not necessarily the case.

There are shortcuts that new entrants can take to join the industry and regulators seem unaware of the risks this poses for clients. The result is that it makes it very difficult for the average property investor to know how to choose a buyers agent.

Of course, many buyers agents are excellent and provide an incredible value-add for their clients over and above the standard pitch of “saving you time and money and finding you off-market properties”.

Different types of buyers agents

Broadly speaking, you can divide buyers agents into two groups.

The first are the “borderless”, often referred to as “FIFO”, or “fly in fly out”. These are “data driven” and decide on a location to recommend to their clients and then proceed to buy wherever the data sends them. While the principle is a good one, unless they have local knowledge, they run the risk of buying underperforming property.

The second type are “local specialists” who develop a deep knowledge of their location and the types of property that do well in that location. Over time, a local specialist acquires an unmatched knowledge of streets, sales agents and even houses. A local specialist who has years of experience will one day be able to say, “I saw that house last time it was on the market”. These buyers agents know the features for which the locals will pay a premium.

There is one problem with local specialists, however; usually they won’t advise you on whether another location might be a better investment choice for you right now.

What’s the best model for investors?

A hybrid model would be utopia, where the first step for investors would be to get strategic advice on their entire portfolio or how to build a portfolio.

Step two would entail engaging a local specialist buyers agent who can help them select the best asset and negotiate the best deal. However, as yet, I have not come across any one source that can provide this guidance.

One-stop shops are compelling for time-poor investors, particularly those with little interest in the nuts and bolts of the property purchasing process.

Some investment advisors sell a portfolio plan that is designed to sell you a mortgage, accounting advice, buyers agency and sometimes property management too.

Plus, you’ll buy a cheap property at the beginning so there’s enough capacity left to maybe buy one or two more – ka-ching! But this isn’t necessarily in the best interests of the investor and with borrowing constraints, you might end up lumbered with only one dud property instead of a braggable quantity.

They’ll argue that diversification is smart, however, if you’re buying a handful of poor performers instead of one high performer, spreading the “risk” ends up becoming the risk.

On the other hand, if you focus on buying one investment grade property (not to be confused with investor stock) as is touted by many property experts, how can you be sure you’re choosing “the one”?

How important is data in choosing the best location in which to invest?

It seems so logical to rely on “the numbers” and remove emotion but this can only take you so far.

Data can and does mislead people when making property decisions. Information is readily accessible, but how do you discern which is relevant versus the white noise?

There are a lot of very clever marketers out there who peddle their latest “data-based strategy”. Yet anyone who has studied even basic statistics knows that “the facts” can be bent and twisted to suit a narrative.

Experienced property data analysts often say the longest forecast period that can be committed to is two years.

Data is very good for understanding underlying market drivers, it’s great for back testing theories and for reviewing performance. Sometimes it can be used to predict an area that’s poised for some growth.

But, here’s the rub, property needs to be a long game. Chasing these short-term sugar hits may make an investor feel good initially, but if it doesn’t translate into long-term growth, it’s a fail.

The problem with basing decisions on macro data is that nobody buys a piece of “Capital city property market” or an “Inner city property market” or even a “Regional centre property market”. Instead, buyers make one decision at a time and gamble everything at that point on whatever thesis they have formed and whatever property they decide is the best option.

The data may point to a location but if a buyers agent cannot master the art of asset selection, all the clever data analysis is to no avail. I can show you numerous case studies of properties that have risen in value in a falling market.

Conversely, there are as many examples of property falling in value in a rising market. If you don’t blend the science with the art of property selection and evaluation, you’re missing out on the icing on the cake.

Of course, if you have a hammer, every problem looks like a nail, so an investor who goes to a local specialist and asks “where should I invest” is likely to be encouraged to buy in their patch.

There is a workaround. Start with your budget then interview buyers agents in different locations. Ask what your budget buys in their area of specialisation, in terms of price and property type. Would they recommend these properties for investors who seek capital growth and, if not, why not. Then ask how much you need for an A-grade asset in that location. This will better equip you to choose a location to invest in.

How to spot an expert buyers agent?

Local specialists may be better placed to buy superior assets than borderless buyers agents but it is a case-by-case basis. If a borderless agency has a local specialist on their team who is based in the area, that may well pose a good solution, assuming they pass the interview checklist (see breakout box).

Local real estate agents and buyers agents alike will regale you with stories of what out-of-town buyers agents buy and the prices they pay. You could ask any local specialist in Brisbane, Hobart, Perth or Adelaide and they’ll tell you horror stories.

I’ve spoken to regional sales agents who tell me of FIFO buyers agents who snap up all the low grade stock they can feed them. They probably convinced their clients that their “relationships” are what led them to these “off-market investment opportunities”. The sales agents’ stories are the complete opposite – they’ve found a buyer who is ignorant to the pitfalls and traps that local buyers avoid, one who will pay more than the property is worth. Then the buyers agent spins the numbers and pitches it as “below market”.

If you choose to go with a buyers agent, whatever decision is reached in choosing a buyers agent, it’s important to choose an experienced specialist who has a demonstrable track record over many years and many market cycles for being able to identify high performing assets.

What to ask your prospective buyers agent

  • How long have you been working as a buyer’s agent?
  • Did you start out as a sales agent?
  • What is the minimum budget for an A-grade property in your area?
  • What is your methodology for identifying an investment grade property?
  • How do you measure performance? (Beware instant equity lifts and high yield)
  • Can you demonstrate your due diligence process?
  • How do you work out the right price to pay for a property?
  • Ask them to show you examples of all of the above.
  • Ask for case studies – and look back 10 years, because property is a long game and it’s only after a number of years that clients will even know whether they made good decisions.
  • Voluntary memberships – check REBAA, PIPA and your state or territory’s REI to ensure they are what they say they are.

Originally Published: Veronica Morgan | Australian Property Investor | 16 March 2023

https://www.apimagazine.com.au/news/article/how-to-choose-a-buyers-agent

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