”Show me the incentive and I’ll show you the outcome.”- Charlie Munger
When buying or selling a house or business, you may be overwhelmed by the all the people who seem very eager to help you. It is important to remember that not everybody’s interests will always align with yours.
Take agents, for example. They represent sellers, find buyers, and make a transaction occur at the highest price possible. In order to create an incentive, they take a percentage commission from the seller. At least on paper, they want what the seller wants – a sale at a high price.
If you’re a seller, what happens if your agent can’t find a buyer? If they don’t make the sale, they don’t make the commission. This is when your best interests may be sidelined by someone who would rather make any sale over a good sale. We’ve seen agents promise both the buyer and the seller completely different things, and then push them into signing a contract they don’t agree on. Once the deposit is paid, the agent practically vanishes – they’ve got their money, and now the parties have to hand it over to the lawyers to clean up.
Likewise, mortgage brokers can help you find the best loans at the best rates. However, they don’t carry the risk of the loan – the banks do. Like agents, they collect a percentage commission for every loan they make. This incentivises them to put you in as much debt as possible, whether or not you can afford it, to line their own pocket. Like agents, if the loan doesn’t happen, they don’t collect their fee, so they’ve been known to massage the numbers occasionally.
I recently met a young fast-food employee who boasted that her “very good” broker helped her buy a house with a 5% deposit. When I asked what his brilliant advice was, the answer was simple: lie! He advised her to lie to the Revenue Office and forge some payslips. Like magic, a risky borrower became a shrewd investor. What this broker should have done was advise his client that she couldn’t afford the loan, and if she wanted to buy a house, she should find a cheaper one within her budget. Instead, he put his commission over his client’s interests.
Finally you have the lawyers. Nobody likes the lawyers. We don’t take a commission, so you have to send us money from your own bank account. Despite charging far less than agents or brokers, handing over the cash up front somehow hits harder. On the other hand, it means we are impartial when it comes to a deal going ahead – we’re trying to help you make an informed decision, not sell you anything. We’re not as slick as the agents or the brokers, we tell you what can’t be done, and we want everything in writing. We see the potential pitfalls, and having your best interests in mind, we want you to avoid them. “But the agent told me Rome was built in a day!” is something I hear too often.
Incentives matter. Agents and brokers are paid commission, and so it shouldn’t surprise anyone that they want to make the sale. Lawyers are paid flat fees, because our incentives should always align with your best interests. So next time someone tells you not to get lawyers involved because we “just slow things down”, ask yourself what they’re trying to sell you, and what their incentive is.
If you want to make sure your best interests are being looked after, contact Jack Nevile at email@example.com.