Careful: UNDERSTANDING AGENT COMMISSIONS IN ECUADOR
It’s important to note, this is a post that is derived from a recent conversation during a session we presented for people looking for property in Ecuador. The conversation was around understanding how real estate agents factored into looking for real estate in Ecuador and what to expect when working with them. This specific post does not expand into the alternative options for finding real estate (going direct, lawyers, etc) – I’ll leave that for another post to address the pros/cons of those avenues. I also don’t dig into the licensed vs. unlicensed nature of would be “agents” in Ecuador in this post but based on conversations and experiences from others, that is definitely deserving of its own post.
Specifically, the discussion this is derived from found itself a point of focus when trying to explain how agents tend to work with respect to commissions on real estate and how it’s mostly stacked against the buyer in Ecuador. That led us into, how does one properly approach this to not get taken advantage of.
I’ll try to organize this into the following sections:
1) How things tend to work in Ecuador
2) The reality of what you can negotiate and should demand
HOW THINGS TEND TO WORK:
If you do even the lightest web searching on real estate in Ecuador, you are going to be presented with a litany of results. The majority of them are backed by someone who is likely collecting a commission if you choose to buy. Less common amidst those results is the “for sale by owner” type of listing. This is just a reality that is resultant of the fact that the people earning commissions are the ones most active in pushing forward listings for you to find, so they block up the web real estate as it were.
This doesn’t mean there is a problem. Many of the listings are legitimate and the commission that would be earned on them is for the most part, deserved.
However, in the pricing likely lies a little misunderstanding about how commissions in real estate, or how real estate sales are meant to work in order to protect all parties and keep things clean.
This brings us to the issue. In Ecuador, most agents are going to show you properties they represent and try to represent you as well. Yet, herein lies a conflict that is very much NOT TO YOUR BENEFIT.
To be clear:
– They are planning to collect a FULL commission on the property as both the buying-agent and the selling-agent. Full commission could range between 5 – 6% of the total price of the sale.
THIS IS NEITHER normal or encouraged in other countries (ex: USA, Canada). In fact, it’s pretty near to illegal in some states in the USA and often considered an extreme fiduciary conflict.
Here’s a quote to help understand in another way:
“Think about it this way, if you were involved in a lawsuit, would you want your attorney to be the same one the other party has?”
So, let’s consider an example to start:
– Home price: $200,000
– Agent commission (in ecuador at 5%): $10,000
This means the agent is earning $10,000 for selling you a $200,000 home. It also means, that when you try to negotiate the price, you are direclty lowering the agents commission in a major way.
With a market as depressed as the current one where you might be able to bargain down the asking price by $20,000. You have just cost the agent $1,000 of their commission.
The conflict here lies in the fact that since they represent the buyer as well, you are fighting both their duty to get the best selling price for the seller (not you) and their interest to receive the highest commission (again, not helping you). Your interests are outweighed before you even got out of the gate. Increase the pricing to a $400,000 property and now you are costing the agent more.
The issue goes even further beyond pricing of course. You have to consider the impact in the event of any kind of payment terms or legal contracts where the clauses outlined may not be created to best protect you since you only represent half of the agent’s sale equation and not the paying half at that.
This is why this practice is NOT permitted in the majority of countries where the MLS/agent system has been formalized and you should not permit it for yourself here.
HOW TO PROTECT YOURSELF
For starters, if considering using an agent, sign a contract to ensure the following:
1) They represent you as the buying agent
2) If they sell you a property that they also represent as the selling agent, you should have a reduced commission rate, agreed upon prior, that they will receive since they represent both parties. So, instead of the full 6%, you might approve for them to receive 4% and the other 2% savings in commission should be passed on to you through the reduction of the sale price of the property.
You at no point should have any hesitation in asking your agent to show you documentation providing proof of the commission percentage they are being paid along with considering it part of the negotiation. This is especially true in those cases where the property is high-priced, $500K+.
(NOTE: It’s worth noting here that this is where using a licensed agent or lawyer can help in giving you at least some type of recourse. The random expat or local down the street that brought you a great deal isn’t likely to want to sign the contract and worse, it’s likely unenforceable against them in the event of issues.)
(NOTE: It’s also worth noting an exception case here which may be instances where you are purchasing in a condominium or large-scale development community. If you have an agent representing you in this situation, their commission may already be reduced to 3-4% as condos and communities typically negotiate these lower percentage rates with respect to the volume of sales potential they offer to agents. In these cases, you should still expect to see some proof of this but probably can let your agent off earning what they have negotiated.)
Alternatively, you might consider trying to reach a flat-fee agreement with the agent for your portion. This is less common but as the owner of a flat-fee agency, we don’t even embrace the commission concept and it saves our clients a LOT of money as well as, maybe, more importantly, it removes any conflict we have in negotiating the absolute best price for the buyer since our payment isn’t affected by the final pricing.
In summary, don’t get caught in the false logic that “when in Rome, get taken advantage of like the Romans do”, because the reality is, it’s only you, innocent to the game that is going to get taken advantage of. The locals all know better and you should be focusing on getting the best price negotiation possible, not making your agent rich off your purchase.
And just for some further reading examples if you don’t want to take my word for it…
— Writer —
Sean Kelly is the owner and founder of Ecuador Expat Realty (http://www.ecuadorexpatrealty.com). He is a licensed agent in Ecuador and a 8 year veteran of real estate investment in Ecuador. He along with his wife Dahiana who is Ecuadorean herself originally relocated to Ecuador from Marina Del Rey, Ca. Since then, they developed the Delfin Villas community in Puerto Cayo, Ecuador and continue to present and teach at conferences on Ecuador Real Estate options.
This article first appeared on http://www.realestatecuador.com and is protected by the website's copyright and trademark information.