Q: I read with interest your recent item on negotiating real estate commissions. I'm a lawyer, although not a property lawyer.
It certainly is possible to negotiate, but it is made difficult by the underlying division of the commissions.
I understand that commissions are often divided roughly 50/50 between the agents and the agencies. Of the agent's 50 per cent, that may have to be shared with a colleague involved in the selling, and almost certainly with the agent who obtained the listing originally.
Of the agency 50 per cent, I understand it is split roughly 50/50 between the area franchise holder and the master franchise.
Sometimes, especially in rural areas or small towns, the agent may well have an interest in the area franchise. If not, the agent on the doorstep does not really have much room to move, and has to go back up the chain to start giving decent discounts, or incentives.
That said, I was involved in two sales of my family interests in the Wairarapa in 2006.
In the first, I asked agents to cut commissions, but didn't make much progress. All sorts of reasons given, including that they were bound by the institute to charge in a particular way; until I pointed out that the Commerce Commission might be interested to hear that.
On the second property, a registered valuer said $206,000, which we thought was pretty high.
I was approached by an agent who swore she had a definite buyer. I told her to act as a buyer's agent and get her commission from them. No way would she do that. She even claimed it was illegal, which of course is nonsense.
She said we would be lucky to get $200,000, but quickly changed that when I said if her buyer was for real she had no additional expenses, and I would pay 1 per cent on $200,000 and 33 per cent on everything above that.
Within a day we had a deal for $235,000. So, we paid nearly 6 per cent, but still got between $10,000 and $20,000 net more than was otherwise likely. Then the real fun started.
An agent whom I had approached initially heard about the deals, and rang me, absolutely furious.
Claimed he did over 40 per cent of rural sales in the Wairarapa, and such big deviations from the standard commissions were illegal. Threatened me with the Real Estate Institute. I said, go ahead.
He said I would be unlikely to get a lawyer to act on such deals (which was weird by any standard), and when I said I was a partner in a big firm (Chapman Tripp) he threatened me with the Law Society. Again I said, go ahead, do you want their phone number?
Finally, he tried to get me to undertake not to tell anyone about the deals. Fat chance.
I hope you found this ramble (longer than I intended) of some interest.
A: I did have to trim your letter, but it's a great story.
I hope it inspires others to negotiate commissions, and to stand their ground. With property prices so high, even if the commission cake is divided four or five ways there is still plenty to go round.
Q: I always admire your measured and sensible advice in your column. However, you seem to have it in for real estate agents.
You recently suggested that a tiered commission will make the agent work harder to get a better price. Mary, the agent always gets the best price the market will allow. The agent does not determine the price and to suggest such is misinformed and does our industry a disservice.
And yes, in this very competitive environment invariably commission is negotiated. As a successful agent now for 29 years I am disappointed that you are perpetuating the image of the greedy and overpaid real estate agent once again.
A: There's an example above of an agent getting a higher price when motivated by high commission. And I don't think there's anything wrong with that. We all try harder when the reward is bigger.
Anyway, it's good to hear that commission negotiations are common. And I'm sure that many real estate agents act honourably.
P.S. I know how it feels to be in a job not widely respected. Journalists are always on that list too, along with politicians and car salespeople.
Q: Recent correspondents have been pondering self-insuring their homes, and we worry they have underestimated the risk. We don't work in the insurance industry.
We're "insurance winners" who will never pay in premiums what we received when our house was written-off in the Christchurch earthquake.
We purchased a property early in 2010. It was deemed unrepairable after February 2011. Yes, working through the insurance process was long and stressful — and we can understand the distrust some have for large insurance companies.
Eventually, and with the advice of our own quantity surveyor, we negotiated a cash settlement to rebuild our house to current building standards, reconnect the services, replace the driveway and landscaping, demolition and clearance costs, and a contribution towards somewhere to rent while it all happened.
The payment ended up at more than double what we paid for the property (which might serve as a warning for people to check carefully they have enough agreed-value cover).
If we had been uninsured, there is no way we could have continued to pay our mortgage and funded the house rebuild. We know others were much less fortunate but, thanks to the insurance money, we now live in a new house.
A: Thanks for giving us a real example of how important house insurance can be.
By the way, I don't think people who never make an insurance claim are "insurance losers". They've had peace of mind for years and never had to go through all the hassle you have been through.
Word on bonds
Q: I'm in the process of reading your book, A Richer You — especially your three tiers for retirement savings, and to keep money you plan to spend in three to 10 years in bonds.
What is your current view on bonds given the volatility, interest rises in the coming years and Warren Buffett's thoughts that bonds may have had their day?
A: Firstly, for other readers, here's some of what I say in the book about the three tiers for retirement savings.
"First you should divide up your money, depending on when you expect to spend it: If it's within the next three years, use a cash fund. They have low volatility.
"If it's in three to 10 years, use a bond fund. This will usually deliver higher returns than cash funds, but there is some volatility.
"If it's in more than 10 years, use a share fund. The returns will be more volatile, but if you don't plan to spend the money for a decade or more there's time to recover from a share market crash. And the higher average return will give you some protection against inflation.
"Every year or so, consider transferring some money from the bond fund to the cash fund, so you always have roughly three years of spending money in the cash fund.
"However, your balance will sometimes fall in a bond fund. If that happens, perhaps wait a while to see if it rises again. This is why you have three years of money in cash — so you can be patient and flexible. But if all that is too confusing, just transfer some money each year."
These days, some people, including Warren Buffett, are not big fans of bonds. I explained in last week's column that when interest rates rise, the value of longer-term bonds already held in funds — which pay the old lower interest — goes down. But I don't think there's a better place for medium-term money. It would be highly unusual for bonds to lose value over several years in a row. Ignore shorter-term wobbles.
However, if all this makes you nervous, instead put four or five years of spending money in a cash fund and six to 10 years in a bond fund.
To find a bond fund, use Smart Investor on sorted.org.nz. Select managed funds, and then defensive funds with "bonds" or "fixed interest" in their name, and check they hold at least 90 per cent bonds.
With the three tiers, you also need to gradually transfer money from the share fund to the bond fund. You will have seen how to do that in the book.
Q: I wrote to you last August about all the bad luck that I have had throughout my life, lawyers stealing money etc. You advised a managed fund so, as you suggested, I went into a low-fee conservative fund, which was very bad advice. The 10-year bond rates have gone up, and the conservative fund has taken several thousand dollars off my principal.
Because it is a low-fee passive fund they knew bond rates were going up and they did nothing. I asked them why they didn't do something and they said it was not their mandate, and they deliberately continued to let their clients lose money. This amounts to negligence. I do not have years to wait because I am elderly.
Even if you did wait a long time interest rates cannot go much lower. Some active conservative fund providers rearrange their affairs, so they wouldn't make a loss, and they actually made a profit for clients.
A: I plead "not guilty" — for several reasons.
In my reply to you last August, I made three suggestions:
• Choose a financial adviser from those listed on the Advisers page on maryholm.com.
• Move the $1.5 million you had in the bank into KiwiSaver funds. "Put the money you plan to spend soon in a lower-risk fund, and the longer-term money in a higher-risk fund, where returns are likely to be higher — as often explained in this column."
• Stay in the bank. "Given your history and scepticism, this might be best. Even if you earn zero interest, with $1.5 million at 73 you could spend $75,000 a year, plus NZ Super, until you are 93, and then get by on just Super." You didn't go with my "best" suggestion. Fair enough. Now you are in a conservative fund, and your balance has dropped with bond values — although the several thousand dollar drop is on $1.5 million, so it's not big percentage-wise.
In any case, that money hasn't gone. The short-term market value went down, but with time it will recover. If you're not prepared for some ups and downs, you should have stayed in the bank.
What about your comments about passive fund managers "negligently" letting their clients lose money, while some active managers made a profit?
With passive management you go with the flow. Because markets — and bond investments — rise more than they fall, you win the in the long run, and at low cost.
Sure, there will always be some active managers making a profit. But meanwhile, others are doing worse than the passive managers. For every seller of a bond, there is a buyer.
And time will show that one of them was on the wrong side of every deal.
Can you pick, in advance, which manager will continue to mostly be on the right side? And will that superior performance make up for their higher fees than in passive funds? Good luck with making that choice.
I stand by my three suggestions to you last August, in particular the third one — with the $75,000 a year plus Super.
To repeat my last paragraph to you then: "You are much wealthier than most people your age. It's time to forget the past and enjoy life!"
- Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. Her opinions do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to email@example.com. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.