August 17, 2007
How Real Estate Commissions Work
We sold our house. I gathered a number of stories along the way, some good and some bad. I also learned a few things about how real estate commissions work. This information was surprisingly hard to obtain, but very important and valuable. So I'm sharing it with you for free, all part of the life services we offer here at funmurphys.com.
First, some definitions: The seller owns the house and wants to sell it. The buyer is thinking of buying a house. The seller and buyer may be working through real estate agents who represent them, the seller's agent and the buyer's agent. The seller's agent is also called the listing agent. Licensed real estate agents are often known as Realtors (TM).
Here's the executive summary: The home seller pays a percentage commission to the selling (listing) agent, which the agent splits in half with her office. If there is a buyer's agent, that agent also receives a percentage commission, deducted from the selling agent's commission. The buying agent also splits the commission in half with his office. A lot of implications flow from this seemingly simple arrangement. Take a deep breath . . .
You can simply sell or buy a house on your own, but it's a Big Scary Process involving a lot of legal paperwork and financial transactions. So most home sellers sign a listing contract with a seller's agent and let them deal with all that. The seller and agent agree on a commission based on the price of the house; the "classic" real estate commission is 6% of the sales price, but that percentage is neither the typical commission nor the average commission (more on that later). The seller's agent receives her commission at closing, when the house is finally sold. If the house does not sell during the term of the listing contract, the agent gets nothing. Of course she'll try to avoid that scenario.
Let's use a house base price of $400,000, which should be fairly typical for people reading this column. A 6% commission of $400k is $24,000. The seller's agent usually splits the commission 50-50% with his real estate office. In this case the agent would receive $12k at closing, and the agent's office would receive $12k.
The 6% real estate commission is not sacrosanct! Many real estate agents want to list and sell your house, so the seller can negotiate that commission. You can ask if a potential agent will accept a 5% commission, or even a 4% commission; and if they want your business, they may take it. Or try some fractional percentage. They might take you up on the offer, depending on a lot of factors like their workload, the house's likely price, how quickly your house is likely to sell, and so on. "Everything is negotiable." Sellers who calculate the commission amount before signing the listing contract often realize that $24k is a big chunk of change to be sending out the door, and start to wonder if there is some way they can reduce that amount? How about a 5% commission instead, or $20k?
At this point we have enough information to bust one myth right away. Here is the myth: Real estate agents will seek the highest sales price for your house because it means a bigger commission for them. Like most myths, there is a grain of truth in this statement. Anybody with a calculator (and most people without one) can see that a higher sales price yields a higher commission.
But "everything is negotiable," especially the price of the home itself. The seller may occasionally get a buyer who will pay the listing price right away, but more often the buyer offers less than the asking price. How much less? A buyer might offer $380k, the seller might counter to $390k, and the two parties will eventually agree on $387k. The monetary increments in house negotiation are on the order of $10k. Amounts of $10k will make or break the deal.
$10k is a lot of money to the buyer and the seller - you can take your family on a Hawaiian vacation for that! It's worth haggling over. Are you working on margin? - you've probably got a mortgage to pay off, or another house to buy. But what is that $10k to the real estate agent? She and her office stand to collect $24k if the sale closes successfully. The difference in commission over a $10k difference is only $600. Does she want to risk the entire $24k over a measly six hundred bucks? No way! She wants the deal to go through. Her motivation structure is set up to reward deals completed, not to squeeze the most commission out of each deal and risk losing the sale entirely. Yes, it would be nice to earn a higher commission, and the seller will probably give her glowing referrals if she gets a good price. But the motivation structure of the traditional real estate commission is set up primarily to reward sales completed. Price increments in the amount of $10k are of secondary importance to the agent.
Now let's suppose the seller has negotiated a 5% commission with the listing agent, and the house is on the market. A buyer comes along in the company of a real estate agent, which is the usual scenario. The buyer likes the house right away and offers the full $400k. How does the buyer's agent get paid?
The buying and selling agents do NOT split the real estate commission 50-50! Surprise! The commission for the buyer's agent is fixed, and this percentage is sacrosanct for the local area! In my region of Colorado the buyer's commission is 2.8%, fixed not by law but by rigid local custom and practice. Real estate companies that subscribe to the Multiple Listing Service (MLS) agree to honor the buyer's commission. If you look at the bottom of an MLS listing you may see something like "BA 2.80". This means Buyer Agency 2.80%, which is what the seller has agreed to pay a real estate agent working for the buyer.
Everybody wants to attract a buyer, and one way to do this is to attract the buyer's agent. The 2.8% buyer's agent commission is sacred because nobody wants their 2.5% commission sneered at, and passed over, by those buying agents out there trolling for properties. So everybody marches in step with the standard buyer's agent commission, and dares not go below that amount. The professionals know these rules and are very reluctant to break them. And a standard buyer's commission helps to keep the agent neutral with regard to multiple houses. (In some places there has even emerged a practice of offering agent incentives - a larger commission for the buyer's agent - as a way of attracting buying agents. This practice is pretty much a bribe and ought to be illegal, but isn't. Yet.)
Back to the example. The total 5% commission paid by the seller on $400k is $20k. The buying agent gets 2.8%, or $11,200. The selling agent gets what's left over: 2.2%, or $8,800. Notice that the buying agent gets more than the selling agent. $2,400 more. Are you comfortable with that?
You might be more comfortable to learn that buying agents do most of the property tours and walk-throughs. 9 out of 10 showings on our house were conducted by buyer's agents, not by the listing agent or by me. The listing agent puts on open houses, posts advertising, and talks up the property, but most of the showings are done by another agent (working with the buyer). Feel better? Maybe, but it still seems weird to me that the commission is not split 50-50. That's Weirdness #1.
Since the buyer's commission is fixed at 2.8%, you can see that the listing agent gets really squeezed by lower commissions. A 4% total commission only leaves the selling agent with 1.2%, and anything below 3% will lose them money.
The standard listing contract states that the real estate commission is paid by the seller. In our earlier example, the buying agent received $11,200 of that commission. Colorado has a required notice to clarify the relationships, saying that the buying agent is working in the buyer's interests, and the selling agent is working in the seller's interests. Nice to know. So our poor seller is paying the buyer's agent $11,200 to negotiate intentionally, deliberately, and professionally against him! That is Weirdness #2. The seller pays the buyer's agent to work against him and against his best interests. I am not making this up.
A listing contract is a pretty thorough document, specifying conditions and terms and payment. The relationship of a home-buyer with a buyer's agent is less well-defined. Suppose you have looked over a bunch of houses over the past year, got serious about a few of them, and have finally settled on one house to buy. Who is your buyer's agent, and who gets the buying agent's commission?
Real estate agents are professionals, and they want to avoid problems with each other and with their clients. To this end, they have adopted certain practices to ensure fairness and avoid client-stealing. The accepted practice is this: The licensed agent who first showed you the property receives the real estate commission. "Showing the property" means accompanying you in person on a physical tour of the home and grounds. The official buyer's agent is the one who first set foot on the property with you.
Quiz
This practice has some implications that might not be obvious to the casual "Looky Louie" browsing through the neighborhood. Take this test:
You and your spouse are thinking that you might move someday, and you come upon a neighborhood that looks nice. Sure enough, you see a house for sale that's attractive from the outside. You pick up a flyer from the sign on the lawn, and call the listing agent to arrange a showing.A couple days later you tour the house with the listing agent. But the bedrooms are not laid out the way you want, or the back yard is too small, or something else is not right. It's a nice house, but it won't do for you. You thank the agent politely for her time. As you are leaving, she says, "Before I left the office I gathered a few listings of similar homes in the neighborhood. Would you have time to go look at those?" How do you respond?
Possible Responses:
A. "Sure, we have another hour to spare. Let's go look at them."
B. "Not on your life! What are you trying to do, trick me?!! Get away!"
C. "Not today, but if you give me your business card I might call you later."
D. Without a word, you snatch the listings from her hand, jump in your car, and speed off! As you make your get-away you copy down the addresses and then shred the listings!
E. "No, thank you."
The answer here is that you can do anything you want, but the agent's innocuous offer has some big implications that most people don't realize. Consider Response A: If the agent (whom you just met) accompanies you physically to the 2-3 other houses this afternoon, she will have locked up your buying relationship with that house. That's the commonly accepted practice among real estate agents, remember? In other words, if you later decide to buy one of those 2-3 houses, you'll have to buy it through her. Did you realize that?
When you called to make the original appointment, the agency may have asked you, "Are you working with a real estate agent?" You truthfully answered "No," because you were just looking around at that point. You expected to deal with the listing agent on the original house, but she doesn't represent the 2-3 other properties. At least, she didn't until this afternoon. But now she represents you if you want to buy one of those other houses. That's Weirdness #3.
Response B is not good; it's rarely productive to be rude to someone for no good reason. But at least it demonstrates that you know what's at stake here. (To be fair, she's probably not trying to "trick you", she's merely offering professional assistance. Then again, her name is printed at the bottom of each listing, leading you to believe that she is the listing agent for those properties, too.)
Response D is a dramatic flourish for the Walter Mitty in all of us, and it would be nice to have those other listings. But the agent has performed a small service for you in running a property search - it would be more ethical to log onto realtor.com or coloproperty.com or zillow.com and find those listings yourself.
Response A is okay if you really want to use that agent to buy those properties. But bear in mind that buying a house can be stressful, and you have at least a month of high-intensity business relationship ahead of you before closing. Weren't you going to interview a few real estate agents before choosing one to work with? Now you're stuck with one you didn't even select.
Response E is kind of abrupt. But it's clear.
Response C is my choice, unless I really take a dislike to the agent. We might decide to work with her after talking it over, and she's already shown some initiative. Why not take her business card without promising anything?
Who Pays?
Who really pays the real estate commission? The seller does, right? It says so right there in black and white on the listing contract! The buyer gets all these real estate services for free, right?
Not so fast! Remember that the seller sets the asking price for the house, knowing that they will have to pay a 5% commission out of that sales price. The seller will only sell if they get a certain minimal amount in return. So it's natural for the seller to raise their asking price by 5%. Now it's the buyer who pays the commission, because they have to pay a higher sales price. Remember that the buyer is the one who will supply all the money to complete this transaction. The buyer has to finance the full amount of the sales price, which includes the real estate commission.
In summary: It's not clear who really pays the real estate commission. But no matter how you figure it, real estate commissions have the effect of sending 5% of the property's value off into the real estate industry every time a house is sold.
Most home-buyers go around with a buyer's agent because they think that they are getting something for free. But it's not free! The buyer is paying for that service whether they realize it or not.
Yes, I know that a buyer's agent will negotiate for you, will protect your interests, and so on. They can make sure that a few hundred dollars of plumbing repairs are completed before closing. But most buyer's agents I worked with urged me to raise the offers I was making! "You're going to insult the seller with a lowball offer." Most seller's agents urged me to lower my asking price. It felt like they were working for the other party, not for me. Remember that real estate agents are motivated to close the deal.
Real estate agents are professionals who provide a service. If the value of that service to you is worth $10,000, then go ahead and hire them. But make sure you know what you're getting, and what the real costs and implications are. If you are searching for properties on your own, calling listing agents to arrange showings, checking out comparable sales on zillow.com, and you know the local neighborhood; do you really need to pay an agent $10,000 to tag along behind you and fill out some spaces on a standard sales contract?
The Unattached Buyer
Weirdness #4 comes when you consider an unattached buyer. Let's call him George. George has read the first part of this article, has done some research, has bought and sold houses before, and has decided to buy a house on his own this time. He'd like to save some money somehow. George has successfully fended off the overtures of agents at open houses, has never gone on additional showings offered by listing agents, and certainly has never signed an exclusive right-to-buy contract.
George finds a $400k home that he likes, and he thinks the asking price is reasonable. Knowing that the seller will not have to pay the 2.8% buyer's commission, he considers offering 2.8% under the asking price. But George is a good guy, and he realizes that the selling agent will have to do more work because he's not familiar with mortgages and inspections and title companies and the like. It's just easier to work with another licensed agent. So George offers 2% less than the asking price, figuring that this offer will save everybody money and compensate the agent fairly.
And he's right! Unfortunately, the seller has signed a listing contract with her agent, without first reading the contract carefully and considering what happens to an unattached buyer. The usual listing contract specifies that if a buyer has no agent, the selling agent will work as a "transaction broker" instead. The transaction broker works for neither party, but guides the transaction to completion. That's great. But the transaction broker still receives the full 5% commission, according to the standard listing contract!
George submits an offer for $392k, and is puzzled when the seller doesn't consider this to be a full-price offer. The problem is that the listing agent has already claimed the 2.8% buyer's commission by the terms of the listing contract. The seller did not notice this provision, and there is no automatic discount for unattached buyers. There should be.
It's not clear how George can get the discount that he rightfully earned by doing all the legwork himself. This is Weirdness #4. The selling agent knows perfectly well what's going on, but might not explain it to the seller. The seller might simply accept the offer as is. But if not, George and the seller have to hope that the listing agent will agree to reduce her commission in order to make the sale. Will she do that? Will she kick up a fuss even though she comes out better off than if George had an agent? Who knows?
The seller could have insisted on a 2% discount for unattached buyers, and written that into the listing contract up front (and specified a 3% commission to the transaction broker). The listing agent will probably say that "most agents wouldn't do this" and agree to it anyway. Real estate agents know that most buyers come with an agent. But the seller wants to sell her house, and one way to do that is to offer discounts to whomever she can.
Recommendations:
The buyer and the seller should each pay for their own services rendered to them. This practice of the seller paying the buyer's agent is just nuts.
If you are a home buyer, and you want to work with a real estate agent in the classical manner, go ahead. A professional can save you a lot of hassle. But don't get attached to an agent without realizing what is happening, and what the implications are when you set foot on a new property.
An unattached buyer has about a 2% negotiating advantage, but it's not clear how to use that edge. Be creative and negotiate. Consider signing up with one of the buyer services that refund most of the buyer's commission to the buyer.
If you are a seller, consider listing your house with one of the discount brokerages. They charge a monthly fee of about $100 for the MLS listing, and a flat fee on the order of $1,000 to handle closing. Don't worry about showing the house yourself - the few times that you personally walk someone through will be enjoyable!
Consider hiring a real estate agent on a flat fee basis. They really do know a lot! $1,000 is a reasonable fee to walk you through the process once the sales price is agreed upon, especially if there are problems. The title company is supposed to manage the transaction itself, but an agent can work out disagreements over the inspection and other matters.
If you are a seller, get one of your friends who has an eye for interior design and decorating (you know who they are). Ask them to walk through your house and let you know how to spruce it up (or clean it out) for sale. Serve them dinner afterwards.
Buy a five-gallon bucket of white semi-gloss interior paint. Start repainting the rooms that are not white. Do not stop painting until the bucket is empty.
Good luck!
Hi Carl,
What an awesome article. You articulated your 4 weirdnesses incredibly well. Some parts of a real estate transaction can be pretty counter intuitive when you peel back the layers. Please consider contributing some of this wisdom to the wiki on Zillow (http://www.zillow.com/wiki/RealEstateWiki.htm)
FYI - there's a great group of forward thinking Realtors who are leading the debate about "divorcing commissions" and "who really pays them" on this blog: http://www.bloodhoundrealty.com/BloodhoundBlog/
Posted by: David G from Zillow.com at August 17, 2007 6:15 PMFirst off, great post! It was so well written, it looked like it came straight out of a real estate textbook! I also wanted to say that I highly recommend Zillow and Bloodhound Realty's websites. They are very informative, I think you will agree! Thanks again!
Posted by: Albuquerque real estate at August 17, 2007 9:11 PMYou've got it all figured out! Great! I was happy to finally discover how the real estate system works all over this country. As a Realtor I guess I have been off track. I have never had to split my commission with my Broker, and my commission as a listing agent has often been as low as 1%, but never fixed. There is a saying: "It is better to get 1% of something than 3% of nothing." I guess I was misled. I also was misguided apparently in my approach to helping my clients. I thought it was clever to provide sold comps which would help guide them toward listing their properties for a realistic price, rather than simply let them pick the highest number they could think of and hope someone would come along and pay it, or to take their listing at a high price which made no sense, unless of course it was designed to obtain the listing in the first place, which I never considered fair nor professional. Most of the time I have been a listing agent, and as a listing agent I have tried to provide maximum exposure through the multiple listing system and the internet, as well as maximum marketing through a system which allows me to work mainly with those active Realtors who have sold property and are successful in the area. As an independent listing agent I am free to offer the selling agent a commission of 1% or 5% or nothing out of the commission I receive.
Now, after 27 years as a Houston/Galveston Broker I fully understand the system and the way it works. Thank you for your insightful and informative article.
Tom Hoke, Broker
Realty Associates
k5odz@yahoo.com
Posted by: Tom Hoke at August 21, 2007 9:01 AMA great read. Would be great see another post on the topic of your search for a new home and its purchase as a buyer...
Posted by: Kyle Else at August 21, 2007 1:43 PMA great read. Would be great see another post on the topic of your search for a new home and its purchase as a buyer...
Posted by: Kyle Else at August 21, 2007 1:44 PMWhat an interesting article. I've just written a similar -- well, more accurate -- article on my blog/website. You mix a lot of "truth" with "half-truths" with a lot of things that are just plain false. If you are using Zillow to do anything more than get an idea, you are really doing yourself a disservice. While I personally like Zillow as a "Cliff Notes Version" of reality, NOTHING beats a trained agent’s Comparative Market Analysis (CMA) except, maybe, an appraisal.
Real Estate commissions are not fixed. Not by local custom, not by real estate companies and not by Realtor® associations.
While I’m not familiar with Colorado, I am very familiar with the real estate business. Listing agreements specify the commissions that the Seller will pay to the Listing BROKER. The independent contractor agreement (or employment contract) between the Brokers and their Agents determine the split between the BROKER and the AGENT (on both sides). As a Realtor®, when you put a property into the Multiple Listing Service (MLS) you must offer compensation to the Selling BROKER (buyer’s brokerage). This creates “the Marketplace” that is the MLS. The amount of compensation is totally up to the Listing BROKER. It can be $1 or 50% or MORE of the compensation that they expect to collect from the Seller WHEN the property sells. A good Listing Broker in a Buyer’s Market (such as what we are currently in) will offer MORE of their compensation to entice more Selling Broker’s Agents to view the property in hopes of a sale for their clients. While you might want to make these illegal – it is a tool for the Listing Broker to attract more attention to the Seller’s property.
The market drives the commission prices. Our firm used to charge 4%, 5%, or 6% depending on how much marketing services you wanted on your property. Most of our clients would pick either the 5% or 6% service level. We fully disclosed what they could expect from us for the different commission splits. These were our prices in 2005 – 2006. In late 2006 the market changed. It took longer to sell homes (as we transitioned into a Buyer’s Market) and it costs us more money to carry a property on our books. IT took more money to market the property and more effort on the part of our agents to sell the property. Doesn’t it make sense that if it costs you more money to sell a property, you would increase your prices? Currently, we offer 5%, 6% or 7% commission schedules. We also offer a fee for service schedule so that people that only need specific services can purchase and pay for only those services they desire. How is this fixed? And what a surprise…it COSTS THE BROKER MONEY TO HAVE A LISTING. The house may or may not sell, doesn’t matter. The Broker has put out their own money when they take the listing. How many sellers are willing to compensate the Broker for their time, expertise and costs associated with trying to sell their home IF it doesn’t sell? How many buyers are willing to compensate for gas, time, expertise that their Realtor® has spend with them while they are “thinking about buying and house” and don’t? Not too many. Remember all these things when you start to question the relatively inexpensive costs of real estate commissions.
I’m not sure where you got the information that the first agent that showed the property “locked up” that property. This is simply NOT true. The Code of Ethics that most Realtors® follow – please NOTE: not all licensed real estate agents are Realtors® and don’t follow the Code of Ethics – state that the Realtor® that is the “procuring cause” is the Realtor® that should be compensated (when there is a dispute). If all you did was show the property in your “drive by” explanation would not qualify as a procuring cause. A good agent will most definitely try to help you find the house you are looking for. This is professionalism. Remember, they make their living selling real estate. Most people don’t buy/sell the number of houses in their lifetime that a Realtor® works on in a year. So, who better to help a person navigate this often time consuming, stressful, complicated, stressful, confusing and stressful process than a professional Realtor®? No one.
Please remember that a Realtors® job is kind of like an iceberg. Most of it is underwater and you NEVER see it. When the closing happens smoothly with no surprises and you get to closing on time and get the keys to your house and you feel like: “Wow that was easy” and you start to question that agent’s commission…that is when you should be offering them a BONUS. Because they did a lot of work that you didn’t even see to make that happen. Real Estate transactions seldom go smoothly; there is always an issue or another. Often, it is the Realtor® that is holding the entire deal together. Driving people around while the most visible function that you see is hardly the function or the value that a Realtor® brings to the transaction.
While I believe that you are trying to be helpful to the public, it does appear that you have some bias in this area. Maybe you’ve had a bad experience with a real estate agent…I know I have…that’s the NUMBER ONE reason most of us become Realtors®.
Posted by: JR Fuller, Broker at August 21, 2007 2:20 PMGreat synopsis! I'm definitely saving this article.
I have a couple of questions. What happens if I walk through an open house and indicate on the "sign in sheet" that I am currently unrepresented? Am I then tied to the seller's agent, or will I be able to use a buyer's agent for that property later on?
What are the rules for open houses when you do have a buyer's agent?
Posted by: Brad at August 21, 2007 3:19 PMThanks for the comments and follow-up information. It should be obvious that there is some variation in these specifications from region to region. My information comes from statements made by local real estate agents. Finding and physically showing the property is considered to be the "procuring cause" for that prospective buyer.
I hired one agent as a transaction broker for about $1,000 and he did hold the entire transaction together. He was worth every penny! Another agent accompanied me on a couple of walk-throughs, wrote up the purchase contract, and received $10,000 (this was before I knew the rules). The listing agent, who had listed the house for six months, received $9,000. That's weird.
I understand that in a hard-to-sell market the selling agent may need more compensation to cover their costs. Unfortunately, one of the best ways to sell a house is to reduce the price. A 7% commission adds a lot to the asking price! So that higher commission tends to remove one of the seller's best tactics.
Unattached Buyer:
With regard to the Unattached Buyer problem, I think "George" will have a hard time convincing the listing agent that he deserves 2% of the sales price out of her commission. And even though George has bought properties before, he may have some questions. If George does not want to follow the classical arrangement, he can sign up with some company like BuySide Realty (http://www.buysiderealty.com/). They will represent George (but not drive him around) and refund 75% of the 2.8% buyer's commission, or $8,400. Under this arrangement, George gets rewarded for looking and finding the house himself.
Open Houses:
When I was first looking for a condo, I visited by myself an open house put on by the builder. Some guy showed me the standard unit. About a week later I returned with my own buyer's agent. The selling agent immediately recognized me, scowled at both of us, turned to the agent, and stated, "He's been here before!" My agent just stared back. The selling agent paused, then remarked, "Yeah, he's been here before. But I'll give it to you." Obviously referring to the buyer's commission. I had no idea then what the problem was. Now I know.
The two of them were cordial by the end of my visit, obviously deciding to act professionally and stick to business. I bought another condo anyway, so the original problem became moot. Home builders are very particular about the declaration you make when you first see a model home; individual open houses may be less strict.
Interesting post, Carl. If I had read this post about six years ago, I think I would have agreed with most of what you wrote, as in my previous life I remodeled homes full time, and thus had many experiences with Realtors, while being on the same side of the fence as you. In fact, like one person posted above, I too became a Realtor because of bad experiences I had with Realtors...what was I paying them for, anyway?? BUT, now that I'm on this side of the fence, I can say that I've developed an evolved appreciation for the rest of that iceburg (once again, in reference to a comment above), and I can now acknowledge that in my previous life, I didn't truly understand the intricacies of the real estate business. I'm still learning, and it's now been six years since I've become a Realtor, and only a few months since I started my own company.
I recently bought a new car (last week, in fact). I researched cars for what felt like forever. I test drove, I read tons of information on-line, and I talked with countless car salesmen. I now have a shiny new car sitting in the drive, but did I get it at the right price? Is it even the right car for me? Does it get enough gas mileage considering the amount of driving I do? How long will this car suit me? It's a wonder I was able to sleep at all while trying to find the right car (I can confidently negotiate a real estate sale, but when it comes to cars, I'm in unchartered waters. I mean, what's MSRP? Is that the market value of the car??). Honestly, it was a nerve racking process in which I felt unsure of my ability to negotiate a fair price for both the car and my trade-in, let alone feeling sure that I was buying the right car! And to make it worse, I found a car salesman that I really liked, but he didn't have a car that I ended up wanting to buy. I joked about how I wished that he worked like I did, so that he could be my "agent" to help me find & negotiate on the right car, regardless of the car lot on which I found it. We laughed about it, and I went on my way. He let me walk out, after having tried to sell me on just about every car on the lot (I felt so bad...he really tried hard to find the right car for me & wasn't too pushy about it either). Anyway, your post has gotten me thinking...what if I'd walked on to the car lot and was told by a salesman that he would be happy to find me a car, and would even negotiate with the manager, on my behalf, to get the lowest price possible for the maximum features...and that it wouldn't cost me anything for him to do that. In fact, the dealership would pay him to do that for me! I think I would have looked at him like he was stone cold crazy, and I immediately would have started wondering...just how badly am I going to get (insert preferred word here)?
In all seriousness, though, I really could have used someone that was savvy in the way of buying a car...and would have possibly even considered paying someone to help me, as I'm still not sure I got the best deal possible, or the right car for me, for that matter. And had I truly thought about it, I probably would have offered that other salesman an agreed upon amount to help me, beyond his car lot, just to have peace of mind that I'd found and negotiated a good deal on the right car.
So, enough rambling about cars...the point I guess I'm trying to make (if you haven't already figured it out) is that I can now very clearly understand your point of view on buyers and sellers paying for their own representation, if they decide they need it. But, as I think most everyone would agree...buying a home is a much bigger investment than a car, and I believe that some (ok, many) buyers may, just possibly, find themselves with a "lemon" of a house if they're faced with the decision of truly paying (I mean, out of pocket...write a check for services rendered) for their own agent or going it alone when trying to find & negotiate on a house. I write this from the belief that I fulfill my obligations of being a buyer's agent (even while being paid by the seller), and therefore truly earn my commissions. How many buyers will go ahead and try to navigate the home buying muddy waters themselves, thinking they're going to come out ahead by saving the fee they'd pay a buyer's agent, when what may very well happen is that they pay too much and buy what they quickly realize after closing is the wrong house for them? Too many, I think. Sure, there are savvy buyers out there, such as yourself, but I think you're in the minority, not the majority.
What I know is that when I ask a buyer to give me five to ten minutes of their time so that I can explain how agency relationships work, and how I am compensated, the information I give is well received, and appreciated. And often I find that I've gained a client. But, if I don't...that's ok (it's ok, it's ok, it's ok), because I know that at least I've educated them a bit (at truly no cost to them) and they'll be better off for it. And hey, maybe they're left with just enough knowledge to write a long post about how the real estate industry really works! ;)
Original post is a good starting point but not entirely accurate... you missed it by a mile on some areas. this jest is correct that an agent should get paid a commission but your splits are way out there. Any Agent that would take a listing for 4% is obviously not spending any money on advertising, marketing or education. I really would never list a property with someone who would sell their services so cheaply. This business is expensive!! I pay more than $400.00 per month just in Multilisting fees, then I have office, vehicle, technology and educational expenses. NOW , how about GAS
With the national average income of a real estate agent being in the mid $30's.... wow, do the math!
Posted by: Jay Hill, Realtor at August 22, 2007 10:23 AMBrad, it's a great question. Since we are being honest here and trying to educate people about real estate (and I would suggest you read and hopefully post to our blog directions below.) let's talk a moment about Open Houses.
Open Houses sell the house less than 2% of the time. It is one of the least effective ways to sell a home. Why then would a Realtor® do one? Well, two main reasons really. First – Seller like it. It is a tangible way that they can see that the agent is marketing their house. And, it might just work (2% of the time). The 2nd reason is that it exposes the agent to buyers. Yes, Realtors® at Open Houses are not only trying to sell the house, they are also hoping that someone will walk in that is serious about buying a house (the one they are in or any other) and will NOT be working with a Realtor® and will consider working with them. The sign-in sheet that they ask you to sign…that is so they can have your contact information to follow-up and see if they can turn you into a client. Is that bad?? I don’t know, I guess it depends on your prospective. If you are indeed searching for a home and would like to get some additional information or would like to get the assistance of an agent, I would guess not. If you are not serious and are really just looking you don’t have to sign the sheet or put that you are currently working with an agent. Interestingly, you will often find less experienced agents attending Open Houses. They do this because the experienced agent probably has more productive business to attend to and they will get some exposure and On-the-Job Training (OJT) working with people.
I would like to echo the comments above made by some of my colleagues in this profession (Real Estate). An educated consumer is our best customer. And we often times provide this education free. Anyone can walk into my office and ask about real estate and I will not make them sign a thing. After they’ve learned, if they find the information that I’ve shared helpful and they are still interested in purchasing / selling / investing in real estate I would hope they would hire me. But, if not, I wish them luck in the future and will hopefully be able to do business with them sometime in the future. If they don’t find my information helpful, they shouldn’t hire me.
To read / post to our blog please visit us at: www.85andSunnyRealEstate.com. We have a real estate radio show 9-10am on Saturday Mornings which can be accessed over the internet (instructions on site) or the podcast can be downloaded from the radio station at: www.wmmbam.com click on podcast and go to the end of the page to find the 85 & Sunny Real Estate Show. Thank you. JR Fuller, Broker/Owner.
The Freakonomics book looked at Real Estate commissions and suggested that they should be higher, but only for a portion of the total sale. For example, anyone could sell your 400K house for say 320-350K, so make that the floor, and only pay commissions on the amount over 320k (obviously at a higher percentage). You wonder if real estate brokers will face the same fate as stock brokers in the next decade or so as information costs keep going down.
Some related links
Endangered Species
http://www.nytimes.com/2006/03/05/magazine/305wwln_freakonomics.1.html
More data on real estate agents
http://freakonomics.blogs.nytimes.com/2007/02/26/more-data-on-real-estate-agents/
This was an interesting site on For Sale by owner http://www.fsboprimer.com/
There is a Brookings Institute paper on
"A Critical Assessment of the Traditional Residential Real Estate Broker Commission Rate Structure" by Mark S. Nadel
abstract (with link to PDF of full paper) is here
While real estate brokers have long set their fee as a straight percentage of a home's sale price, this formula is an anomaly and a primary reason why such fees may be inflated by more than $30 billion annually. Although competitive pressures ordinarily produce a fee structure reflecting costs, real estate broker commissions are strangely unrelated to either the quantity or quality of the service rendered or even to the value provided. Rather, this fee has been based solely on the price of the home. (It is as if divorce lawyers set their fee as a flat percentage of a client's net value, irrespective of whether the divorce was amicable without kids or involved bitterly contested custody and other issues . Oddly, not only is there no evidence that it is any more costly to sell higher-priced homes than median-priced properties, but it is possible that the opposite may be true! Furthermore, the straight percentage fee formula creates little incentive for real estate agents to provide home buyers or sellers with additional value.
The article analyzes five elements of the traditional residential real estate broker rate structure, the most important of which are: 1) setting fees as a percentage-of-sale-price, 2) letting the seller's broker set the fee received by the buyer's broker, and 3) refusing to unbundle the price of a full package of services. After explaining the conditions under which such rate elements would be justified, this article finds that those conditions do not generally exist in the real estate brokerage market. Moreover, it identifies more than a half dozen harms that the rate elements cause to home buyers and sellers. For example, buyers are often not alerted to attractive homes because the rate structure leads traditional agents to intentionally avoid showing them. Meanwhile, many buyers do not even consider negotiating the fee paid to their broker because the rate structure causes them to believe their brokers' services cost them nothing.
After this criticism, the article suggests that consumers would benefit most from a fee-for-service approach – combining flat fees, hourly fees, and bonuses, including percentages of extra value created – and it identifies currently available examples of some of these options. After reviewing eight reasons why incumbents are able to protect the current structure, the article suggests four questions that consumer media should teach consumers to ask to help undermine the industry's protectionist practices.
And here are two blog posts from a realtor site that comment on Nadel's article:
"If a monkey can sell a $1M home for $950K, does he deserve 3%? (Parts 1 & 2)"
http://3oceansrealestate.com/blog/part-2-if-a-monkey-can-sell-a-1m-home-for-950k-does-he-deserve-3.html
JR, I appreciate the information but I didn't quite find an answer to Brad's question in your post.
Here's the situation: Brad comes into your open house, signs in with no agent, and you show him around. Wow, this is great! Brad really likes the house! An hour later he promises to get back in touch with you and he leaves.
Brad calls back in a few days: "JR, this is Brad. I'm ready to buy the house but I've decided to work through my brother-in-law Bill, who's just starting out as a real estate agent. I want to shoot him some business. Hope that's okay with you. Bill will fax a purchase contract over to you tomorrow."
How will you react?
Carl and Brad, If the situation that you described to me happened (and it has many, many times) to me my answer would be “Let’s do the Deal!!”
I think people should do business with people they are comfortable with. I will do my job professionally and while I won't get "both sides" of the commission in the above example, I will get paid for selling my clients home...that was the objective after all.
Would I be disappointed? Not at this point in my career...when I was newer and younger and had less experience...you bet! I took a lot of that personally as it is probably human nature to do so. Now, I don't assume the deal is closed until I've left the closing table with a check. That means I'm on the clock throughout the process. It means that I understand the people work in their self-interest and I don't get disappointed when someone chooses those self-interests over my self-interests and I try to be a professional in all that I do. My objective is to align my self-interests with your self-interest. If I am professional and this person has a bad experience or just sees the difference in the level of experience and professionalism I bring to the table...maybe, just maybe, the next transaction will be mine.
I've had people ask for my business card at the closing table with their realtor sitting right there. That's always interesting :)
My recommendation in this situation is to be honest and treat people like you want to be treated (or even better!). Tell the realtor that you have a relative in the business and that you will probably use them to buy a house from. They will respect that and any realtor that doesn't, well, you really don't want to do business with them anyway..do you?
I realize that my last post, I expanded on the issue. I hope that it was helpful information and I hope that I answered the question above. JR
Sean,
Excellent Post. At my company (85 & Sunny Real Estate) we offer both Fee for Service and Full Service (commission based pricing).
Personally, I prefer the Fee for Service. I would do that all day if the market would let me. Interestingly, the customers that most often choose the Fee for Service option are the Real Estate Investors.
One could argue that they are the most knowledgable about the value for the service and since they pick this option the market should. Most that do use the Fee for Service end up selling faster and for less overall money than Full Service, but they have to pay upfront and in many cases the services does NOT depend on the outcome.
I like the ideas of paying for value, but I would have to caution that those metrics for performance must be agreed to in advance and be objective in nature. This might take some work/negotiation but should be able to be agreed upon.
There are groups our there that do Real Estate Consulting. Mostly commercial properties and mostly large deals, but I know we've talked about doing this in our office for residential clients.
Do you think this would be a good service? Would you pay...say $1000 to a realtor to help you locate and find a house an write an offer? What if their service ended there? What if this included looking at up to 10 properties then it was $100 a property after that? Would you then pay $300 for advice or negotiation services? What would be a fair price for these services? Lawyers make 250 and up per hour. Are you ready to pay your realtor 100 per hour? What if you fail to find a house that suits you (even though they meet your requirements you can't decide on a house)? Do you get a refund, pay less or still pay because the realtor did the work of searching for, setting up appointments, driving you to the house, do the neighborhood research, answer all your questions about the house?
What happens to the commissions that they are paid by the Listing Broker (see above post)? Do you get it in a refund? That could be interesting. You pay upfront for the services that the realtor provides either on a per service or hourly rate or combination of both...then you get the commission which is offered to the realtor representing you (or not) from the Listing Broker. That could be very interesting.
Would that be interesting to you? I would probably be willing to do something like that for my customers. Question is...would the customers be willing to do that?
JR
www.85andSunnyRealEstate.com
Thanks Carl for a blog post that was informative, award winning, and well trafficed. Sadly, the comment spammers have arrived so I am turning comments off.
Posted by: Kevin Murphy at September 4, 2007 11:07 AM
