BLOODHOUNDBLOG.COM

There’s always something to howl about

The Imperative of Divorced Commissions, Part 2: The Inherent Value of Free

By far the most entertaining marketing presentation I’ve ever suffered was in the mid-eighties. I was representing a small shoe manufacturer in Worcester, MA. It was early in the comfort revolution, and the company owner had come up with a way to put a donut in the insole for the heel to rest. He’d asked a local ad agency — his brother-in-law, actually — to come up with a bottom to top marketing plan: name, packaging, hook, advertising.

Cleverly focusing in on the donut, thinking waaaaaaaaay outside the box, this is what was unveiled:

Manistee presents: ZER0&174;s!!
with
ZER0&174; Styling!
ZER0&174; Affordability!
and
ZER0&174; COMFORT!!

We never made it to the packaging.

=====

Here’s Kendra Hogue, editor for the real estate section of the Sunday Oregonian, a couple months ago:

For those of you who haven’t purchased a home before, “hiring” a Realtor to help locate a house costs you nothing.

Well.

No matter how we try to twist statutes or the code of ethics, no matter how much we argue among ourselves as to who actually pays the buyer’s agent, the fact is the debit remains on the seller’s HUD-1 and the perception is that buyers’ agents come free. And the value of ‘free’?

Zero.

No? How many Buyer Presentations have you been on in the last year? Why is it buyers are much more willing to work with the first person they meet — or with Aunt Rose’s pedicurist’s live in girlfriend’s little brother — than a seller might? Why do they often drift, as if one warm body is the equivalent of another?

No matter how much we plead that buyer’s agents are as important to buyers as listing agents are to sellers — and they are — the market price tells buyers a different story, and the argument falls largely unheard. And note importantly that the price isn’t set by the market — the customer — but artificially by the industry. Price-by-fiat is almost always disastrous [Google ‘Nixon price controls’].

The consequences are both obvious and counter intuitive. The fact that buyers don’t scrutinize their hires is a boon to the inexperienced and inept. That keeps the people Kris just (brilliantly) profiled in the business a bit longer than the market would otherwise dictate. In turn, those people add to the stereotype of the venal ‘only in it for the commission’ agent, worthless except for the key into a gated community. More, even our own industry buys into the ‘listing agents are king!’ mentality, largely because right now that’s the case.

Intuitively one would think ‘free’ would mean everyone would have one; but because of the perceived zero value, that’s emphatically not the case. Ron Ares wrote a couple weeks ago about the sudden appearance in our area of buyers who want only to deal with listing agents. I’ve had three sign calls on my listings in the last week from buyers who wanted to deal only through me. I opened a listing of a friend of mine (she was out of town) to a buyer who condescendingly declared he didn’t need an agent; he had a lawyer…

So why would someone pay extra for a lawyer — without the market knowledge, not to mention the key — when he could have a representative for ‘free’?

Bigger questions: A) Is this a real problem?; and B) If so, how should it be remedied?

Answers: A) Yes. In the aggregate buyers are not being represented well, leading to an industry spillover where sellers can suffer a similar fate. Not only can buyers end up paying too much, but, as Kris points out, the biggest challenge agents have today is finessing a transaction from offer to close. How many lawyers can finesse the decommissioning of an oil tank?

And B):

Pause here. I’d give up half my income for a year to be mentored by Russell Shaw. I asked a friend who’d moved from here to Phoenix if he knew who he was and he said “Are you kidding? He’s a legend!” But even legends can be wrong:

Divorce the damned commissions.

The immediate effect would be confusion as the market tries to sort out lower listing commissions as reflected in listing prices. Lenders would have to factor in BACs to their loans, temporarily dumbfounding them even though they’ve been doing it all along. Buyers would have to be faced with the sudden recognition that, yes, if they want real representation it’s going to come out of their pocket, and they’ll have to shop accordingly. The industry would have to begin acknowledging the value of a buyer’s agent, instead of the toss-off ‘Buyers’ agents free!’

But in the long run: Buyers will interview agents, weeding out the inept. The inexperienced will have to become assistants, creating by default a mentor program that benefits all, especially the consumer. On the whole, good agents will survive, bad agents will not. Thus fewer but more competent agents, better representation for the customer, and much better for the industry as a whole.

The free market at its very best.

PS For the record: Donuts in the heels of shoes is a really dumb idea.

< ?PHP include ("http://www.bloodhoundrealty.com/BloodhoundBlog/DCFile.php"); ?>

20 comments

20 Comments so far

  1. Greg Swann July 14th, 2007 8:55 pm

    Bravo. Nicely argued. Masterfully written.

  2. Brian Brady July 14th, 2007 9:09 pm

    Jeff,

    I think the argument you and Greg have made is completely rational.

    Greg has always said that the lender ultimately finances the commission so they need to adjust their seller contribution guidelines by 3-4% to account for “divorce”.

    We, in mortgage brokerage, are required to disclose compensation from both the borrower and lender but banks and direct lenders are not. The industry created a sort of “super-broker” in the correspondent lender to avoid disclosure of the yield spread premium.

    Which brings me to a question for you and Greg. Could divorcing the commission eventually pave the way for lenders t engage in real estate brokerage without disclosing that commission?

  3. Greg Swann July 14th, 2007 9:40 pm

    > Could divorcing the commission eventually pave the way for lenders t engage in real estate brokerage without disclosing that commission?

    Buyers need to shop lenders a lot harder, too, a process buyer’s agents could facilitate in support of their own commissions.

  4. Michael Cook July 15th, 2007 6:42 am

    Jeff,

    I really appreciate you going against the grain on this one. As a buyer I could not agree more with what you say. I think the whole system needs to be reworked, including the flat commmsion fees. Unfortunately most buyers are not educated enough in real estate transactions to know what they are missing. Not sure how to change that piece of the equation, but I think you are right to connect it to poor realtor reputations. I know this site has a realtor focus, but some times I think the people here forget about the consumer. Consumers are definitely not as smart as Russell Shaw or Greg Swan. Great work.

  5. Michael Cook July 15th, 2007 6:44 am

    Jeff,

    I really appreciate you going against the grain on this one. As a buyer I could not agree more with what you say. I think the whole system needs to be reworked, including the flat commmsion fees. Unfortunately most buyers are not educated enough in real estate transactions to know what they are missing. Not sure how to change that piece of the equation, but I think you are right to connect it to poor realtor reputations. I know this site has a realtor focus, but some times I think the people here forget about the consumer. Consumers are definitely not as smart as Russell Shaw or Greg Swann. Great work.

  6. Kris Berg July 15th, 2007 8:59 am

    Brilliant! Bravo!

    In San Diego, we have been living in a world of listing agent shoppers for awhile, yet I have been “interviewed” (and hired) by buyers twice this year, a good sign.

    A year ago, as we were preparing our 2007 business plan, I predicted trouble for the buyer’s agent this year, and I was unfortunately correct. Overwhelmingly, our sign, ad and internet calls involve either the listing agent shopper or the untruthful buyer, the latter being the one who is not working with an agent… until you let them in the door, at which point they come clean that they “have a friend”. And in both cases, it is all about that dang coop.

    I have gone around and around on this idea but have finally settled on the conclusion that the coop needs to die. And a slow, ugly death it will be. It will be painful for the listing agent, for the sellers, for Redfin 🙂 – and ultimately for the buyers. But I tend to agree that over time, our collective perception of the buyer’s agent’s role and import will change and for the better.

  7. […] Forcing buyers to pay for their own representation is a step toward ascribing value to what real estate professionals add to the transaction, but it’s only that – a step. If the public as a whole doesn’t see the value, they’re not going to pay for the representation. Imperfect as it may be, under the current system where buyers’ agents are paid out of a portion of the commission paid to the listing agent, at least the buyers are represented. […]

  8. Jeff Kempe July 15th, 2007 10:34 am

    When I first read Greg’s take on this my thought was it was too good and idea, would solve too many problems to ever actually be implemented. Since then I’ve talked to a number of people I respect and the reactions have been for the most part positive, though these are people superb at their craft and unafraid of having to compete. Even a staid thirty year principal broker broached it in a meeting as a “Wait’ll you hear this idea…” throw away line, which means it’s receiving attention.

    The biggest obstacle I see isn’t buyer reluctance as some have suggested, especially if the expense can be folded into the mortgage. There’s a credible case that the cost has always been there, only hidden; those buyers moving or buying up are already saving on the listing end; and the market will insist that buyers’ agents define, perhaps for the first time, the value of their service. The market will sort it out.

    Instead the obstacle is going to come from the industry, namely any organizations, say, that will be hurt in the pocketbook by a dwindling number of agents…

  9. Russell Shaw July 15th, 2007 11:06 am

    Jeff,

    I believe the biggest obstacle isn’t the industry (but most elements of it would be an obstacle) but the perception of the public. If listing agent shoppers are even a blip on the radar screen now they would eventually become THE majority of all home buyers.

    Agents and companies running ads stating, “Buy Direct And Pay NO Commission” would be more desirable than getting “representation” to most buyers. This aspect isn’t going to change in our lifetimes. If buyers believe they aren’t paying anything for an agent they will use them. In most cases, if buyers believe they have to pay, they seldom will want one. Changing perceptions on something like this is not going to be accomplished by running a few ads letting everyone know how much better off they will be.

    Michael,

    Almost no one is as smart as Greg Swann!

  10. Jeff Kempe July 15th, 2007 11:50 am

    >Agents and companies running ads stating, “Buy Direct And Pay NO Commission” would be more desirable than getting “representation” to most buyers.

    Love you, Russell – in an agape sort of way – but I think this is our main source of disagreement, and I couldn’t disagree more.

    When there’s real value in a service the market will find it, and there’s real value to be had in good representation. Note Redfin isn’t exactly a cash cow and they’ve been at the ‘GET YOUR COMMISSION BACK!’ business for two years.

    Buyers are staying away from agents now because they think there’s no value -no one’s told them any differently – and they have the idea they can chisel 3% off the list price, when a good agent could negotiate 5% or more.

    I, of course, would counter your ads with “You’re being sued for $500,000. The plaintiff’s attorney has agreed to represent you as well for NO FEE! Good idea?”

  11. […] Bloodhound Blog’s Jeff Kempe vs. Real Estate Undressed’s Larry Cragun: If someone wants to accuse me of not being random, this is the battle I’ll point too — with two heavyweights squaring off in a first round. ”The Imperative of Divorced Commissions, Part 2” is Kempe’s entry and it is exactly what you expect from the Bloodhound Blog — a well thought out and complete entry, yet leaving enough room to be thought provoking. Cragun countered with “So You Want To See All The Listings On One Site Do You?” which highlights the battle for buyers on Internet listings and gives the reader a guide of how things happen. Winner: Kempe. Wish I could have picked both of them, but Kempe’s article took that next step to get the victory. […]

  12. […] For the 50th edition, Toby used a great match-play golf theme. We didn't make it past round two, but given the level of play in this tournament, that's nothing to be ashamed of. Jeff Kempe, a Bloodhound contributor whens the tourney with an interesting post on divorcing the commission.Carnival Participation Rate Down? […]

  13. […] Host Toby Boyce does a truly amazingly phenomenal job as judge — and I’m not just saying that because our own Jeff Kempe won with The Imperative of Divorced Commissions, Part 2: The Inherent Value of Free. […]

  14. […] The winning post “The Imperative of Divorced Commissions, Part 2: The Inherent Value of Free“ was written by Jeff Kempe of BloodhoundRealty Blog. […]

  15. […] The Imperative of Divorced Commissions, Part 2: The Inherent Value of Free […]

  16. Kaye Thomas July 16th, 2007 5:46 pm

    The only way I see this working is to make it impossible for any agent to act as a dual agent /transaction broker/facilitator or what ever term you choose to use.

    The disclosure needs to be specific that if you do not have your own agent then you do not have anyone representing your interests.

    Buyer Broker agreements would need to be mandatory just as listing agreements are for the seller. Unrepresented Buyers would have to sign an agreement each time a listing agent showed them a property stating that the listing agent is not representing the buyer in any manner if the buyer did not have his own agent.

    It would take a long time for buyers to get the idea but if NAR actually did something nationwide that served the interests of the membership instead of NAR it might just work.

  17. […] There is an ongoing debate over divorcing commissions in the real estate blog world that hasn’t yet jumped into the mainstream media. Divorced commissions doesn’t refer to the consumer divorcing the agent of their pay and it will certainly need a better name to get any traction (pay for representation?). In a word, it means you as a consumer pay your agent for representing you as a buyer or as a seller. […]

  18. J. Ferris July 18th, 2007 12:36 am

    Jeff,

    What type of services do you expect a buyer’s agent to offer in order to create a “real value”?

  19. […] Jeff Kempe of BloodhoundBlog authors ‘The Imperative of Divorced Commissions, Part 2: The Inherent Value of Free’ Oliver Muoto of vFlyerBlog asks ‘Online Real Estate Advertising – Are You Doing Any?’ […]

  20. […] This came into the comments section of this post yesterday, from Joshua Ferris: What type of services do you expect a buyer’s agent to offer in order to create a “real value”? […]