BLOODHOUNDBLOG.COM

There’s always something to howl about

Introduction to “A consumer’s guide to the divorced real estate commission” — the eBook

[This is the introductory text to an eBook I have prepared discussing the idea of divorcing the real estate commissions, a topic I have discussed here at some length. You can find the eBook by clicking here. If you like, you can post a button linking to this book — there is code at the end of this post. But my primary motive for putting this together is to appeal to the various consumer-facing personal finance weblogs. I don’t foresee any meaningful reform in the real estate industry originating from the inside, so I am doing what I can to arm consumers against the pernicious evil that is the National Association of Realtors. –GSS]

 
Introduction

Here are three interesting real estate questions, two that came to me directly and one that was commended to me by Rudy Bachraty of Trulia.com.

Question #1: “Potential buyers for our home ($800K – California) have a realtor but he did not find our home for them. The buyers did and have visited both times without him. He has played no role whatever in bringing us these buyers. If we accept their offer why on earth should we give him 3% ($24K) of our home’s equity for contributing nothing whatsoever?”

Question #2: “When looking at homes on our own and calling the listing agents ourselves to set up appointments, does that obligate us to go with the listing agent if we decide to place an offer on the property?”

Question #3: “Since the amount of work involved doesn’t really differ according to the value of the house, financially, it seems like the percentage commission would make higher prices more favorable from a buyer’s agent’s perspective. If this is the case, why would the buyer’s agent be motivated to help negotiate the price down?”

Now, there are nice, long, complicated answers for each of those questions, and nice, long, complicated answers are the very essence of a certain type of salesmanship. It’s called Tap-Dancing, and it works — at least if you’re easily confused. But here are much shorter, much more truthful answers to those three questions:

Answer #1: If you want to hang onto the buyers, you’re probably stuck paying the do-nothing agent. Grin and bear it.

Answer #2: You are not obliged to have the listing agent represent you, but he will almost certainly not agree either to compensate a buyer’s agent for you, nor to waive the buyer’s agent’s commission.

Answer #3: Ethical buyer’s agents and whores-with-hearts-of-gold do exist, but paying a buyer’s agent a percentage of the sales price is a misalignment of incentives: The buyers would rather pay less, but the buyers’ agent earns more when the buyers pay more.

Even better, here is a very short answer to all three of these dilemmas, plus dozens of others: Divorce the commissions.

Each one of these problems is caused by the insane way we compensate buyer’s agents in the residential real estate market. From the beginnings of real estate brokerage, sellers have set the amount of compensation for the listing agent, and the listing agent has set the amount of compensation for the buyer’s agent. The buyer’s agent’s incentives are misaligned with the buyer’s interests because the seller, historically, was paying the buyer’s agent to get top dollar for the seller — a complete betrayal of the buyer.

Things are still done this way because nobody ever thought to change them, but the entire Rube Goldberg contraption is absurd: Sellers pay the listing agent to pay the buyer’s agent to betray the seller’s interest. Buyers believe they are getting real estate representation “for free,” when in fact “their” agent is being paid by the seller and the listing agent in the hope that the buyer’s agent will betray the buyer — often with secret bonus payments to the buyer’s agent to sweeten the pot. All of this is a massive conspiracy devised by real estate brokers to enrich themselves by defrauding consumers.

Over the course of the last two or three years, we’ve had a wonderful information explosion in the real estate industry. Venture capital-funded internet start-ups — I call them Realty.bots — have sprung up, providing scads of information to consumers — information that was previously more difficult to obtain. But the owners of the Realty.bots are much like consumers themselves: They understand real estate at the surface level of transactions, but they really don’t know very much about what’s going on at the level of real estate brokerage.

This is not a criticism. No one understands sex like a gynecologist, but when an OB/GYN’s fancy lightly turns to thoughts of love, you might wince and change the subject. So while a great deal of previously undisclosed information is suddenly being shared with consumers, the most important issues in residential real estate representation are still concealed.

What are these issues? The real estate licensing laws do not exist to provide you with consumer protection. They exist to “protect” you from cheaper competition. The IRS “safe harbor” income-reporting exclusion for real estate brokers virtually assures that 90% or more of all new agents will fail within their first two years in business — but not before they’ve had the chance to wreck the financial lives of innocent consumers with their “state-licensed” inexperience and ineptitude.

There’s more, but by far the most significant “secret” issue in residential real estate is the way that buyer’s agents are compensated. The current system virtually assures the betrayal of both the buyer’s and the seller’s interests, with this fate being avoided only by accident. Moreover, it occasions as a secondary consequence the citadel of secrets and lies known as the MLS system.

The residential real estate industry is not a true business in its present form. By means of legislative fiat and its own internal structures built on secrecy and deceit, it is a cartel — a vast conspiracy against the consumer. But of all the reforms I could name to correct this atrocious situation, the one that would make the most immediate, most consequential difference would be to divorce the real estate commissions — to restructure the way we account for funds at the closing table so that the seller pays only the listing agent and the buyer pays only the buyer’s agent.

How hard would it be to effect this change? It could happen just like that — just by a change of policy by loan underwriters.

How likely is this to happen? Hide and watch.

But this is a vitally important consumer issue. There are a few Realtors who understand why this is so important, even if it might result in our earning less per transaction. There are similarly enlightened lenders and title reps. But for the most part, the entire real estate industry is opposed to this idea — and they’re way ahead of consumers because they know the issue exists, and most consumers do not.

That’s why I’ve put this little e-book together. It’s based on a series of weblog posts I wrote in November of 2007. I’ve updated them here and there, but the main argument stands — and, to my knowledge, no one has been able to dispute it in even the smallest way. There is simply no way to argue that the present system of compensating Realtors is in the best interests of consumers. It serves — and is designed to serve — the real estate brokers and their agents at the expense of the interests of consumers.

What can be done? The best recent hope for divorcing the commissions was the Department of Justice/Federal Trade Commission lawsuit against the National Association of Realtors. Alas, that ended in an essentially-meaningless whitewash settlement. It seems plausible to me that, in due course, a judge in a real estate lawsuit will take notice that buyer’s agency as it is currently practiced is in fact simply sub-agency — every agent works for the seller — in camouflage. And there’s always a chance that both the NAR and the Mafia will wake up one day and forswear their criminal ways forevermore.

But don’t hold your breath.

What we can do for now is arm ourselves with information. The sad fact is that most consumers don’t even know this issue exists, and they blithely grope their way through real estate transactions, convinced to the core that their agents really are acting in their best interests. The good news is, this is often true. The bad news is, the commission structure we have right now rewards and sanctifies the persistent betrayal of Realtors’ fiduciary duties to their clients.

So even though we may not be able to change anything right now, on our own, nothing will ever change until consumers learn that they must look out for their own interests in their real estate transactions.

So this is a matter of “consciousness raising.” If buyers and sellers understand how their agents are compensated, they can at least negotiate payment terms that aligns their agents’ interests with their own. Simply raising the issue could provide important clues about the honesty and trustworthiness of particular agents.

If you would like to help pass this word along, you can use one of the buttons shown below to link back to this eBook. The more people who know about this issue, the greater our chances of achieving reform. To deploy one of these buttons, just copy the code you see below the button and paste it into the sidebar of your website or weblog.

Large button — 200 pixels

<p align="center"><a
href="http://www.bloodhoundrealty.com/DivorcedCommissions.pdf"
target="_blank"><img border="0"
src="http://www.bloodhoundrealty.com/DivorcedLg.png"></a></p>

Medium button — 150 pixels

<p align="center"><a
href="http://www.bloodhoundrealty.com/DivorcedCommissions.pdf"
target="_blank"><img border="0"
src="http://www.bloodhoundrealty.com/DivorcedMd.png"></a></p>

Small button — 125 pixels

<p align="center"><a
href="http://www.bloodhoundrealty.com/DivorcedCommissions.pdf"
target="_blank"><img border="0"
src="http://www.bloodhoundrealty.com/DivorcedSm.png"></a></p>

If you walked into court to defend yourself in a lawsuit, only to discover that “your” attorney was being compensated by your opponent in the dispute, you just might be able to smell a rat. As you will learn in this small book, residential real estate is a rat’s nest. With your help — and your completely justified outrage — we just might be able to clean it up.

 
Elsewhere: The Philadelphia Real Estate Hub, Political Calculations, Bigger Pockets, Frugal Babe, RealCentralVA — Jim Duncan, Living Almost Large, On a Quest to be Debt Free, Consumer-Focused Carnival of Real Estate.

Technorati Tags: , ,

20 comments

20 Comments so far

  1. Ryan Hartman September 7th, 2008 6:03 am

    Greg,

    Thanks for this! — It’s nice to have such an opportunity to participate…

    Will get it up on our site asap. Here’s to hoping my broker doesn’t make me take it down.. 🙂

  2. Greg Swann September 7th, 2008 6:30 am

    > Will get it up on our site asap.

    Bless you, sir. Thank you.

  3. Stephanie Edwards-Musa September 7th, 2008 7:16 am

    Greg, this is interesting. I was walking out the door so skimmed and read parts of this. I have been saying for several months now that I forsee the real estate industry changing and that brokers should allow to be paid on something other than a percentage of sale. Keyword being sale. It just makes sense.

    Many agents are chosen because of expertise. Consultation? Personally, I think we will start seeing more of that. Interesting to watch it all come together and change with technology.

    Will come back after my appoinment to read this word for word. Thanks

  4. jim canion September 7th, 2008 10:47 am

    Greg
    You certainly have some interesting ideas. This sounds like a good idea at first blush. Most anyone who wants a higher quality of representation by the agents of this industry would gladly work to achieve that goal since a better reputation would be a good thing. As a home buyer
    I know that my purchase price is affected by the total commission paid as a result of the transaction. Even though the seller is charged at closing based on the traditional contract provisions used in most areas, it
    won’t make any difference to me as a buyer if I pay direct to my agent unless I end up with a lower net cost for the property.To achieve this I have to negotiate a lower commission with my agent and get the seller to lower the price due to not being charged with my agents
    fee. Dont hold your breath.Also, being able to negotiate a direct fee with my agent doesnt mean she is skilled or
    hard working and I wont really know for sure until later.
    All agent fees are under scrutiny today and soon will be
    reduced on an ongoing basis. Many companies are privately
    doing what you recently wrote about; rebating even when
    you didnt have to. Redfin,Zip and others have an entire business model based somewhat on direct representation for a fee or a rebate to their customer.
    Would it not be better to work for better, more informed,
    trained,tech supported agents to give the public better assistance even at a higher commission.I know that sounds
    far fetched but lets not give up on our profession. We can do better…..

  5. Teri Lussier September 7th, 2008 3:05 pm

    An amazing body of work. You have, once again, raised the level of discourse about this issue.

    >But my primary motive for putting this together is to appeal to the various consumer-facing personal finance weblogs. I don’t foresee any meaningful reform in the real estate industry originating from the inside, so I am doing what I can to arm consumers…

    Smart move. Thank you so much for doing this.

  6. Greg Swann September 7th, 2008 3:51 pm

    > Smart move. Thank you so much for doing this.

    Bless you, ma’am. Thank you. I got the nudge from McCain Thursday night: It’s not enough for this argument to be findable on Google, since consumers don’t even know to search for it.

  7. Susan Livingston September 7th, 2008 9:29 pm

    Greg, This is great information on a subject I’m very interested in. Since this whole situation is not likely to change very soon, I’m curious as to how you currently structure your buyer and seller commissions to address some of these issues in the meantime. Have you shared, or will you share, that information with your blog readers? Thanks.

  8. Greg Swann September 7th, 2008 10:30 pm

    > I’m curious as to how you currently structure your buyer and seller commissions to address some of these issues in the meantime.

    When we list, our compensation arrangements are fairly elaborate — much more elaborate than our clients are expecting. When we represent buyers, unless there are unusual circumstances, we’re fairly traditional. We don’t take bonus commissions, so we disclose them when they’re offered and concede them at COE. We’ve never negotiated a buyer’s agent’s commission that aligns our interests with the buyer’s, but as I have discussed on repeated occasions, we’re more interested in taking care of our clients than in taking care of ourselves. I’m very grateful that there are so many scrupulous Realtors out there, given that the system is designed to reward more mercenary conduct.

    This has nothing to do with you, Susan, but I hope you can forgive me for taking it on here: If inlookers want to discuss this issue, they must do so in accordance with our comments policy. I think it’s absurd to try to impugn my integrity as a Realtor, but we’re not going to host flaming comments under any circumstances. So far I’ve killed three abusive comments. Fear not, though. You didn’t miss anything. There wasn’t a cogent argument in any of them.

  9. Jay Thompson September 8th, 2008 9:44 am

    Much to absorb here. Thanks for collecting it all in one place. I don’t want to sound off until I’ve had time to digest and ponder, but I can say that I’ve always struggled with two things: 1) the misnomer that “buyers representation is free” — in short, there is very little in life that is “free”; and 2) “incentives” provided by the seller/seller’s agent to the buyer’s agent (incentives as in “bonuses”, the often ridiculous co-brokes offered by builders, etc.)

    “. . . even if it might result in our earning less per transaction.”

    Earning less per transaction, probably. Earning more in the long run, almost certainly — through satisfied clients repeat purchases, their referrals, and what could be a “turning of the tides” in general consumer appreciation of Realtors. To focus on maximizing the dollars on the individual transaction is very short-sighted. Alas such focus is common in this business.

  10. Greg Swann September 8th, 2008 9:47 am

    > Earning less per transaction, probably. Earning more in the long run, almost certainly — through satisfied clients repeat purchases, their referrals, and what could be a “turning of the tides” in general consumer appreciation of Realtors. To focus on maximizing the dollars on the individual transaction is very short-sighted. Alas such focus is common in this business.

    Hear, hear!

  11. […] from Blood Hound Blog writes about real estate agent commissions only benefit the agent, and about how we can raise awareness and bring about reform in the real estate industry.  If […]

  12. […] Swann talks about real estate agents commissions in Introduction to “A consumer’s guide to the divorced real estate commission” – the … posted at BloodhoundBlog. I think we’re moving there already with I sold my house dot com, […]

  13. Marti Scott September 10th, 2008 9:57 am

    Finally someone agrees with what I have been advocating for years. I have three things to say about this:

    1. It has been apparent that commissions are being paid on commissions! Example: House priced at $400,000 includes a 6% commission. So the agents get to share $24,000. The real value of the house is $376,000. Am I understanding that the seller is now paying 6% for the $24,000? It so appears to me! What would be another word for double taxation in this instance of paying commission twice?

    2. I have never understood why the seller pays, or authorizes, the buyer’s agent commission. My answer is to have the seller pay their agent and the buyer to pay their agent. Where does this money come from? Simple. The sale price (example above) $376,000 for value of the home, plus whatever commissions the agents will work for to be added to the sales price and the lenders use that all inclusive figure to fund the loan. In my model, the lender authorizes commission payments.

    3. In summary: Not only do agents need to rethink how to get paid, appraisers and lenders need to rethink how they package loans to include the agents fee. They may as well throw in all the title, closing and lender fees in that category too. In California, the property tax is based on sales price. In my model, the property tax would be the $376,000 as in my example above. Why pay property taxes on agent’s commissions?

    Now you have my two cents. Anyone agree or care to disagree with me?

  14. jaybird September 10th, 2008 2:22 pm

    This discussion–at least from my perspective–ignores several truths:
    1) 95% of “listing agents” are nothing more than data entry specialists who do nothing more than put a home in the MLS with shifty photography included
    2) 99% of “listing agents” know nothing about getting a home massive exposure in addition to the MLS that does not cost the Seller a ton of money.
    3) once a home is in the MLS it is exposed period
    4) from a seller’s perspective which is a more valuable service–putting his home for sale in the MLS or an agent bringing a buyer to the table who will ratify a contract with him after negotiating. I guarantee you most educated sellers find more valuable the agent who brings the buyer to the table and would rather that agent get paid for it and more for it–a higher portion of the commission–than the listing agent. This is why average listing commission will continue to drop yet the average commission received by the selling agent (buyer agent) will not drop nearly as much–the selling agent with a buyer brings the value to the table.
    5) the more productive selling agents (20-100 transactions a year on the buyer side) tend to be passionate about their fiduciary duties telling clients to walk away from transactions on a regular basis and exposing overpriced listings continually–a very protective mentality for protecting their clients financial interests. When you’re making 2, 3 or $400,000 a year then pithy differences in commissions based on sales prices or pathetic/unnecessary bonuses mean absolutely nothing to you. Satisfaction and reputation for your consumer advocacy on the buyer side is everything. The challenge for buyers is finding these types of selling agents (buyer agents).

    Flame away “listing agents”. And for that small minority of us who pursue excellence on the listing side versus status quo mediocrity my hats are off to you.

    peace out,

    J

  15. […] Swann presents Introduction to “A consumer’s guide to the divorced real estate commission” – the … posted at […]

  16. Carnival of Net Worth #8 September 11th, 2008 11:12 am

    […] Swann presents Introduction to “A consumer’s guide to the divorced real estate commission” – the … posted at BloodhoundBlog, saying, “By far the most significant “secret” issue in […]

  17. […] Swann presents Introduction to “A consumer’s guide to the divorced real estate commission” – the … posted at BloodhoundBlog, saying, “By far the most significant “secret” issue in […]

  18. […] Swann presents Introduction to “A consumer’s guide to the divorced real estate commission” – the … posted at BloodhoundBlog, saying, “By far the most significant “secret” issue […]

  19. […] Swann presents Introduction to “A consumer’s guide to the divorced real estate commission” – the … posted at BloodhoundBlog, saying, “By far the most significant “secret” issue in […]

  20. […] Swann presents Introduction to “A consumer’s guide to the divorced real estate commission” – the … posted at BloodhoundBlog, saying, “By far the most significant “secret” issue in […]