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32 Comments so far

1. Jonathan Greene April 9th, 2007 2:09 pm

   Thanks for weighing in. It’s an interesting topic, although I can’t say I agree with you. Your logic, as always, is supreme.

2. Jesse Bilsten April 9th, 2007 3:46 pm

   Very interesting take on the problem. I’m not sure it would solve all the problems as I think the very fact that % is involved is the root of the problem.

   I don’t see why Realtors should be different from any other profession in this country where you provide money for time invested. If an agent made an amount based on time involved a lot of this fear of getting ripped off by the consumer would disappear and an agents worth would be immediately relevant.

   Not to mention agents would still be making money in bad markets unlike today where it seems agents disappear in bad markets (can’t sell houses = no money) and multiply like rabbits in good ones (selling tons of houses = tons of money).

   Setting a fixed amount or hourly rate I think (while also splitting the payment) is the silver bullet to most of the agent payment problem. Agents would make money even if a house didn’t sell and when the houses were selling fast, they’d also be pulling in a similar amount. Self checking ethics just like every other profession.

3. Greg Swann April 9th, 2007 5:36 pm

   Once both sides are negotiating, each side can negotiate to mutual satisfaction. I didn’t mean to imply that nothing would change except the HUD-1 bookkeeping. I expect everything to change in radical and unforeseen ways once commissions are divorced.

4. Mark Ballard April 9th, 2007 6:06 pm

   On an average, practical basis, the buyer is not going to have the funds to pay their half of the commission. There are many practical reasons why very few areas have a buyer pay any commissions. This is hardly a “debate” anymore.

   To give an analogy, name one other commodity or asset, (besides securities where the buyer has cash on hand) where the buyer directly pays their salesperson an additional commission amount? It is the Seller’s (the owner’s) responsibility to pay the agents working to sell their product. When you buy groceries, you don’t pay the cashier, the stock boy, and the produce manager 1% commission each on top of the purchase price. You don’t do that with computers, cars, or much else.

   The practical reasons for this inclued: It simplifies things for the consumer, and the Seller controls the responsibility of negotatiating and making sure each party working for him receives whatever compensation amount he/she thinks will maximize his overall profit.

5. Greg Swann April 9th, 2007 6:34 pm

   > On an average, practical basis, the buyer is not going to have the funds to pay their half of the commission.

   You need to reread what I wrote. The buyer is already paying 100% of both commissions at Close of Escrow. In principle, nothing need change but the bookkeeping on the HUD-1. Everything will change in due course in consequence, but all that is required for this to happen is a slightly different set of underwriting rules.

   For the rest of your argument: Home buyers will not have — and will not insist upon — effective representation until they control the buyer’s agent’s compensation.

6. Brian Brady April 9th, 2007 7:34 pm

   Mark:

   I’m going to weigh in here by answering this question:

   “name one other commodity or asset, (besides securities where the buyer has cash on hand) where the buyer directly pays their salesperson an additional commission amount”

   You are describing sub-agency and in all good faith, the sub-agent represents the interests of the transaction and not the buyer.

   I think that Greg proposes to move that buyer’s agent fee to the left side of the HUD with a seller credit from the right side (and being a negotiable item). Am I correct on that Greg?

7. Giles April 9th, 2007 7:35 pm

   “Home buyers will not have — and will not insist upon — effective representation until they control the buyer’s agent’s compensation.”

   Call me skeptical, but I’m not sure I understand what effective buyer’s representation entails. It’s well documented that real estate agents (both buyer’s and seller’s agents) don’t have perfectly aligned interests with their principals. (See Freakonomics). Buyer’s agents have an incentive to maximize the price a buyer pays in order to maximize their commission. The buyer on the other hand would prefer an agent to supply him with information regarding the lowest possible price that will seal the deal.

   Would you claim that an effective buyer’s agent can suggest this lowest price in spite of the fact that it’s against their economic interest?

   Also, why not just use a real estate attorney? They charge a flat fee or by the hour. They actually know the law and the legal ramifications of any oral or written contractual terms.

8. Greg Swann April 9th, 2007 8:27 pm

   > I think that Greg proposes to move that buyer’s agent fee to the left side of the HUD with a seller credit from the right side (and being a negotiable item). Am I correct on that Greg?

   No, what I am proposing is that lenders change their underwriting guidelines in such a way that sellers pay only listing agents, never buyer’s agents, with the corresponding change for buyers and buyer’s agents. Right now the lender will allow up to 7% commission, allegedly paid by the seller. This is strictly a matter of HUD-1 bookkeeping. In fact, all or most of the money is the lender’s money, and then the borrower’s money. We do things this way not because they make sense — they don’t — but because we did it that way in the days of sub-agency. If the lender only regarded a commission appropriate to a listing agent as coming from the seller, with a commission appropriate to the buyer’s agent coming from the buyer — all of which is purely imagination in the part of the lender anyway — then we could eliminate a vast host of ills in the real estate industry.

   Looked at another way: Right now, lenders are willing to pay the buyer’s agent’s commission because they pretend, contrary to fact, that the seller is paying the commission. They do the same thing with so-called seller-paid closing costs, lending more to the buyer so that the buyer can pretend to shove the money to the seller, so the seller can pretend to shove it back to the buyer. The whole charade is the lender playing peek-a-boo with himself. If we restructure the rules of peek-a-boo so that the lender lets the buyer pay for representation directly, instead of playing make-believe with the seller for the lender’s sake, then buyers will finally be able to obtain full representation.

9. Greg Swann April 9th, 2007 8:35 pm

   > It’s well documented that real estate agents (both buyer’s and seller’s agents) don’t have perfectly aligned interests with their principals.

   The listing agent’s and the seller’s interests are perfectly aligned with a percentage-based commission, although the parties can and do negotiate other terms.

   If buyers controlled their own agents’ compensation, they would learn to negotiate to maximize their own interests. The idea that a good buyer’s agent would risk a lifetime of referrals for a few hundreds bucks is absurd, but surely there are better compensation models than a straight percentage commission.

10. Kris Berg April 9th, 2007 8:41 pm

    Buyer’s agents have an incentive to maximize the price a buyer pays in order to maximize their commission.

    I am so very tired of hearing this flawed argument. If you truly believe that your agent is only concerned with you paying $20,000 more for a home so that they can pocket an extra $400 or so, you had best find yourself a new agent.

    The buyer on the other hand would prefer an agent to supply him with information regarding the lowest possible price that will seal the deal.

    Darn tootin’. And, for agents who rely on this line of work for a sustainable income stream, client satisfaction is everything.

    Would a fixed fee arrangement be more equitable? Perhaps, but some might argue that a flat tax rate is more equitable as well. Others would point out that fixed fee systems tend to be exclusionary.

    Without getting into the fee structure argument, let me say (blue in the face) that I, personally, work my butt off for my clients and at the expense of discretionary time, conventional family time, and a social life. I make a handsome living, and I pay an unquantifiable price. As for your attorney, when everything is said and done, I make a hell of a lot less than $250 an hour, and I work weekends and evenings.

    Greg - I like the concept of divorcing buyer and seller commissions on the face, but suspect that this separation would eventually lead to the death of buyer representation altogether. I see a world where listing agents end up “representing” both sides for half the fee, which brings us back to the dual agency argument. Redfin-esque companies are driving our business in that direction, and while their model is founded on the “Power to the Buyer” principle, I believe it is the buyer that will suffer in the end.

11. Giles April 9th, 2007 8:46 pm

    The seller’s interests are not perfectly aligned with the listing agent’s. Although both want to maximize the sales price, it is not always in the interest of a listing agent to put in extra work to raise the sales price by a nominal amount. This is especially true if the listing agent does not pocket the full 3% (and must share it with his company). The listing agent in most cases will prefer to close the transaction instead of waiting for a higher price since they will only see a fraction of any final sales price that is higher than the current price.

    It is well documented that agents selling their own homes garner a higher sales price than for homes which they represent clients (after appropriate factors are controlled for). Agents listing their own properties will let the house sit on the market longer in order to get a higher price if necessary. It has been shown that listing agents prefer to move client’s properties more quickly.

12. Giles April 9th, 2007 8:51 pm

    “Buyer’s agents have an incentive to maximize the price a buyer pays in order to maximize their commission.

    I am so very tired of hearing this flawed argument. If you truly believe that your agent is only concerned with you paying $20,000 more for a home so that they can pocket an extra $400 or so, you had best find yourself a new agent.”

    What is the flaw in this argument? Buyer’s agents maximize the sales price albeit subject to some constraints. However, as buyers are best considered as one-off players, buyer’s agents are more properly concerned with the reputations with other agents than with clients. As agents will deal with each other repeatedly, its in every agent’s interests to play fairly with other agents (sometimes to the detriment of their clients). The price paid by clients might not be huge, but it is non-zero.

13. Greg Swann April 9th, 2007 8:53 pm

    > The seller’s interests are not perfectly aligned with the listing agent’s.

    Assuming this is true, sellers need to negotiate performance incentives. The difference, for now, is that sellers can do this, where buyers are more circumscribed by the retarded way lenders disburse commissions.

    > It is well documented that agents selling their own homes garner a higher sales price

    NASCAR drivers are better in traffic than you are, too. A good argument for making the right deal with a Realtor. An excellent argument for not going though an attorney, who gets paid the same no matter what happens to you.

    Take a moment to consider that you are arguing against real reform in the real estate industry.

14. Greg Swann April 9th, 2007 8:55 pm

    > its in every agent’s interests to play fairly with other agents (sometimes to the detriment of their clients).

    You have no idea what you’re talking about.

15. Giles April 9th, 2007 9:00 pm

    “NASCAR drivers are better in traffic than you are, too. A good argument for making the right deal with a Realtor. An excellent argument for not going though an attorney, who gets paid the same no matter what happens to you.”

    I don’t see how this suggest anything about not going through an attorney. An attorney is subject to ethical duties and malpractice. If anything in the deal stinks, they may be held liable. This is one of the best reasons to have an agent and not go solo (without a realtor and attorney) — if your agent should have uncovered something and didn’t you can hold someone responsible.

    The NASCAR analogy is a bit off though I think. The point is that people respond to (financial) incentives. There’s nothing wrong with that, it’s just human nature. Realtors selling on their own account will maximize their take home. When they represent clients they have less of a financial stake (as low as 1-1.5% after others are paid their share), so it’s just natural that lesser incentives will achieve a less spectacular result. I don’t think there is a “right” realtor who can get around the behavioral aspects of incentives.

    I also don’t see this post as advocating against reform. Please explain.

16. Greg Swann April 9th, 2007 9:06 pm

    > Realtors selling on their own account will maximize their take home.

    Except this will piss off the other agents, which you say matters to someone, somewhere.

    > Please explain.

    Why bother? I would not even consider representing you. If you want to educate yourself, you’ve come to the right place. If not, you’re not my problem.

17. Giles April 9th, 2007 9:18 pm

    “> Realtors selling on their own account will maximize their take home.

    Except this will piss off the other agents, which you say matters to someone, somewhere.”

    I don’t say that anywhere. Come on, this is just common sense. If you’re selling something and keeping close to 100% of the proceeds (opposed to 1.5%), you are going to work harder to maximize the sales price.

    As far as this comment:

    “its in every agent’s interests to play fairly with other agents (sometimes to the detriment of their clients).”

    this is just a basic insight of game theory for indefinite games composed of repeat players.

18. Kris Berg April 9th, 2007 9:18 pm

    Now I am officially confused. Agents want to send buyers down the river for a couple of hundred bucks and risk future referral business and solvency, but agents at the same time want to send sellers down the river at the expense of a few hundred bucks to placate their fellow agents. Attorneys are magnanimous, and real estate agents are egocentric money grubbers. Glenn was right - We are a despicable bunch.

19. Kris Berg April 9th, 2007 9:19 pm

    Addendum: This is starting to remind me of a really bad high school debate class.

    My dog couldn’t have bitten you, because I don’t have a dog. And, besides, my dog doesn’t bite.

20. Giles April 9th, 2007 9:27 pm

    “Now I am officially confused. Agents want to send buyers down the river for a couple of hundred bucks and risk future referral business and solvency, but agents at the same time want to send sellers down the river at the expense of a few hundred bucks to placate their fellow agents.”

    You are being histrionic but ignoring the basic underlying motivations which are admittedly constrained by reputational concerns. I am not following your logic where anyone is being sent down the river. The issue is which party is capturing the surplus. In many cases, the amounts at issue may be nominal. This doesn’t mean that incentives don’t matter. Or is that your argument? That realtors are benevolent agents somehow unaffected by incentives (seemingly the only people operating in the economy unaffected)?

21. Giles April 9th, 2007 9:28 pm

    “real estate agents are egocentric money grubbers. ”

    I would suggest that a worker is worth what someone is willing to pay. My impression is that real estate agents are clawing to hang onto past compensation schemes thinking they are worth that compensation structure. If that makes someone a money grubber, so be it.

22. Giles April 9th, 2007 9:36 pm

    “Addendum: This is starting to remind me of a really bad high school debate class.”

    Did you go to Exeter too? What a phenomenal time.

23. Christoph Schweiger April 9th, 2007 9:52 pm

    I can see two fallacies of composition here:

    >1) NASCAR Drivers are better in traffic than you are?

    http://www.theheckler.com/news/templates/?a=654&z=2

    or

    http://sports.espn.go.com/rpm/news/story?series=wc&id=2222038

    >2) Also, why not just use a real estate attorney? They charge a flat fee or by the hour. They actually know the law and the legal ramifications of any oral or written contractual terms?

    http://www.northcountrygazette.org/articles/2007/022307AttorneyScheme.html

    or

    https://www.ajc.com/metro/content/shared-blogs/ajc/copbriefs/entries/2007.03.21.146518.html

24. Brian Brady April 10th, 2007 1:04 am

    I think I got it!

    The buyer’s commission is moved to the left side of the HUD and the lender allows an add of, say up to 3.5% to the LTV guidelines (so a 100% loan would go to 103, a 95% loan goes to 98, etc, etc)

    Yes?

25. Greg Swann April 10th, 2007 1:22 am

    > the lender allows an add of, say up to 3.5% to the LTV guidelines (so a 100% loan would go to 103, a 95% loan goes to 98, etc, etc)

    You’re almost there.

    Assume six percent in commissions. I would expect this to change as a result of making this change, but it’s simpler to keep the math the same for discussion.

    The way we affect to pretend to make-believe to do things now, if the buyer has 100% financing, the lender is pushing 100% to the buyer, who pushes that 100% to the seller, who pushes 6% to the listing agent, who in turn pushes 3% to the buyer’s agent.

    None of that is literally true, it’s just the fiction we write into the listing contract and the HUD-1. In fact, the lender is paying 94% to the seller, 3% to the listing agent and 3% to the buyer’s agent. The HUD-1 tap-dance in nonsense. The money all originated with the lender, and every penny of it is now owed by the buyer.

    The exact same circumstance would obtain in an all-cash sale, except the money would start with the buyer, not the lender.

    But let’s change the underwriting guidelines so that the lender acknowledges on the HUD-1 what is actually happening: The listing agent’s commission is charged against the seller’s side of the HUD-1, and the buyer’s agent’s compensation is charged against the buyer’s side of the HUD-1.

    Instead of the lender pretending that the buyer’s agent is being paid by way of the listing agent, by way of the seller, the lender allocates the exact same money on different line items of the HUD-1.

    What’s the benefit? The buyer now directly controls the buyer’s agent’s compensation. Buyers will make better deals with their agents, and they will effect better supervision over them. With this one simple change — to nothing but the underwriting guidelines — buyers will achieve true representation at last.

26. Reuben Moore April 10th, 2007 12:31 pm

    How is it that everyone who reads Freakonomics thinks they know all the intricacies of this counter-intuitive business? Oh, I know, I know, they’ve also bought and sold a house or two. And, I guess it helps if they attended Exeter.

27. Giles April 10th, 2007 2:49 pm

    How is it that everyone who passes a real estate licensing exam thinks they are suddenly an economist and are experts in the intricacies of the market?

    I would take a study (even in the form of Freakonomic essays) over the self-interested anecdotal stories of realtors any day.

28. Jesse Bilsten April 10th, 2007 3:29 pm

    I think the fact the Real Estate industry is questioning itself from the MLS’s to the way agents commissions are paid is proof enough that the “professionals” in the industry don’t know how to operate this “counter-intuitive” business.

    You described the very problem with the industry in your retort. It’s “counter-intuitive” and most of the suggestions that are made to try and streamline the business model and make it more intuitive are met with irrational hate and sheer unwillingness to change. Unfortunately those in this industry who aren’t willing to embrace change are going to be left behind. Your customers aren’t going to wait for you.

    Those of us who are making the suggestions aren’t really going to be affected too much, we’re just trying to weigh in on the situation. Whether you think it needs to change or not ultimately doesn’t matter. It will change regardless because the consumers (i.e. the people who drive this industry) are asking for visible and much lower commissions, public house searches, and the ability to sell their own houses without an agent.

    If there wasn’t this need, then obviously companies wouldn’t be sprouting up everyday to try and provide it. The only reason it isn’t changing faster is because NAR and every agent I seem to encounter is fighting it tooth and nail rather than embracing it and trying to serve the consumer.

29. Jonathan Greene April 10th, 2007 4:05 pm

    Wow. This got awfully ugly, didn’t it?

    I can only vouch for my action, as I’m not much for categorizing men broadly.

    I recently showed a client two properties. Both properties paid 3% co-brokerage commission to the buyers agent (me). One property was $298K, and the other was $261K. The buyer loved both properties equally, and wanted to put an offer on the $298K property and forgo the remaining showings. I personally thought that the $298K property was slightly overpriced, so I insisted that we continue on.

    Wouldn’t you know, we found a nearly identical property for $261K, at which time I gladly wrote the offer. This is a true story. Am I a freak of nature?

30. Greg Swann April 10th, 2007 4:18 pm

    > This got awfully ugly, didn’t it?

    Naw. Bad behavior gets clipped. Bad arguments are educational.

    > Am I a freak of nature?

    If you are, there are a lot of similarly afflicted Realtors around here.

31. If lenders divorce the commissions, they’ll be divorced | BloodhoundBlog: Real estate marketing and technology blog | Realtors and real estate, mortgages, lending, investments July 16th, 2007 9:07 pm

    [...] Jim argues for legislative changes, but my thinking is that lenders could effect this change overnight, without new laws. [...]

32. The Imperative of Divorced Commissions, Part 1: Fundamentals of Narcissism. | BloodhoundBlog: Real estate marketing and technology blog | Realtors and real estate, mortgages, lending, investments July 16th, 2007 9:07 pm

    [...] The only remedy I see, the only way to consistently get buyers equal representation, is, as Greg has argued so many times, to split the listing commission from the buyer’s commission. In this case two things happen: having secured his own contract, there’s no temptation for the buyer’s agent to lean to the seller’s side; [...]