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Butterflies might be free, but home-buyers pay for real estate advice — whether they know it or not . . .

By: Greg Swann, Phoenix Real Estate, Post Archive, RSS Feed
Posted: Friday, September 29th, 2006, 5:25 pm MST
Category: Blogging,Disintermediation,Enduring Interest,Marketing,Real Estate

Ardell raises some questions at Rain City Guide about my column in this morning’s paper on negotiating the buyer’s agent’s commission. I’m going to address some of her remarks here, but my fullest statement on the topic is quite a bit more comprehensive. In the newspaper, I get 350 words a week, with the result that I am splitting this one topic over 5 (or possibly more) weeks. I’m thinking, too, that we should create a category for these weblog posts, because both Cathy and I are writing quite a bit on the subject.

And thus to Ardell’s points:

“I find that most consumers would like we in the industry, to lead the revolution and win that battle for them, rather than being involved in the process of that change in the industry.”

I’m sure that would be nice, but I don’t expect it to happen that way. One of the reasons agents are so close with the co-broke information is that they’re giving up so much on the listing side. Buyers are the last sheep to be shorn — even though buyer representation is getting easier, not harder, and even though the prices of homes have risen dramatically over the years.

I don’t see any way for this to change across the board without buyers becoming educated and putting their education to work. One market segment who could help a lot are the For Sale By Owner sellers. They could implement my idea of conceding funds directly to the buyer, to be used at the buyer’s discretion for representation or other costs, with none of the risks a listing agent might face.

“Has anyone seen the Buyer Agent fee show on the Buyer’s Closing Statement when the transaction closes?”

This is the only way a HUD-1 is produced in Arizona. If it’s not being done that way in Washington — one HUD-1 for everyone — I can’t imagine why. In any case, the buyer can negotiate for full disclosure of all funds.

“Seller pays his agent and buyer pays his agent, is the only rational answer…”

But it’s not actually true. For a represented home, the seller sets the amount of the commissions, the listing agent sets the distribution, and the buyer pays every penny. The rational argument is that the buyer discovered the home because the seller paid a marketing expense, much as you discover any other product. But the marketing expense is nevertheless paid by the buyer, with no input from the buyer as to the amount to be paid to the listing agent. The buyer can affect the amount paid to the buyer’s agent — but only by a process of negotiation. You and I are initiating that negotiation now. Few other agents are. All buyer’s agents would initiate that negotiation if the funds available to be used to pay the buyer’s agent were controlled by the buyer, rather than by the MLS co-broke policy. Until that happens, most buyers will have to initiate this negotiation for it to take place, since most buyer’s agents would rather represent their services as being “free”.

“Truth is, buyers really do like these lies up to a point. They really do like to believe that is is free and the seller is paying it. Buyers like to “receive money from the agent” like the Redfin cashback. It’s a whole lot more fun to believe that they are “getting back” $20,000 than to understand that they are paying $10,000. They are not really getting back anything, they are financing their cash credit, if they take it in cash or cash credits. To truly save something, they have to negotiate a sale price with the seller and AFTER the fact, reduce the purchase price by the negotiated buyer agent fee difference. Otherwise they are including the full fee and they are paying it with interest for 30 years! They are borrowing it from the lender, not “saving” it.”

And all of this is a huge problem. Buyers need to grow up — and fast.

“But Greg does not give any advice regarding what to respond when the agent replies: “What do I charge?”

I only get to do this in 350 word snippets. But that’s a good one, so I’ll do something explicit with it. (I have to say, Q&A is an easy way to punch out a lot of text fast. Somebody should have a blogging contest…)

“What do you say to a buyer agent who tells you his services are FREE?”

A smart answer would be, “That’s interesting. How do you make your car payments?”

Buyers are not dumb, they just want something for nothing. Shopping should be “free.” Well, it is, if you do it alone or do it with an agent who has nothing better to do. Sellers understand why they must negotiate — because they understand that no agent is going to work to sell their home for “free.” If buyers wake up to the fact that they do pay for representation, then they can embrace the idea that negotiating a more favorable fee is to their advantage no matter how the excess funds are deployed.

Further down, from the comments:

“If a buyer needs to sign a contract to talk about commissions, the purpose becomes for the agent to get a contract, and not for the buyer to…anything.”

The purpose of every contract is the mutual benefit of the contracting parties. Right now, anything we do with buyer commissions is essentially unilateral, because the buyers don’t know to ask for it, and don’t question the numbers we offer. Cathy is playing right now with a flat fee for buyers, and we may go to that — possibly also with an added discount in exchange for a non-refundable retainer. Half of this is about giving the buyer a much better deal. The other half is about eliminating our front-loaded risks. The corresponding and countervailing sets of costs and benefits are what make it a good deal — for both parties.

I think we’ll end up doing the same thing with listings, and for the same reasons. We bring exceptional value to the transaction, and we’re willing to share in the cost savings we can effect, but the quid pro quo is that we want to eliminate non-productive client relationships from our practice. If I know going in that every client I work with is going to cover his or her costs, I can afford to charge less. That’s business, and buyers will do better by doing business than by shopping.

There’s more: There are at least three components that have made this industry amazingly stupid, as compared with any other business in the capitalist system. The first two are commissions and licensing, but the third, and by far the most consequential, is the safe-harbor income tax exclusion. Because brokers can “hire” everyone as an independent contractor, they have no reason to cultivate human capital — the only kind that really matters. This was a foolish mistake, and it may well be the death knell for traditional personal-service real estate. One of the things we want to do, in the long run, is effect a totally different kind of business model for real estate representation. This again could result in huge costs savings for buyers and sellers while increasing our own profitability.

Want to get the bums out of this business? Make real estate brokerage so efficient that only smart, honest, ethical people can make a living. Profit is the purpose of capitalism, but a gradual movement toward moral perfection is a necessary secondary consequence. There is nothing wrong with asking buyers to make a commitment in order to get one in return. What is wrong, in my opinion, is deceiving them — one way or another — into thinking that extremely valuable professional advice is “free”…

 
The divorced real estate commission file: This is an organic compendium of weblog posts and internet-based articles arguing for and against the idea of divorcing the residential real estate commission — eliminating the co-brokerage compensation from the listing agreement, with buyers contracting for and arranging compensation for their own representation. One way this might be effected: Lenders could permit buyers to expense representation on the HUD-1 form as sellers do now. The entries collected here represent the full gamut of opinions on what may be the most important issue facing Realtors today. To submit additional posts or articles for inclusion on this list, fill out the form at this link.


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Related posts:
  • Who pays the buyer’s agent? Once we’ve divorced the commissions, we can stop worrying about it
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  • Why should you enlist a buyer’s agent to help you buy a home? Because you’ll get a much better deal — even if you pay full price

    • 13 comments

    13 Comments so far

    1. ardell dellaloggia September 29th, 2006 8:15 pm

      Excellent comeback :-)

    2. Joshua September 30th, 2006 1:47 pm

      Agreed. Excellent comeback.

    3. Helldigger October 3rd, 2006 4:16 pm

      I sold my house in 15 days after starting the process and after 8 days on the MLS, by myself to a buyer without an agent and we both benefited from the transaction.

      Of course I had completely remodeled the house and it was in pristine condition. We also priced the home in front of the falling market. Every listing agent had a different number and the range was amazing. We finally had an appraiser come in to get a solid number. We offered the home below the appraisal by 1%

      I paid for a listing on the AZ Republic classified section and put in a paid ad on forsalebyowner.com. I had listed my house on various free sites like craigslist.com and owners.com. I made flyers and circulated them around the neighborhood. I contacted the neighbors and told them about the house.

      The calls came rushing in. Not buyers, but the bloodsucking listing agents. “We can market your house better than anyone” was the recurring theme.

      I had over 24 listing agents vying for the listing with all kinds of fancy flyers, marketing schemes and scare tactics.

      The bottom line was that they would put the house up on the MLS and take a hike. I might get a sign and a lockbox and promises of widespread advertising on the web and to their extensive client base.

      After extensive consideration, I became acutely aware these people had no intention of selling the house by actually bringing prospects by, but would be getting 12,000 for an MLS listing, a sign and a lock box.

      I needed a better solution. I researched the net for an agent who would list the property for no commission. I easily found one.

      I paid a flat fee of 399.00 for an MLS listing, offered 3% for the buyers agent and made my own sign and flyer.

      The listing Broker offers all of his services on an al- a- cart menu.

      If I want a lock box or sign post, I can pay for that particular service. If I want contract help or negotiating the offer, I can pay for that product only. If I needed a title company or lender, I could pay for a list.

      I held OPEN HOUSE for two weekends.

      I got 1 agent who actually showed up at the property with buyers after it was listed on the MLS. The only reason they came by was because they were looking at the house across the street by appointment.

      I got lots of play off the other ads, open house signs, flyers and word of mouth. I had a steady stream of lookers and many qualified buyers. None had an agent with them.

      I had 3 offers.

      It seems to me Agents take an aggressive stance on listing the property but lose all interest once it is.

      The buyer had seen my property on Craigslist.com and on Owners.com. but not the MLS.

      I split 3% on the sale with the buyer who had no agent.
      I saved 3% by paying a flat fee MLS listing with no commission to the listing Broker.
      So I sold the house at 1-1/2% less than my full price but put 4-1/2% more in my pocket by selling it myself direct to a buyer without an agent. My out of pocket advertising costs were less than $800.00.

      The process has left me wondering about the Real Estate community as a whole. It seems the game is “Get a listing then go on vacation”.

      I believe agents think the market is so bad why even try. I am very disappointed that I had no agents show up with actual buyers.

      What’s up wit that?

      The only thing a seller needs is a qualified buyer and a good title agency. The hype surrounding agents saving you from yourself is unfounded. Representation by an agent is a good idea if you have no clue what you are doing, but if you have any sense at all, it will save you thousands by educating yourself about real estate transactions, offers, contracts and title insturctions. Why pay someone thousands for what you can do yourself?

      Helldigger

      .

    4. Greg Swann October 3rd, 2006 4:29 pm

      > The bottom line was that they would put the house up on the MLS and take a hike.

      I can’t quarrel with you because I have the same complaint. We do a lot more for our sellers than the Realtors we compete against, but I can’t imagine why people would pay 2% or 3% for the sales effort they seem to get from some — not all — Realtors in the Phoenix area.

      Congratulations on your sale. If you’re ready to buy, I’ll make you a sweet deal. ;)

    5. Helldigger October 4th, 2006 1:44 pm

      Im looking at the proceeds.

      What do you know about hedge funds?
      Why would I buy real estate in a declining market?

      Helldigger

    6. Bob October 4th, 2006 3:39 pm

      Probably the best advice on selling a home fast can be found at this site.

      It’s one simple word, but it really worked for me.

    7. Greg Swann October 4th, 2006 3:47 pm

      > Probably the best advice on selling a home fast can be found at this site.

      Excellent. Bravo!

    8. The San Diego Home Blog » Blog Archive » Dirty Little Secret October 6th, 2006 8:58 am

      [...] So, I’ll say it. I do what I do to make money. But who pays me? I honestly don’t know why I am having such a tough time getting my arms around this one. Maybe I need some deprogramming, or just maybe I’m right, but I continue to think that sellers in a transaction pay the real estate fees. By that I mean, they pay the compensation to both the seller’s and buyer’s agent. It may not always be so, but at least for now, that is the way it is. Greg at the Bloodhound Blog continues this debate in a recent post, insisting that it is in fact the buyers who pay their agent. Ardell at RCG agrees, although they each put a slightly different spin on the argument. At the risk of appearing a small thinker, let me just state the facts. [...]

    9. Blue Collar Agents - Business Week: “Home Buyers, Beware” December 17th, 2006 8:42 am

      [...] A most important point, which buyers often fail to understand, is that they are sharing in the cost of commissions and incentives. In most cases, a buyer could negotiate a commission with their buyer’s agent, then apply any excess commission towards the purchase of the home. [...]

    10. How’s the Market? » Blog Archive » Top Producers? January 18th, 2007 10:36 am

      [...] Ben – my brother and the Buyer Specialist on my team for those that don’t know – and I rank as top full service agents working the Oakhurst, East Lake and Kirkwood markets. In fact, from January 1st 2005 to August 30th 2006 we are ranked in the top 100 agents in the State for listings taken and homes sold! That’s no small feat given there are over 38,000 licensed agents working the state of Georgia… The interesting thing about this…while I rank in the top 100 agents in the state (currently #81), I also rank as #2 in my marketplace (24 and 52 FMLS market areas – which include Oakhurst, East Lake, Kirkwood and City of Decatur). The #1 listing “agent” in the area is DUFFY REALTY – a flat fee brokerage that is essentially a For Sale By Owner assistance program coupled with an MLS listing and the #3 “agent” is CENTURY 21 CLICKIT.COM – another flat fee MLS brokerage and For Sale By Owner assistance program. By the way, don’t fall into the flat-fee trap – the true cost of listing your home in the MLS has to be figured using this simple equation: “the ‘flat-fee’ you pay upfront not contingent on the result of selling your home”+”3% to the buyers agent working to help your buyer locate/negotiate/assist in selecting your home“. It strikes me when I see a flat-fee company advertising their services and failing to mention that the buyers agent fee must be calculated to give a fair and accurate cost of sale analysis. Now, there has been much debate on who actually pays the buyers agents’ fee in the blogosphere – I’ll save my opinion for another post. [...]

    11. blog » Who pays the commission? buyer or seller? Both? January 19th, 2007 10:16 am

      [...] wow there is this bizarre chicken and egg type conversation going on over at Bloodhound Blog [...]

    12. Help-U-Sell Northside Realty MN Blog powered by Agentscoreboard.com February 18th, 2007 2:31 pm

      [...] WOW there is this bizarre chicken and egg type conversation going on over at Bloodhound Blog i’d like to offer some food for thought… consider the sale of a stock. The stock price is set by the market, what a seller is willing to sell for and what a buyer is willing to pay. The “broker” charges a commission over an beyond the underlying value of the security, to both sides, for the allowing the participants to use his access to the trading platform (NYSE, NASDAQ, Etc..) . Because there is a lot of liquidity in the market and the stocks as an asset class are uniform, the process of transfering ownership is standardized. The value of the broker here is access, of course they could provide some sort of guidance as to which stocks to buy but you’ll pay a premium for that. [...]

    13. Rancho Santa Fe December 14th, 2007 11:05 am

      “I believe agents think the market is so bad why even try. I am very disappointed that I had no agents show up with actual buyers.”

      I do not know about Arizona, but in California there is “implied agency”. It means that a few actions on behalf of the agent representing the buyer in a FSBO transaction can result in an “implied agency” relationship, which now makes the agent liable as the agent of the seller, even without that intent.

      As a result, many agents will not show a fsbo listing because of the risk of lawsuits.