Greg just posted an email he received from a West Valley broker, Joe Bourland. I want to respond to his last paragraph:
Maybe you should look into your established practices of real estate. There is an immense value in representation. Hopefully, the educated buyer you warn will realize the disservice you promote for clients.
Mr. Bourland,
Specifically, what disservice have you identified? Let’s assume that the base price of the home is $200,000. If the builder is offering me, the buyer’s agent, 6% for bringing my buyer into the community, I could look forward to a $12,000 payday when the sale closes! What is the most effort and money I could possibly do to earn that money? Well, I am in process of such a transaction at this very moment, working with numbers close to these. Let’s see what I’ve done and what I plan to do to earn this money:
At the beginning of this process, I introduced the couple to a few lenders who I thought would be a good match for them. They loved one, and she worked up a couple of Loan Status Reports (a loan document referenced in the Arizona Department of Real Estate’s standard contract language for Residential Resale Real Estate Purchases), depending upon whether we found a free standing house or a condo that the couple wanted to buy. (Ardell did a great job of explaining why this is important yesterday on Rain City Guide.) This filled in an important parameter of what we could look for.
Over the next couple of weeks I researched on MLS, looking for new and resale houses that fit the criteria that the clients gave me. I drove the wife around for about 20 hours total, and during this period I was better able to refine our search, based upon her reaction to what she was seeing. Once we had narrowed our search down to houses that would truly please her, the husband joined us to exercise his veto power. Finally, we found something they could qualify for, which satisfied both of their wants and needs, in a new home development.
The house they chose was a spec home. There are quite of few of them in our market right now. Greg talks about this in more detail in his response to an Ask the Broker question. So, they didn’t get to go to the design center to make any choices. Instead I had to communicate the difference between the model and what they can expect.
Now, these clients are not from the United States, and their fluency in the English language is merely adequate. Neither the builder’s agent nor I speak the native language of my clients, so we are transacting in English. This isn’t optimum, but it is adequate. I just need to be careful to check for understanding all along the way. When it comes to the finances, however, I think it is essential that they work in their native language. Since we are working with a builder who is offering buyers’ incentives to use the builder’s lender, we had to say goodbye to the loan officer who they had been working with. This was a cultural obstacle that we had to overcome, because my clients were displeased with being “disloyal” to her. I helped them fill out their pre-qualification paperwork, and left a note requesting a loan officer who could work with them in their native language, and asking that the loan officer contact me, so I could catch her up to speed.
The next day, I got a call from the loan officer. I explained that my clients are from a culture that disapproves of buying on credit. They’re cash customers, but they won’t be buying their house for cash. I wanted to give her a heads up that they won’t have the type of score that the loan officer would have hoped for. Then there are some other interesting issues that I explained and asked the loan officer to take into consideration while she sought out the best type of loan for them. She was great, and my clients felt comfortable again with the financial part of their home-buying adventure.
Then, I coordinated the meeting to sign the contract and will sit with them, checking for understanding as the builder’s rep describes what they are signing.
One of BloodhoundRealty.com’s Standards of Care when we’re dealing with residential resales is we always pay for the first year of a premium home warranty. Well, that would be silly with a new build, which will be covered for at least the first year by the builder. So instead, I’m buying my clients a New Home Construction Inspection. We’ll be using a third party inspection company to make sure nothing has been overlooked in the construction of their home, before the drywall goes up and the flooring goes down. (I think, by the way, this will be a nice marketing feature when the time comes to sell this house.) Then I’ll have the inspector come back to the final walk-through. I figure this will cost me about $350 for both inspections. Again, there’s that language barrier, so I researched to find a company in the Valley that can overcome that barrier. I was delighted to find one that can even produce the report bilingually!
The house won’t be ready to close till the end of the year. So between the two inspections I ordered there won’t be much more for me to do… just take pulses every now and then.
When my clients are setting up home in December, I will have invested about 30 hours total plus maybe $500 for inspections, a closing gift and gas. Does this satisfy your definition of “disservice” to our clients? I do not know your office’s Standards of Practice, so I won’t presume to comment on yours as you did on ours. However, I would be hard pressed to imagine that your agents representing clients at new builds are being more attentive to their clients. Is my 30 hours plus $500 worth $12,000? I don’t think so! And I know I’m good! I earn the commissions I make. So I have conceded 4 points of my commission to my clients to buy down the cost of their house, and I will make 2 percent. That’s $4,000. Subtract $500 in out-of-pocket expenses and I’m still going to make $116 per hour. And that’s a reasonable hourly rate for a self-employed entrepreneur. So you tell me: Who is doing a disservice to his clients?
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Joe Bourland says:
Mrs. Collins
You commented that $116 per hour is a reasonable rate for your service. When you sold a home earlier this year for $683,900 was your rate still $116 per hour? I figured 2% is about $439 per hour under the same scenario. Did you credit back the buyer $323 per hour?
September 22, 2006 — 4:30 pm
Cathleen Collins says:
Thank you, Mr. Bourland, for this opportunity to further illuminate the actual point of my article, which is that representing the buyer of a resale home is substantially more arduous than representing the buyer of a new build — both in time and in professional expertise.
September 22, 2006 — 5:22 pm
John K says:
I still don’t get where you guys are coming from. Is it the actual dollar amount that bothers you, the percentage, the feeling that agents don’t add value equal to their commissions, or what?
How does Bloodhound Realty do things, and how are they different?
I might add, at most agencies, you wouldn’t end up with $12,000 off a $200,000 sale. The company might take up to 50% of the commission.
Again, is it the size of the commission, the rate, or the entire commission structure that is the problem, and what are the solutions you suggest?
September 22, 2006 — 6:35 pm
Tim says:
Hate to say it, but when my mother comes to Arizona to look for a nice retirement home, I think the rebates Cathleen & Co. offer will probably be more attractive than the alternative. Money talks, particularly when the money to pay everyone in the transaction was her own to begin with.
September 22, 2006 — 6:36 pm
Jeff Brown says:
Geez Louise Mytle. I’ve never seen so much misguided Kumbaya hand-wringing in my life. I thought value was a perception of the client/customer in any transaction. The next words out of someone’s mouth, after hearing ‘$116/hour is enough for anyone’ is offering free copies of Karl Marx’s (Marks?) famous manifesto.
This post made me check on my hourly pay over the last 24 months, and it was just over $500/hour. I guess that puts me just a step or two behind the Enron guys, eh? I don’t wish to be unkind, but this pay structure has been in our industry for decades before I entered the business, and that was in Nixon’s first year as president. If, like computers did, the price for our services goes down, then the free market has spoken. I’ve seen so many times in my career when start-ups have tried to permanently lower fees, and they’ve all failed. Although this time the apparent trend showing a decrease in broker fees seems to have some traction, there will always be folks who wish to work with who their perception of value tells them are the best.
My clients reap benefits for which they’re willing to pay the fees I charge. I never list for under 6%, and I never buy for less than 3%, period. If the value I bring to the table falls short of that they’re free to find the door. That happens about once every couple years.
As far as all the folks who are hand-wringing over this, make better use of your hands. Make a circle, hold hands, and sing Kumbaya until the anxiety passes.
September 23, 2006 — 10:44 pm
Cathleen Collins says:
I’m sorry I wasn’t clearer, Jeff. I didn’t mean $116 an hour should be everyone’s rate for every transaction. I meant it is a fair rate for the service I am delivering to my clients who are buying their first home from a builder. I was establishing the quality of service that I deliver, since Mr. Bourland had raised a question about that value.
I think that the investors who are fortunate enough to work with you are probably getting a bargain at $500 per hour. And that’s really the point. One size doesn’t fit all. I would be amazed if even you were able to bring enough value to justify $500/hour from the first-time home buyer buying his residence from a builder. But if they wanted your time over Mr. Bourland’s agent’s time or mine, you are justified in charging $500 per hour, because that’s what your time is worth. If you’re working with new home builds, you don’t have time to make money for your investors.
I mentioned this in my post yesterday: I think Ardell DellaLoggia’s business plan is probably the best I’ve seen in this business — she makes a point of talking to her buyers up front about who’s really paying her, how much she will get paid and what value the clients can expect from her. I believe that you have this conversation with your clients, too. But I can’t imagine that you believe that this conversation is typical in our business, or even expected by the average buyer.
September 24, 2006 — 12:12 am
Jeff Brown says:
> I meant it is a fair rate for the service I am delivering to my clients who are buying their first home from a builder.
Fair? The market is giving you that rate and you’re now reducing it because you are making more than you’re worth? The developer thinks you’re worth that much and he did a mountain of research to find out the highest possible price he could charge for his product. The commission has not one thing to do with the price Cathleen. This was no doubt proven the same day you received your accepted offer from the developer, as he sold the same model to an unrepresented walk-in for the same price. The developer decided that HE would pay what HE thought your service to HIM was worth for bringing a buyer to him he might not have had but for you. HE paid you, not the buyer.
The convoluted logic used to prove the buyer pays for everything is the same used to say the hitter of a homer in a baseball game isn’t responsible for the homer, the pitcher is. And the logic there? The pitcher pitched it, and since the homer couldn’t have been hit without the pitch being thrown, the pitcher is responsible for the homer and not the hitter. That made me dizzy just writing it. 🙂
There are two ways to compute your value Cathleen. One is the market, which is what I prefer. The other is you, which in this case, and in my opinion, was under what the FREE MARKET said.
>I think that the investors who are fortunate enough to work with you are probably getting a bargain at $500 per hour. And that’s really the point. One size doesn’t fit all. I would be amazed if even you were able to bring enough value to justify $500/hour from the first-time home buyer buying his residence from a builder.
Again, the developer, the one who decides what you’re worth, not your buyer, decided you were worth $6K. If that’s the case, and I worked 12 hours on the deal, I’d be making $500/hour. The developer decided you were worth it, and that it was a fair price for HIM to pay you for bringing your buyer. You didn’t have to jusify anything because the developer already did, and he’s paying the bills. He’s the one $6K poorer, not your buyer. The only reason your buyer has more money in his pocket after the sale is because you decided the developer had thought too much of you.
That logic makes the back of my brain crash into the front of my skull. 🙂
>she makes a point of talking to her buyers up front about who’s really paying her, how much she will get paid and what value the clients can expect from her. I believe that you have this conversation with your clients, too. But I can’t imagine that you believe that this conversation is typical in our business, or even expected by the average buyer.
You’re right, I do have that conversation up front. You’re also right that I don’t believe it’s a typical conversation in our business. Even if all you say is that the developer/seller is paying your fee, NOT THEM, that’s fine. However, I go one step beyond that. I tell them I make 3% as a buyer’s agent, and if the commission is less than that they’ll make up the difference per buyer/broker agreement. And like you so correctly pointed out, the investment side is very different than selling homes – I make them lots of money, which is what they’re hiring me to do in the first place. We offer different end products, but they both have a value to our clients.
The difference between us Cathleen is that I think you’re value to clients is worth more than you do. You’re the cream of the crop and are worth every penny the market offers you. Why won’t you believe the market?
September 24, 2006 — 9:18 am
Cathleen Collins says:
That’s a meaty comment. Thanks. This is exactly the type of exchange I wished for when I wrote about project planning in real estate.
It’s Sunday, so I’ve got to run out to spend the day with clients. Gives me something to think about, Jeff. I’ll get back to you later.
September 24, 2006 — 10:01 am