The Commission-Based Fee Structure: it’s Bad for Buyers
Craig on 04 22, 2008
This post is not legal advice. For legal advice, consult an attorney in person, not a blog.
[Sorry, no links or cites here, but I think the following historical perspective is undisputed:] Originally, real estate agents (and brokers, referred to collectively in this post as “agents”) represented only the seller. The “listing” agent signed the contract with the seller that entitled the agent to a commission. This agent then informed other agents about the house now available for purchase by posting on the Multiple Listing Service. Another agent, the “selling” agent, would see the listing and show it to a potential buyer. Even though the selling agent then assisted the buyer in purchasing the property, she actually — and legally — worked for and owed a duty to the seller only. Because the “selling” agent assisted with the sale of the property, the “listing” agent would then split the commission paid upon the sale. The system made sense, as only the seller paid the commission to the listing agent, the listing agent then offered to share the commission as means of finding a buyer, and both agents eventually assisted with the sale. Indeed, some agents today still look at commissions in this light. As James Melanowski, an agent, said in a recent comment (#20):
There is one commission. I get paid x% to sell your property and with that x% I will do everything in my power to do my job. That may include paying a buyer’s agent, it may not. I may want to pay that agent y%, y-1/2%, or y+1/2% to bring that buyer to the table. The point is, x% is what you pay ME and it is to do with as I please.
Unfortunately, in this system, buyers usually mistakenly believed that “their” agent represented them in the transaction, when in fact they had no representation at all and “their” agent worked for the seller. With the evolution of consumer protections, many states revised this system. In 1996, Washington passed RCW Chapter 18.86, which by law altered this arrangement. Since then, in Washington a “buyer’s” agent owes a duty only to the buyer, regardless of the source of compensation, while a “seller’s” agent represents only the seller. Notwithstanding this new legal arrangement, the term “selling” agent is still used today by the MLS to describe a buyer’s agent(much to the chagrin of enlightened agents — right, Ardell?).
But if the buyer’s agent now represents the buyer, why is the buyer’s agent paid by the seller? This alone is enough to create a conflict of interest that could potentially impact the quality of the buyer’s representation (see RPC 1.08(f)). Furthermore, if the buyer selects her agent and works closely with the agent to find and buy a house, and the agent owes a duty only to the buyer, shouldn’t the buyer have the ability to decide how much to pay the agent? Under the current system, based on an outdated and no-longer-applicable model of representation, it is the seller — not the buyer — who ultimately determines the buyer’s agent’s compensation.
In addition, agents can and do represent both buyers and sellers. Thus, they have a vested interest in a system that promises a significant commission for both sides of the transaction. With flat fee listing and FSBO, the listing agent commission has come under increasing price pressure, and indeed it is not uncommon for listing agents to reduce their commission from the previously “standard” 3% (often times as long as the seller will also use the same agent for the following purchase, thus allowing the agent a subsequent and “full” 3% commission). The “selling” agent commission, however, is immune from such price pressure given the current business model. Indeed, as Kary Krismer, another agent, said in a comment (#31) to a recent post in reference to a buyer’s agent’s commission of 2.5%, rather than the standard 3%:
Well, it’s not that it’s a waste, but it’s not a wise decision at all. We’ll show buyers 2.5% properties, and have actually had a number of transactions in them. But there are some agents that won’t, or that subconsciously might down-talk the property.
Agents may argue that they are “entitled” — or, more accurately, earn — a full 3% given the time and efforts they invest in a sale, but that alone cannot justify this failure to show properties with a slightly lesser commission. After all, even 2.5% is a reasonable — to say the least — paycheck given the average house price (2.5% of $400k is $10,000). Thus, whether consciously or subconsciously, a signifcant number of agents fail to best serve their clients’ interests (by showing them ALL suitable properties and giving honest and accurate advice about each) simply because they won’t make as much money. While that is not absolutely wrong, at a minimum the buyer should be aware of this “limited” representation. How many buyer’s agents — who discriminate against commissions of less than the “full” 3% — have that conversation with their clients?
Finally, because the commission is a transaction cost, it stands to reason that a decrease in that cost will benefit either buyers or sellers or both (either prices remain the same with less costs and more money to the seller, or prices are reduced to reflect the reduction in costs, or both). With the current system, there is virtually no incentive to reduce this cost — or, for that matter even an ability to do so, unless the buyer is willing to forego an agent and either use another professional (say, ahem, an attorney) or self-represent.
So, the current commission-based fee structure, based on an outdated and now inapplicable model, leads to increased transaction costs (than what would be available in a truly competitive market) and a decreased quality of buyer’s representation. I’d say that’s bad for buyers.
About the Author: Craig Blackmon
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295 Responses to “The Commission-Based Fee Structure: it’s Bad for Buyers”
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I’m not sure what the problem was. You don’t have to list your property with a broker, you don’t have to pay a commission, you don’t have to pay a selling office fee … and if you do decide to list your property with a broker, you can shop for one that meets your budget.
That’s already in place. What’s the noise about?
Well, the great majority of sellers list with a broker. Indeed, I’m pretty sure the NAR et al. believe that listing a property is the best way to sell it. The issues isn’t what you’re legally required to do — obviously that’s not a problem. The issue is that the primary and most effective method for selling a property is detrimental to the interests of buyers.
Not only that, but how does “shopping for a listing broker that meets your budget” address the disadvantages to the buyer? I don’t understand that comment at all.
I am anxiously awaiting Ardells response.???
Ardell has seen the light — she’ll be supportive…
Mack,
Pretend you haven’t been drinking many years of Kool-Aid and try that again. The “Like it or Lump it” response is a little too monopolistic and a tad mafioso.
.
Craig,
It’s a little long for me to fully digest as I’m on my way out the door to an appointment.
But as to your bottom line paragraph:
“…the current commission-based fee structure, based on an outdated and now inapplicable model, leads to increased transaction costs (than what would be available in a truly competitive market) and a decreased quality of buyer’s representation. I’d say that’s bad for buyers.”
I wholeheartedly agree to every word, and in fact believe that the structure decreases the quality of a buyer’s representation, even when they have their own buyer’s agent, many and most times.
When I return I will give the entire post my full attention.
Ardell — I look forward to your input. Thanks for setting Mack straight…
One of the more interesting things about this issue is the tradition of whom really is the most important player in the transaction. Sellers certainly seem to be at the top in theory, mostly due to the commission structure and long standing tradition. Seems reasonable until a little wrinkle comes in to play: (sarcasm on)
If a transaction does not close….
1) Rats, the escrow guy does not get paid.
2) Rats, the listing agent does not get paid, nor their broker.
3) Rats, the selling agent does not get paid, nor their broker.
4) Rats, title insurance premiums don’t get paid, nor support staff.
5) Rats, the mortgage broker, processor, and support staff don’t get paid.
6) Rats, the roofer who decided it was ok to get paid at closing, all of a sudden does not get paid.
7) Super Rats, the seller can’t sell and then can’t pay the home “stagers” who decided to take payment when the home sold.
So, I suppose since everyone pretty much doesn’t get paid unless the buyer comes with money to finance everyone’s fees, the industry should continue to place the most importance with the seller. (sarcasm off)
Or,….the mortgage industry should recognize that buyers really DO finance everyone’s fees and allow them to finance their own fees, including paying a buyer’s agent commissions, and let the seller pay their listing brokerage cleanly from their side of the Settlement Statement. Buyers,then, would have superior representation and the money to pay for it wouldn’t circulate in a convoluted way through the sellers side of the HUD, as it is today. Clean, and who “represents” who is solved.
Eh, never mind, too many moving parts in the deal to make industry moving parts come to some sort of industry standard/compliance.
Tim — I agree! Unlike you, though, I would blame the extremely entrenched interests of brokers and agents and the deep pockets they have to fight any changes — not the many moving parts. After all, brokers/agents are the primary beneficiaries of the current system that supports “artificially” high commissionsfor the selling agent.
Good topic, as addressed in my last paragraph I think the conclusion is somewhat obvious.
Anyway, that’s the first time I’ve ever heard anyone say the old system, where both agents represented the seller, made sense! That was the most absurd system possible, and I suspect if the legislature hadn’t changed it, the courts would have. The current agency system needs some tweaking, but it’s far better than the old system.
FYI, the selling agent is not called the buyer’s agent because the selling agent might not be the buyer’s agent. The selling agent might be the seller’s agent, or no one’s agent. That’s the reason for the awkward terminology. It dives me nuts, BTW.
As to the 2.5% commission thing, you’re leaving out a major point. While it’s not right that some agents wouldn’t show 2.5% properties, I think it would be naive to assume all agents do show such properties. I’d guess the majority do, but that’s purely a guess. So that means if you want the BEST chance of selling your property, you don’t want a commission that is INFERIOR to your competition. Let’s say 100 agents see your listing on the NWMLS, and 10 like it enough to show. If 1 of those 10 don’t show it because they notice it’s a 2.5% commission, that might be the agent that has the client that would like your house enough to buy it the first month. You might wait 2 more months to find a second such buyer. Anyway, not a wise decision, IMHO.
As to your main point, that this system is bad for buyers, that’s not really a big surprise. The properties on MLS systems are there because the sellers know that’s what works best to sell the properties. They don’t care what works best for buyers, they care what works for them. That’s perhaps a bit blunt, but the fact is sellers control the game because they are holding the cards and acting as dealer. Once a buyer buys, and wants to sell, they can deal some other way if they want. And until they buy, they have other options to find properties besides the NWMLS, if they don’t like the way the cards are dealt in that game.
Kary said: “FYI, the selling agent is not called the buyer’s agent because the selling agent might not be the buyer’s agent.”
It can and should be called the Buyer Agent fee. That way everyone would understand the absurdity of it remaining “in play” if and when the buyer has no agent. No Buyer Agent? Then no buyer agent fee. How simple is that?
Ardell wrote: “t can and should be called the Buyer Agent fee. That way everyone would understand the absurdity of it remaining “in play” if and when the buyer has no agent. No Buyer Agent? Then no buyer agent fee. How simple is that?”
The listing can be written up that way, but it needs to be disclosed. From a buyer’s agent’s point of view, however, that’s even worse than a 2.5% commission, and also is not something I recommend. In fact, just yesterday I was asked to review a listing that wasn’t selling, and that’s one of the things that was recommended to be changed.
Another excellent “stur the pot” post on this blog. Well done!
If you agents (REALTORS(R) or otherwise), want to call buyers your “clients” instead of your “meal tickets” or some other more accurate description, then you have no business excluding any properties without at least in forming your “clients” as to why you are doing this. Especially with higher priced properties (say $750K and up), if 1.5% is not enough for you, what can be said for you – you are special, as if you have special poer over showing someone else’s listing.
Maybe that’s just me, but, if I caught wind that my “agent” was pouty over only getting 2 percent or 2.5 percent or anything less than 3%, that person would no longer be my agent. Decision would take seconds. I would dump you. I would not be your “client”, just because you static-clinged yourself to me at some open house. Don’t overvalue yourselves, people, there is an unlimited supply of REALTORS(R) who can “show” me the same houses. I don’t need an entitlement agent.
p.s., great blog.
Craig,
The only thing I would add (and I have no criticism or correction) is that often the 2.5% or 3% is 4% or 5% or more, at times. With inventory increasing this will become more of a problem, as sellers vie for the attention of “selling agents” by offering increased incentives to stand out in the crowd.
“Please sell mine; I’ll pay you more if you do” will become the norm. That is why I have tried in most cases to change all of my fee negotiations to flat fees. Not only with the seller, but with the buyer as well.
“The system” may find fault with that method of pricing, and Kary has pointed out that possibly the way I do it is against some rule somewhere. But sometimes rules need to be broken.
It’s odd, but true, Craig and I agree on this post.
Tim, you are soooo right! Eventually the buyers agent commission might well be listed on the buyers side of the HUD statement, but in the meantime, just because it is listed on the sellers side doesn’t mean the buyer doesn’t have have full buyers representation – but it is something that needs to be addressed before closing of course. Your point about the buyer being the most important player in the transaction is smack on target.
I think the commission being funded by the sellers works for the majority of buyers, especially first time buyers. What everyone seems most interested in arguing about is the MONEY amount, much more so than who pays it.
Craig, your article doesn’t state the full set of choices out there to buyers. It simply criticizes a system in place that is in use fairly consistently in all 50 states, and leans towards the suggestion that the commission based fee structure is “bad for buyers” but doesn’t offer solutions. Mostly what it suggests is that the fees earned by real estate agents are “too high”, which is entirely a different issue.
Keep in mind, any agent and buyer can have a Buyers Agency Agreement that allows a buyer to pay the agent the commission.
The amount disclosed as being paid by seller can be credited against that buyer-paid commission at closing, or to reduce the purchase price, or pay buyers lender allowed closing costs. There are many ways of financially allowing a buyer to pay his agent directly, and by using the NWMLS form for Buyers Agency Agreement – all terms between buyer and agent are allowed by the NWMLS, which also mean it is allowed to present these terms to the seller as part of the offer.
If a buyer & agent agree that the buyer will pay agent a 10% buyers agent commission, the Buyers Agency Agreement will specify whether buyer contributes that amount or seller — and it is within NWMLS rules that the Buyers Agent can negotiate with the seller to pay the whatever amount that is negotiated between buyer and his agent per the Buyers Agent Agreement.
So basically, you want the commission/fee to be paid by the buyer not the seller? Fine, it is easy to make it so, with a written agreement.
What I like is that today buyers have a smorgasbord of choices.
* whether they want to be represented by a buyers agent
* whether they want no representation at all
* whether they want to be represented by an attorney instead of a real estate agent
* they can negotiate a flat fee paid by them or paid by seller
* they can negotiate a lower commission or a higher commission to be earned by their buyers agent, with provisions for nearly anything
Sure, sellers negotiate the commission with their listing agent. Buyers also can negotiate their commission with their buyers agent, in any way they and their agent agree.
Ardell, your main argument is usually that buyers and sellers should negotiate their commissions, and I agree with that, so to say the current system is ‘bad’ for buyers implies that buyers cannot negotiate with their agents. Buyers indeed can and do negotiate with their agents. For example, you may choose to give half of your buyers agent commission paid to you by seller to your buyer.
You certainly can negotiate anything you wish with your buyer clients, so how is it that you feel that the current system is ‘bad’ for buyers?
Everything is negotiable. The bottom line is always the same: if you don’t like it, then renegotiate or walk away.
Nice post. So this is how this crazy system came to be.
PatentGuy wrote: “Maybe that’s just me, but, if I caught wind that my “agent” was pouty over only getting 2 percent or 2.5 percent or anything less than 3%, that person would no longer be my agent.”
I’d agree, but remember, I’m talking about this from the seller’s point of view, not the buyer’s point of view. We do show 2.5% properties to our clients, but again, it would be naive to think all agents do.
Ardell wrote: ““The system” may find fault with that method of pricing, and Kary has pointed out that possibly the way I do it is against some rule somewhere. But sometimes rules need to be broken.”
It’s only against the rule if you hide it. You can do whatever you want if you disclose it, and the only thing you need to disclose is if you as a listing agent have a commission arrangement that would allow your offer to be more favorable than an identical offer from another buyer through another agent. Absent disclosing that, it’s unfair both to the other agent and the other agent’s client.
Leanne, I don’t think you said the “R” word–Redfin (or Rebate broker). That type of option is yet another option for those who think they need fewer services. It allows them to play the game, without taking advantage of anyone, or placing anyone else at an unfair advantage.
Kary,
If I represent the seller, then the buyer agent fee isn’t available to me. I shouldn’t have to “disclose” that, as it does not give the seller more or less money than another agent’s offer.
I just don’t take that which is not mine to take…it is the buyer’s and the buyer’s choice.
Kary -
The obvious irony with Redfin is that unless the seller is “pressured” by traditional realtor(R) types to pay big $$ to buyer’s agents (or else they will be boycotted or something) to steer buyers their way, Redfin is toast. They can only “give back” to the buyer 2/3 of what was offered to them as a bribe in the first place. No bribe – no kick back. That simple.
So even if Redfin manages to eek out a living with this plan, the next obvious buyer’s move is to skip the middleman (Redfin) and go direct. This saves the seller having to pay me back the buyers their own money (how stupid is that), and makes the buyer’s offer a bit better.
On the other hand, the (also obvious) reason why buyer may prefer Redfin is if lenders continue the patlently dumb practice of financing realtor(R) commissions as part of the loans, so that buyers get “cash back” from Redfin. Pretty cool if it works.
Just when I thought I was out they pull me back in! I’m sure I’ve got something to say here but it’s been a long day and I may get a bit more snarky than I should. I’ll return tomorrow and revisit.
Jeez. I’m actually quoted someplace and my name gets misspelled. How depressing.
- James
Ardell, wrote: “If I represent the seller, then the buyer agent fee isn’t available to me. I shouldn’t have to “disclose” that, as it does not give the seller more or less many than another agent’s offer.”
Talk to the people at SKCAR (I have), or watch the Ethics clock hour course they send out on DVD (or is that WAR?–anyway that DVD is how I even discovered the rule.) It’s a variable commission, and in this area much be disclosed pursuant to the rules of ethics of Realtors.
It’s not the buyer’s agent commission. When you sign the listing agreement, the total commission is specified, and the SOC portion of that is specified. As I mentioned in my first post here, selling agent is not the same as buyer’s agent.
PatentGuy wrote: “So even if Redfin manages to eek out a living with this plan, the next obvious buyer’s move is to skip the middleman (Redfin) and go direct. This saves the seller having to pay me back the buyers their own money (how stupid is that), and makes the buyer’s offer a bit better.”
Nope, it doesn’t work that way. It’s better to use a rebate broker. When we were looking for our own house to buy, we never took the commission off the table, because there’s no way you can have any idea that your reduced commission will go to the seller. Contractually it goes to the listing agent.
Well, I shouldn’t say never. We did that on the house we bought, but there the seller was the listing agent.
PatentGuy wrote: “The obvious irony with Redfin is that unless the seller is “pressured” by traditional realtor(R) types to pay big $$ to buyer’s agents (or else they will be boycotted or something) to steer buyers their way, Redfin is toast. They can only “give back” to the buyer 2/3 of what was offered to them as a bribe in the first place. No bribe – no kick back. That simple.”
I’m not exactly sure what you’re saying here, but some agents do try to deal with Redfin by saying the commission is reduced if certain events don’t occur (e.g. selling agent not present at first showing, etc.). Yet another thing that’s not recommended if you’re trying to sell your house.
The thing agents don’t like is being tricked into showing a house by a buyer, claiming to be unrepresented, and who then goes through Redfin to make an offer. I don’t mind showing a house at all, and at the showing I’ll expressly mention that they have the option of going through a rebate broker.
My job as listing agent is to get the damn house sold, and I’ll do what I think needs to be done to accomplish that, and that includes:
1. Listings with 3% commissions.
2. No variable commissions.
3. Disclosing to potential buyers all their options for buying the house, including using a rebate broker.
To anyone who still doesn’t understand that, I’d suggest reading my P-I Blog (and discussion) entitled: Fishing While Backpacking. It’s all about why you want to attract buyer’s agents.
http://blog.seattlepi.nwsource.com/realestate/archives/135895.asp
BTW, this isn’t really all that common of a problem. I just ran sales of three firms for the past year, where the listing office and selling office were the same. I can’t tell whether the listing agent and selling agent were the same, so it could have been another agent in the firm was the selling agent.
Anyway, in the past year, a total of 13 sales for 3 firms. To risk scaring away buyers’ agents over the slight chance of this occurring isn’t a good choice, IMHO.
Also, in another thread on the topic, apparently people trying to do this is more common in some areas than others. So my opinion on it is possibly based on the fact that I don’t see it a lot.
BTW, in case it wasn’t clear, post 25 was addressing variable rate commissions.
It get’s worse.
I was hoping over night there would be an end of discussion to the ridiculous assertions made by the poster, but there isn’t. It’s tired pot stirring that brought us a rodfun to begin with. Rodfun does nothing to collect a fee. They promise they will do nothing for that fee and people pay it. Rodfun has already made a profit, the Glum guy spokesman is moving on and Real Estate people are still beating a horse dead on the track.
The public, and consumers are asking for service. The public wants information while consumers want value. If you’re in the Real Estate business you need to ask yourself what you bring to the table. What information or value do you bring to the table?
I have never considered myself a good Real Estate agent. There are people much smarter than I am. There are better negotiators, there are people with more exerience, and more calm under fire than I. Where are they? Why aren’t they taking issue with an information stream on the internet that makes no sense or worse is bad or deliberately misinformation?
Redfin has turned a profit? I’ve not heard that.
I’ve only dealt with Redfin once, but from that experience I wouldn’t say they do nothing. They can write a decent contract, which is more than I can say for a lot of agents. But that’s what I’d expect. But they clearly weren’t full service.
ARDELL, if you’ve listed the home and found the buyer through your efforts, would you still collect the “buyers commission” (or whatever you call it)?
Rhonda, you might need to describe “through your efforts.” If Ardell called to have a sign placed, and the buyer saw the sign, that would be through her efforts. If the buyer picked up a flyer off the sign, that would be even more through her efforts. If the buyer saw the listing on the Internet, liked the description and the pictures, that would be through her efforts.
One interesting thing about this post and the subsequent comments is the half-hearted (at best — see below) response not withstanding the fact that it is a direct attack on the current system for buying property. Indeed, everyone apparently concedes that the system encourages shady dealing by agents! What else describes a system that allows — even encourages — AGENTS (i.e. representatives of buyers who should be acting in the buyer’s BEST INTERESTS) to act in their own self interest at the expense of buyers?? This is of course the situation where (a) agent does not show property because of a commission less than 3%, and (b) agent convinces buyer to buy house — even though it is not the best house for the buyer or is priced too high — because of a commission greater than 3%. Apparently, here in the enlightened atmosphere of RCG, agents, brokers, and others “in the biz” largely agree that the current system has a significant flaw that acts to the detriment of buyers.
That said, Leanne, Mack, and possibly david losh (I think — his comment is a little “fuzzy”) all mount a weak and ineffective defense. If I understand it, they all say, “Hey, there are LOTS of options for buyers, so what’s the problem?” Two major flaws with this argument: (1) Is there really much of a choice, where agents actively work to maintain the current system (including major advertising by NAR) and the MLS is the de facto “marketplace” for property? I’d argue that these choices are illusory. And (2) This argument ultimately misses the point (which I thought I made clear — see my title and concluding sentence): the system itself is detrimental to buyers by increasing prices and fostering poor representation. Whether or not buyers have “choices” is ultimately irrelevant. The system does not work, whether or not buyer’s have meager, difficult, and often ineffective “alternatives” (hey, I’ve had listing agents torpedo an offer from me BECAUSE my client chose to use an attorney…).
Finally, Leanne, I don’t think it’s enough to respond with, “Oh yeah? Well, what’s YOUR solution?” There are two steps to correcting a problem: (1) identification of problem; and (2) correction. My post falls into the former — I did not even attempt to suggest a solution. But, if you wish (and as suggested elsewhere in the comments): Buyer pays buyer’s agent in EVERY CASE; lenders allow buyer’s to finance that fee (as happens indirectly right now). Boom! Problem solved.
Craig, thanks for not including me in the group making weak and ineffective defenses.
As to agents being affected by 2.5% or 4%, how is that different than attorneys who discourage their client to settle (or encourage them to file suit), just so they can earn more in hourly fees? Do all attorneys do that? No. So why would the fact that some agents are affected by commission be a reason to get rid of the current system while retaining hourly rates for attorneys?
Whether you’re talking about attorneys or real estate agents, you can find good ones and you can find bad ones. I think it’s a people problem, not a system problem.
BTW, I suspect there’s probably an ethical rule or even a state licensing statute violated if an agent doesn’t show a 2.5% property. So it’s not so much that the system allows it, as much as it’s hard to police.
Hi, everybody. I’m just a regular guy who’s been trying to buy a house for the last 4 months, without success. One effect of this process is that I’ve gotten sucked into this and other real estate forums, primarily as a spectator.
Craig, in #31, pretty much describes the opinions I’ve come to over the months as a buyer.
We were also sellers in St Louis. WE closed that sale on March 17 through a combination of aggressive pricing and treating the buyers like royalty.
We’re buying here through Redfin and sold through a deep discount broker called Johnson Realty, owned and operated by one Cheryl Johnson. Johnson charged $500 to put our house on the MLS and .34% commission to negotiate the price (but not the inspection) and do the closing paperwork.
Kary — you make a great point. You’re right, it is to a certain extent a people problem. As for the rule violated when an agent doesn’t show a 2.5% property: RCW 18.86.050 requires a buyer’s agent to “make a good faith and continuous effort to find a property for a buyer, except that a buyer’s agent is not obligated to . . . show properties as to which there is no written agreement to pay compensation to the buyer’s agent.” It turns on the definition of “good faith,” of course (an amorphous term), but I’d argue that a refusal to show a property that offers a commission — ANY commission, not just 2.5% — violates this law and would make an excellent Consumer Protection Act claim. Marketing Note: if anyone thinks their agent has violated this rule, I’d be interested in talking to you.
There is a distinction with attorneys, though. With attorneys, there is no sort of artificial system that allows attorney’s fees to avoid downward price pressure. I could offer my services at $100 per hour, thus dramatically undercutting my competitors. If I was successful, then at least theoretically other attorneys might feel the need to cut their fees as well. With the commission-based fee structure as it exists, agents are able to effectively insulate the buyer’s commission from this sort of pressure. So, unlike attorneys, there is a systemic problem with agents — not just a “people problem” — that is detrimental to clients.
I have to run, but my quick response would be I always thought comparing hourly rates is a joke. I had one Chapter 11 where a creditor’s attorney charged more than I did as debtor’s attorney, even though the creditor was over-encumbered and I obviously had to do a lot more to get a Chapter 11 plan confirmed than they did to contest it. Part of that, a phone call that I had with the attorney for 6 minutes lasted for 15 on his end!
BTW, I contested his fees, and was unsuccessful.
Also, in bankruptcy you get to review other attorney fees. I’ve seen attorneys at big firms who day in and day out bill over 8 hours a day to a single case. If there was a trial approaching, I could see it, but I’m talking day after day. (And yes, I realize there are ethical rules against that too.)
“But if the buyer’s agent now represents the buyer, why is the buyer’s agent paid by the seller?”
So that the costs can be rolled into the loan.
I’m not a real estate agent, but it seems to me that the buyer’s agent works for the buyer (not the listing office), and the buyer does indeed pay the a buyer’s agent fee, albeit indirectly as it is rolled into the cost of the home. The buyer’s agent might not know the listing agent from Adam; hence, he or she does not work for the listing agent. In contrast, buyers’ agents typically have close relationships with the clients they work for — the buyers. Again, however, I’m not a real estate agent.
Hey Kary — no fair! This post is about bashing agents, not attorney!!
That said, until I hear otherwise I will assume you agree — there’s a systemic problem with agents that does not exist with other professionals, such as attorneys.
“ARDELL, if you’ve listed the home and found the buyer through your efforts, would you still collect the “buyers commission” (or whatever you call it)?”
“found the buyer”? Is it a “finder’s fee”? Or is it an amount paid on behalf of the buyer (by the seller as a convenience to the transaction) for the buyer’s representation?
If the majority of agents and industry people deem it to be a “finder’s fee”, then of course Craig is correct on all counts. No one should pay someone to “go FIND US a buyer”. Should we all get lassos or handcuffs or leashes to drag the buyers in with?
All it would take is for everyone to recognize the buyer agent fee as a set aside for buyer representation. But Craig wins because not enough are even trying to “get it” as more than a “finder’s fee” for “finding” a buyer. Buyers are not FOUND by anyone…they weren’t lost in the first place.
Ardell (forgive my questions if they seem goofy–I’m just a mortgage person)… if you were working with a buyer and had been showing them potential homes and also had a listing that wound up being perfect, how would you base your compensation?
This is facinating to me.
That is rare, Rhonda, but coincidentally just happened to me, or I should say is “currently” happening to me. I’ll let you know how it turns out. It was a bit awkward to address, but given the buyer and seller are both reasonable and rational people, we’re all agree.
Point is that the buyer and the seller and I all get to have a say in the matter, not just me and the seller…and not just me.
I didn’t mean to single you out on the “found a buyer” quote, as many if not most view it this way, including most sellers. It will be a long process to change the way people think, and I miss no opportunity to do so, so please don’t take it personally.
As to Kary suggesting I “earned” 3% by having a $50 sign put up or by someone reading a flyer I printed and caused to be there…that’s just as bad. The buyer agent fee is for REPRESENTING a buyer’s best interests and not for “procuring” the buyer. That said, I do not support eradicating “procuring cause”, but we do need a better name for that.
Only people who can REPRESENT the buyer should be able to collect that amount, as further negotiated between the buyer and their chosen agent. By law, that can’t be the listing agent, as the listing agent cannot be the Buyer’s Agent. At best they can be a Dual Agent, which is obviously not worth the same amount as a Single Agent.
Under no circumstances should a buyer who is UNREPRESENTED (including those “merely” represented by an attorney) be paying the same amount as one who is fully represented.
Rhonda, if Ardell says she wouldn’t want to be paid for selling her listing to a buyer cient she has been previously working with, then she’s not being fair to herself.
Offeing to sell yourself short isn’t a solution that works for anybody.
If she lists the house, and the buyer comes to her directly from the ads/sign/internet, she wants to act as a dual agent — that is where we do not agree — I believe in that case she should be a sellers agent, not a dual agent. There are many discussions of this aspect in other posts.
Craig, all you’re doing here is trying to discuss further the current system in a way that brings you clients! Hooray for you
!
I happen to think that the current market “system” allows buyers to have a full or partial array of services, at whatever cost structure they would like. For buyers to argue that things are “against” them is silly – there’s never been more available information than what the internet brings all of us.
Buyers, interview agents, and Craig too if you’d like. Choose the model that works for you, and don’t be afraid to choose to “add” service levels over time if you see you want to do that too.
Leanne,
I’m going to cry. We don’t “sell TO” people.
That is where Craig is sooooooooooo right. If you think the second half of the commission is to “sell TO” someone, then you are carrying that forward from the days when all agents represented sellers.
When we all represented sellers, and I did work in real estate on that basis and during that time, we got paid to “sell TO” buyers. That ended more than 15 years ago…and yet the thinking has not changed. The thinking has not changed because not one word has been changed in the contracts nor in the way brokers talk to agents about this.
It’s very sad, and frankly I don’t see a light at the end of the tunnel.
Leanne said: “Craig, all you’re doing here is trying to discuss further the current system in a way that brings you clients! Hooray for you !”
While I am ready for the final round of “the death match” and prepared to suggest how wrong that is, this post is NOT doing that. This post is not only factually correct, but as a result of the comments, is obviously and sadly very true.
Craig is so right on this, and all of the comments regarding the buyer not being involved in the process of both choosing their agent and negotiating the fee with their agent, only emphasizes how right Craig is.
“If she lists the house, and the buyer comes to her directly from the ads/sign/internet, she wants to act as a dual agent — that is where we do not agree — I believe in that case she should be a sellers agent, not a dual agent. There are many discussions of this aspect in other posts.”
Leanne, now tell me how in the world the agent for the seller should KEEP the buyer agent fee…under ANY circumstances.
Craig said, “I did not even attempt to suggest a solution. But, if you wish (and as suggested elsewhere in the comments): Buyer pays buyer’s agent in EVERY CASE; lenders allow buyer’s to finance that fee (as happens indirectly right now). Boom! Problem solved.”
Won’t happen and not necessary.
It’s as simple as this. Every Listing Contract has two lines Listing Agent Fee _____ Buyer Agent Fee _____ and includes language that covers what happens in the event there is no buyer’s agent. Since the price includes the buyer agent fee at the designated amount, then that fee should be removed from the price (as finally negotiated) or credited to the buyer’s closing costs.
If everyone would simply recognize the fee as a fee to represent a buyer and not to “find” a buyer, all would be well with the world and this simple change in the Form wout take about ten minutes.
Ardell, I’m glad to see this conversation and I do not take it personal. After being around RE agents for 20 years from the title/escrow/mortgage biz…this is very interesting to me.
If a buyer were to pay the fee for to an agent, I wonder how many first time homebuyers (such as FHA) would not be able to swing it assuming the guidelines allowed the buyer to pay 3% (or what ever the compensation is). We may still find that sellers would offer to pay the buyers commission in order to attract more buyers (no different than offering to pay x% closing costs).
Craig (#31): “My post falls into the former — I did not even attempt to suggest a solution. But, if you wish (and as suggested elsewhere in the comments): Buyer pays buyer’s agent in EVERY CASE; lenders allow buyer’s to finance that fee (as happens indirectly right now). Boom! Problem solved.”
How would that work exactly? Only if the loan was for full fair market value plus buyer’s agent commission? What are the odds of this in the future?
A more likely scenario is that the lenders would require buyers to pay their own buyer’s agent commissions along with any of their other non-seller-paid closing costs. I guess one could craft a loan package with a 10% down payment and a 93% loan to cover this expense. But, isn’t that the same as 7% down with a 93% loan (and the buyer really paying his or her own agent)?
Questions: If the buyer’s agent expense is shifted to the buyer-side of the transaction, how many buyers will choose to forgo using a buyer’s agent altogether? Or, will buyer’s agents all of a sudden become dramatically less expensive? And, how much is gasoline in your area? Will listing agents charge somewhat more to offset unrepresented buyer?
Ardell (#45): “Every Listing Contract has two lines Listing Agent Fee _____ Buyer Agent Fee _____ and includes language that covers what happens in the event there is no buyer’s agent. Since the price includes the buyer agent fee at the designated amount, then that fee should be removed from the price (as finally negotiated) or credited to the buyer’s closing costs.”
Well, while we certainly explain how much of the listing fee is turned over to the buyer’s agent, we would never agree to completely remove the fee. Here’s what we do: We offer our sellers a multi-variable listing compensation agreement. There are (currently) five compensation alternatives included, all of which are discussed with the seller at time of listing. Unrepresented buyer is one of the alternatives. Discussed in advance, this takes the firepower away from the buyer at the time of offer and leaves it where is belongs – between the seller and his or her agent.
Ah, Rueben — you’ve nailed it! That is exactly my point. Some — perhaps most — buyers certainly will forego using a buyer’s agent, at least an agent that charges a 3% commission. As a result, buyer’s agents will become dramatically less expensive. There may be a few surviving 3%’ers, but not many, and they will be outstanding agents who provide the ultimate in hand-holding experiences.
I further agree with you that lenders are unlikely to change their underwriting standards to allow for the financing of the buyer’s commission. One alternative would be a change in the law requiring lenders in this state to allow for such an arrangement (just thinking creatively here — I really have no idea how or whether that would work). Or, buyer’s could just accept the fact that they need to save up their down payment, plus an additional sum to pay the professional who will assist them with the transaction. Given that the fees will certainly go down (and given that there are — Leanne, please don’t read further — already low-cost alternatives to agents such as flat fee attorneys), then the amount that needs to be saved should be reasonable and relatively doable.
Finally, Ardell, your proposed solution — while simple and creative — will not work legally. I’m planning on a subsequent post to address that issue.
Rhonda,
The buyer is and always has paid their portion…as part of the price.
Interesting use of terminology, Reuben (#48), and it feeds right into Ardell’s comments above. The fee is paid to the BUYER’S agent as compensation for representing the buyer. Yet, you routinely eliminate the buyer’s ability to have any say-so WHATSOEVER in terms of this compensation (you “take the firepower away from the buyer at the time of the offer and leave it where it belongs — between the seller and his or her agent”). Just like you made my point on #47, you make Ardell’s point in #48. Nice work.
Reuben said: “Discussed in advance, this takes the firepower away from the buyer at the time of offer and leaves it where is belongs – between the seller and his or her agent.”
Craig,
Short of a firing squad…I see no way to get people to understand how offensive that position is to buyers.
Offensive to buyers? Well, not intentionally….
But, as listing agents, we do not represent the buyer. If we agree to reduce the buy-side compensation, the benefit flows to our principal, the seller.
It’s interesting to point out that the seller may, in fact, accept a lower price from an unrepresented buyer. But this really must be first negotiated among the parties to the listing agreement. We simply move this to the front end.
Reuben,
Let’s go back to Craig’s title on this post:
“The Commission-Based Fee Structure: it’s Bad for Buyers”
You make his case in one sentence when you say: “But, as listing agents, we do not represent the buyer. If we agree to reduce the buy-side compensation, the benefit flows to our principal, the seller.”
Then you say, “It’s interesting to point out that the seller may, in fact, accept a lower price from an unrepresented buyer.” NSS!! what does that have to do with insuring that the seller’s agent is not taking the buyer agent fee? If the buyer and seller agree on a lower price, but the agent for the seller still walks off with 6% or the seller keeps any portion of the buyer agent fee of 3%, then the result is “bad” and offensive to buyers, intentionally or not.
They say “The road to heaven is paved with good intentions”, but in reality, the road to hell is paved with lots and lots of unintentioned aggrievances.”
It is thinking like this that creates the perception that buyers who deign to speak of “the commission” to a listing agent are ballsy and offensive.
Ooops, Craig you have a typo in the title and I repreated it when I cut and pasted it. Change that to “Structure”.
Ardell, in my scenario, the seller would only agree to a lower price because, he and his listing agent have previously agreed to some variable compensation rate for an unrepresented buyer. And, that is where the decision belongs.
Please don’t read too much into my “not intentionally” comment. While I will not intentionally offend the “other side,” in this case, the buyer, I do remember who I work for, in this case, the seller. I can tell you this: My seller client would be pretty offended if I forgot who I am representing!
DOH!!! Thanks, Ardell.
Ardell wrote: “Buyers are not FOUND by anyone…they weren’t lost in the first place.”
I’d disagree with this when it comes to someone other than the listing agent. Buyer’s agents are valuable for one reason: They know people ready, willing and able to buy.
Craig wrote: “Hey Kary — no fair! This post is about bashing agents, not attorney!!
That said, until I hear otherwise I will assume you agree — there’s a systemic problem with agents that does not exist with other professionals, such as attorneys.”
No, I’d disagree. The problems may be different, but there are problems in almost any billing system that isn’t a pre-bid type situation (e.g. $300,000 to build house per plans).
Attorney billing isn’t very good at all, with the possible exception of contingent work. It’s prone to just as much, if not more, abuse.
In fact I’d compare real estate commissions to attorney contingent fee. Sometimes both are paid at a high rate per hour, sometimes a low rate, and sometimes nothing.
I can tell you this – I will never, never, NEVER use a realtor again. While you DO need a lawyer, you do NOT need an agent. There is nothing an agent can do that a dedicated buyer or seller cannot.
There is, of course, convenience; and some people will find that’s worth the 6% (or 5.5%) the buyer has to pay.
But the whole commission structure stinks. FSBO’s are the way to go.
This entire argument is based on a misunderstanding of how commissions work.
The seller offers the listing agent’s broker a commission (say 6%) From that potential fund, the listing agent’s broker offers other agents a part of it (say 3%). The entity paying the money is only the seller indirectly. The direct payee is the listing broker. If the listing agent “finds” a buyer, the seller still owes 6% pursuant to the contract they signed, but the broker doesn’t have to pay anything out to another broker.
And as evidence of this, I’d reference the undisclosed short sale transaction. Buyer makes an offer through their agent to buy a house, and eventually removes all the contingencies. Seller can’t close because it’s a short sale (something they discover from escrow a week prior to closing), and the sale flips. Listing agent’s broker owes buyer’s agent the promised commission. Seller paid nothing, but buyer’s agent gets paid.
Karl wrote: “I can tell you this – I will never, never, NEVER use a realtor again. While you DO need a lawyer, you do NOT need an agent. There is nothing an agent can do that a dedicated buyer or seller cannot.”
Simply put, you cannot know what you don’t know. I have to run again, but I’ll try to come up with an example when I return.
But what you’re paying for is experience and expertise. I’ve run into people that own over four parcels of property that don’t know what they’re doing. I’ve run into attorneys that don’t know how to deal with real estate transactions.
That said, not all real estate agents are equal. Some are bad, sort of like attorneys. (Sorry Craig!)
Does WA state have a standard offer agreement that mere mortals can download from the Internet and read?
Forgive my naiveness but I have never been through the process and it would help to see what an actual sample offer generally looks like.
How are taxes assessed in WA? My understanding is that there is no income tax but property tax is quite high.
If tax is assessed off of the purchase price then I would think the buyer would want the actual purchase price as low as possible. Even if they had to pay the realtor and closing and various other fees out of their pocket.
Kary said: “This entire argument is based on a misunderstanding of how commissions work.”
This entire argument is based on the thick-headedness of agents and the industry who refuse to change, and want to keep the same system in play from back when we all represented sellers.
Don’t you think it a tad unrealistic and ODD that not one thing changed in the way “we” do this and see this since that time? How did buyers get “rights” only to the degree where they have to shut up about commissions because it’s none of their damn business? That is ludicrous and that it remained in play for 15+ years after Buyer Agency came about, is borderline criminal.
Running…sorry for nailing that so hard…no time to soften the blow.
Peter,
The seller pays an excise tax based on purchase price of just under 1.8%. “Real Estate Taxes” are not based on purchase price in WA as they are in CA. In fact CA is the only place where I have seen real estate taxes change based on a purchase and sale.
Kary,
For someone who has only been in real estate since 2006, you sound like a Kool Aid drinker of many years. How can you think like that without years of “programming”?
w.r.t. 63, Kory said “Simply put, you cannot know what you don’t know. I have to run again, but I’ll try to come up with an example when I return.
But what you’re paying for is experience and expertise.”
this is true anywhere, with anything. It comes down to this: Realtors are optional. Lawyers are not. Caveat Emptor. It is worth it for me to invest the time and energy to figure out how to bypass the optional parts of the system.
As far as experience and expertise – I fail to see anything a realtor offers other than convenience.
Kary — as an initial matter, and with all due respect, I obviously understand how commissions work. Don’t you think it is disingenous to argue otherwise? All key participants in this conversation clearly understand the commission structure, particularly as briefly related by you.
Not only that, but your brief synopsis does not raise any counterargument at all. First, it is simply wrong. Per the listing agreement, seller owes listing agent upon “sale,” defined in that agreement as “a contract to sell, an exchange or contract to exchange, an option to purchase, and/or a lease with option to purchase.” In other words, the property is sold for purposes of the commission when the parties agree to a PSA. That triggers the 6% commission due listing agent. Therefore, if any commission is paid in your hypothetical, it must come from the seller first. Then, and only then, does the listing agent have an obligation to split that commission with the selling agent. So, in your hypothetical, notwithstanding that the transaction did not close, the seller is still contractually obligated to pay the listing commission, and, via the rules and contracts that governs relationships between brokers in the MLS, the listing agent must split that with the buying agent. I would be shocked if MLS rules/conracts require a listing broker to pay a selling broker, EVEN WHERE NO COMMISSION WAS PAID PER THE LISTING AGREEMENT. If you believe otherwise, I’ll need specific cites.
Second, I’m not even clear on the relationship of your hypothetical to my larger point: buyer agent commissions, as paid today, are artificially high, thus resulting in inflated purchase prices; and the method of payment leads to a decrease in quality of representation (I mean, WHO would show their buyer client a property with a 2% commission?). In your (mistaken) hypothetical, the buyer’s agent still gets paid. How does that disprove my thesis?
Lawyers are optional. there is no requirement for you to engage legal counsel.
Peter — your comment leads to another point: Here in WA, sale of property triggers the 1.78% (depending on county) excise tax. So, a seller has an interest in NOT including transactional costs in the purchase price. Today, the reported and taxable sale price is the price in the PSA, notwithstanding the fact that 6% of that (or so) is paid by the seller as a transactional cost. Thus, the current system causes sellers to incur additional and ultimately unnecessary tax liability.
And no, there is no downloadable form offer. Remember, professionals — whether agents or lawyers — make their living of off such forms, so they will not be given away.
Karl — one other point: As I lay out in the post, and as largely unrefuted by these comments (even you admit that “As to your main point, that this system is bad for buyers, that’s not really a big surprise.” (#10)), the current system of compensation is bad for buyers. What is the equivalent “system” for attorneys? There isn’t one. All attorneys compete for clients on an even field. There is no aspect of any attorney fee structure — whether hourly, flat, or contingent — that impairs the ability of market forces to lower compensation rates. Attorneys compete for clients, and one way to do so is to offer a lower rate. That is most certainly NOT how agents compete for buyer clients — again, even you admit that the current system acts to keep those commissions at or near 3%. There is a distinction, and it is fatal to the comparison.
Wow, this post ran away from me … I’ve been trying to sift through the comments and just don’t have the time to read each one. It seems to me that people are concerned about “shady” buyer agents who are showing based on what they’ll get out of it as well as the old “money left on the table” argument again.
In my opinion, it would seem that the only fix that would make everyone happy is to not allow the listing broker to offer compensation to the buyer agent AT ALL. If the agent is working for the buyer, let the buyer pay his fee through a contractual agreement just as the listing agent is paid by the seller.
I think I said something like “the buyer has no right to know what the buyer agent is getting paid unless the buyer is paying the fee – the buyer has not ‘hired’ an agent unless there is a buyer/broker agreement in place” in the previous post that started this whole deal.
If you pull compensation out of the MLS completely there is no chance of ’shady’ agents steering buyers towards a higher paycheck, the buyer will have a contract with their agent with compensation agreed upon and may actually get better representation if the contract is based on performance, and finally, the listing agent won’t have to take a pay cut to bribe buyer’s agents to show their inventory. There won’t be any “money left on the table” because the buyer is paying his agent whatever they agree on in advance and they can still request that the seller contribute to their closing costs in the contract so the buyer agent fee will be rolled into the loan.
Sounds like a win-win to me. Okay, go ahead and tear this one up! I’ll sit back and watch the the frenzy.
- James
The genius of the arrangement is that the 3% buyer agent fee has to be paid whether or not the buyer wants/uses an agent!
I’m a buyer. If I were to pay 3% myself to use an agent, there’s no way I’m gonna use an agent. But since it’s a “fixed cost” that I don’t get to decide on, you can be very sure that I’m gonna use one.
BUT
That’s where the genius of Redfin comes in. That way, I get a portion of the “fixed cost” back. You guys slamming Redfin has no idea why we buyers love them, don’t you?
All these talks about where the buyer agent fee should come from is going off-tangent, badly. The thing is, we consumers/clients/customers would like to have a choice of paying 3% instead of 6% in the event that we don’t need a buyer agent. Or, better still, we prefer not to even pay the seller agent fee, if we think we could sell the house ourselves.
We want to have a choice, which currently this NARS-monopolized/dominated non-free market is not allowing right now. Do you see where I’m coming from? How would you feel being forced to pay for some “service” that you don’t even require in the first place?
James — tear it up? Heck no! You’ve got the right answer. I would add that, with this new compensation structure, market forces will apply downward pressure on buyer’s agent commissions (heck, they might even drop below 2.5%). And you’re right, the quality of the representation will improve because agents will no longer be able to show only high-commission properties. They’ll be getting paid the same regardless of the house purchased by their client, the buyer.
I hate to say this is like bowling, but honestly — the counterarguments are pretty easy to knock down…
craig: Agreed. Capitalism and the free-market at its finest. My point in the original blog that you quoted from was if the buyer wants control they need to take responsibility. Hire an agent in the true definition of the word.
The problem with being a buyer’s agent under the current system is that the buyer’s agent feels like a whore. They try to peddle their wares anyplace they can but have no guarantee of compensation. Buyers typically are disloyal and will flirt with numerous agents if they think they’ll get a better deal.
If buyer’s agents will step up and treat buyer representation like a business and not like a hobby they’d be much better off. A listing agent will get paid no matter who sells the property. What guarantee does a buyer’s agent have without their own contract?
Agents: Prequal your clients, make sure they’re serious, and then go to work. If you don’t have an agreement you don’t have a job – you’re a shoe salesman hoping the buyer will find the right fit. We’re in the customer service business. Serve your clients well and work in their best interests.
Buyers: Make sure you really want and are in a position to buy. Interview agents, ask for a resume, negotiate a fee, sign an agreement. Work with your agent and they will work with you. If they don’t, fire them and hire someone who will. Don’t take advantage of an agent by having them show you everything in the world and then write an offer with someone else. An agent doesn’t get paid until you close … If you’re not going to close with that agent, please let him free up his time for someone who will.
- James
Ardell wrote: “For someone who has only been in real estate since 2006, you sound like a Kool Aid drinker of many years. How can you think like that without years of “programming”?”
It doesn’t that long to understand the system, and I’ve been involved in in for longer. Before when I said if the legislature hadn’t changed it, the courts would have, I was thinking of the fact that 20 years ago (or so) I thought the system was ripe for litigation.
What I don’t understand is how you don’t understand how the system works after all your years. It doesn’t take a rocket scientist to figure it out.
Craig wrote: “Kary — as an initial matter, and with all due respect, I obviously understand how commissions work. Don’t you think it is disingenous to argue otherwise? All key participants in this conversation clearly understand the commission structure, particularly as briefly related by you.”
Craig, first I wasn’t referring to you specifically, but others generally (including the agents who should know this stuff).
Second, the commission owing to the broker is owed pursuant to the agreement between the brokers on the MLS, not the P&S agreement. Legal Bulletin 169 (which may have been superseded due to the new short sale form–I haven’t checked), in discussing short sales, explains:
“Although this exception [allowing short sales] will allow listing brokers to input short sale listings, it does not relieve listing brokers from the obligation to pay a commission to a selling office who procures an offer. By inputting these listings, the listing office bears the risk that the lender may not approve the purchase and sale agreement.”
Basically, the listing of a property on the NWMLS is an offer to all the other agents to bring in a buyer and be paid a commission. That offer is accepted by bringing in such a buyer and the commission is due if the deal falls apart in the manner I explained, if the offer was non-contingent at that point.
If you’d like a copy of the legal bulletin, I can email it to you as a PDF.
Daph wrote: “That’s where the genius of Redfin comes in. That way, I get a portion of the “fixed cost” back. You guys slamming Redfin has no idea why we buyers love them, don’t you?”
No one here has slammed Redfin.
Peter, I don’t think our real estate taxes are that high. It’s just under 1% of value in most cases. I’ve heard many people from other states with income taxes that pay much higher real estate taxes.
Kary — I stand corrected, in part (as explained below). Thank you for the cite and quote. Yes, the listing agent is apparently liable to the selling agent where the deal falls apart as you describe. However, in that instance, the seller would ALSO be liable to the listing agent under the listing agreement, per the language I quoted above. So, owner is liable to listing agent for full amount of listing commissin, listing agent liable to selling agent for agreed commission split. If the selling agent demands payment, I’d wager good money that the listing agent will too. The listing agreement has an attorney’s fees provision (I think), so litigation would be an option.
Regardless, though, you still fail to explain how your hypothetical disproves my thesis. Please explain at your convenience how your point (that a selling agent is entitled to compensation even if the deal falls apart) disproves the larger argument that the current compensation system is detrimental to buyers (a point to which you previously agreed in #10)?
Craig wrote: “Attorneys compete for clients, and one way to do so is to offer a lower rate. That is most certainly NOT how agents compete for buyer clients.”
Do you think Redfin has a monopoly on rebates?
As to attorneys, I don’t think the hourly work competes on price at all. December rolls around and the partners decide how much they’re going to raise their rates. Maybe for institutional work they compete that way, but for the average Joe a lot of them think there’s a correlation between how much their attorney charges per hour and how good they are.
Kary — well, what a ridiculously ineffienct system, where market forces are applied only through rebates. That is not an effective way at all to force buyer commissions lower. It is, however, the ONLY way to do so given the current system.
As for attorneys, you’ve done a good job of bashing them, but you still have not identified any aspect of the method of compensation for attorneys that acts to immunize those fees from market forces. Your simple denial (”I don’t think the hourly work competes on price at all.”) is not an argument at all. Any attorney can offer his/her services at any price, right? And potential clients are free to choose an attorney based on fees charged, right? So in order to attract clients, an attorney can lower his fee so as to be more attractive to potential clients, right? Other than “rebates,” agents cannot do the same. Their fee is artificially supported by the system of compensation. And to the extent that the “average joe” fails to appreciate this fact (thinking instead that price = quality), well, that can be corrected through education of the consumer. The same cannot be said of agents’ commissions. The system conspires against consumers.
Real Estate taxes here are low. NC has a state income tax. The RE tax when I lived there was 0.75%.
TX does not have a state income tax. Depending on the county you lived in your RE tax was 2-4%.
1% with no income tax is super low and helps to explain the roads around here.
Craig, I was admittedly forgetting about the seller still being liable in that situation, because typically it would be rather irrelevant. If they had other resources, then they could close the transaction without the bank’s permission (and if they had such resources the bank wouldn’t approve the short sale). It’s sort of an empty right usually, so I don’t usually think of it. Sorry.
But I think it is relevant still that it’s technically the broker that owes the commission to the buyer’s agent. The seller pays the broker 6% (or whatever) to sell the property. It’s not technically the seller’s money or the buyer’s money. So it’s not like the buyer has a right to come in and say: “I’m not using an agent, so give me the 3%.” Maybe doing that would be intentional interference with a contract!
Again, I agree the system isn’t the best for buyers, but that’s because sellers pick the game. Buyers have the option of rebate brokers or trying to find a variable commission listing. Trying to turn a straight commission into a variable is problematic.
BTW, there’s one other thing you missed. If a buyer is financing closing costs, that too gets added to the commission. You can add a clause that says the commission is based on the net price, and I’ve done that before. So you can get around that part of it, but not the excise tax portion.
Alan wrote: “1% with no income tax is super low and helps to explain the roads around here.”
The year before Eyeman’s $35.00 license tab initiative was passed, the voters approved constructing roads, where the payment method wasn’t specified. The next year they gutted the financing for the roads by approving $35.00 tabs. Democracy in action!
Washington does have one of the highest gas taxes in the nation.
LOL! Kary,
Touche! I “got” it…I just didn’t make a shrine to it.
Craig wrote: “Kary — well, what a ridiculously ineffienct system, where market forces are applied only through rebates. That is not an effective way at all to force buyer commissions lower. It is, however, the ONLY way to do so given the current system.”
Perhaps it is inefficient, but there really aren’t a lot of buyers out there that want to pay an agent hourly. And if you don’t pay hourly, it’s contingent. And if it’s contingent, that means it will likely be higher than it would be if hourly.
The rebate system allows those that don’t think they need full service to do a lot of the work themselves and effectively pay less.
You admitted you didn’t have a solution to the problem. So far the rebate thing is the best solution out there, and it’s certainly the best solution I can think up.
Sorry about beating up on attorney fees, but as an attorney I think I have the same right to do that as I have to tell attorney jokes!
Kary — I don’t think that would be intentional interference with a contract. For such a claim to arise, there must be a duty of noninterference. I don’t think a buyer has any such duty.
Finally, neither sellers nor buyers pick the game. There is one meaningful system for buying and selling, and it is controlled lock, stock, and barrell by the brokers and agents — to their benefit and the consumer’s detriment.
[...] The Commission-Based Fee Structure: it’s Bad for Buyers (Craig Blackmon) [...]
The interference with contracts comment was a joke and thus the:
that followed it.
As to who picks the game, I guess it’s just a matter of perspective. Brokers could set the system up however they wanted, but if it didn’t work for sellers, no one would play. For every listing on the NWMLS, the seller elected to not go FSBO (or to give up on FSBO). I’d describe that as the seller picking the game. They don’t d create the rules, however.
92 comments in two days…many from agents, buyer or seller. Regardless of which you are, you are not out selling or buying. You are sitting around on a chat board bickering about who get’s what. In Donald Trump’s words you’re ALL “Fired”! Get a life and get to work.
Thank you for #93, but it is, though, like watching a train wreck, literally.
Kary said: “Talk to the people at SKCAR (I have), or watch the Ethics clock hour course they send out on DVD (or is that WAR?–anyway that DVD is how I even discovered the rule.) It’s a variable commission, and in this area much be disclosed pursuant to the rules of ethics of Realtors.”
And did you not ever ask yourself why there is a rule that agents must “disclose” to other agents when they may be charging less, BUT there is no rule requiring agents to “disclose” to buyers what the fee is for their services?
Ardell wrote: “And did you not ever ask yourself why there is a rule that agents must “disclose” to other agents when they may be charging less, BUT there is no rule requiring agents to “disclose” to buyers what the fee is for their services?”
Well the first is so that the listing agent doesn’t have an unfair advantage. Rather obviously that should be disclosed.
We discussed the second before, and I’d like Craig’s take on it. My policy is not to disclose that I’m showing a 2.5% commission to a client, because I don’t want that to affect their decision. But somehow, I do feel like I should disclose a 4% commission. I can’t reconcile that, because it seems like the policy should be the same.
BTW, this same concern could be discussed in the context of whether agents in general should disclose (which was Ardell’s point). I guess my answer to that is the same as my response to where prices are headed: I don’t know.
That said, disclosure of 4% commissions would be a tough policy for me to implement, because I don’t tend to notice commissions as a matter of course.
Not “noticing” the commission is step 3 in a four step program. Step 4 is to sit down with your buyer client up front and come to a meeting of the minds with your client, the buyer, with regard to commission.
Let’s say you agree at 2%. The it becomes necessary for you to disclose the commission on each house as the difference is THEIR money and not yours.
Builder offering 5% then becomes 2% to you and a 3% buyer bonus.
Seller offering 2.5% if the buyer was expecting 1% toward closing costs, then becomes .5% toward closing costs, red flagging the buyer to possibly negotiate the difference in the offer.
By establishing a flat fee or amount slightly less than “the norm” with your buyer, the buyer becomes an interested party in all commission issues. By doing so the buyer would HAVE to be kept appraised of commission issues and changes. That’s the respect they deserve and the dignity they’ve been denied.
P.s. Kary…that shoots a big hole in your “variable rate” issue. If every buyer agent established an undisclosed and different commission with their buyer clients…variable rate rules would be irrelevant.
Gee Craig, I don’t think I said “oh yeah, what’s your solution” … what I said to you was this: Craig, your article doesn’t state the full set of choices out there to buyers. It simply criticizes a system in place that is in use fairly consistently in all 50 states, and leans towards the suggestion that the commission based fee structure is “bad for buyers” but doesn’t offer solutions. Mostly what it suggests is that the fees earned by real estate agents are “too high”, which is entirely a different issue.
Keep in mind, any agent and buyer can have a Buyers Agency Agreement that allows a buyer to pay the agent the commission.
You make what I say sound like an offensively challenging question, which I didn’t intend. Your article simply is meant to challenge fees or commissions to buyers, and to stir the pot.
I guess I prefer a discussion of solutions. Silly me.
Craig, any good buyers agent has a Buyers Agent Agreement in writing which will discuss if buyer agrees to pay any commission to agent in the event seller doesn’t agree to pay what buyer and buyers agent agreed upon, and that same Buyers Agent Agreement can allow the buyers offer to request/negotiate seller to pay the fee to Buyers Agent.
Therefore, all agents worth their salt will have this Buyers Agent Agreement in place, and will show their buyer clients all listed property, no matter what the posted commission is. Then, if buyer wishes to make an offer on said property, agent can ask seller to pay whatever commission buyer and agent have agreed upon per that Buyers Agent Agreement. Legal, efficient, and solves the problem.
What it doesn’t solve is “presentation”. Many buyers ask their agents not to show them properties where the seller offers a lower than xyz commission. It’s always price and terms, and if the buyer chooses not to negotiate with a seller due to sellers choice of terms, then that seller reduces his market exposure.
# 44, Ardell, this isn’t a discussion of ‘keeping fees’ it is a discussion of earning fees and who you represent. Your choices as an agent are different than mine, and that is part of my point:
Buyers and sellers have a smorgasbord of choices.
We do not have to agree on how we do business, and buyers and sellers benefit by our disagreements I believe.
# 46, Rhonda, this discussion has been around for eons. It isn’t new. The fact is, commissions are supposed to be negotiated, and they are. Buyers do need a method to have representation in an affordable way. Sure, we can say lenders should allow buyers to finance their agent commissions — but can you imagine how many years that might take?
What seems to work for most people is that the buyers agents get paid from seller proceeds. Buyers benefit cash-wise when they buy, and repay that debt when they sell. Sort of like the new wind-energy credits …..
There is no immediate solution to this issue, other than the obvious: Buyers and sellers, you can negotiate for what you feel is fair.
If who you want to do business with doesn’t agree, then you don’t have a meeting of the minds, and perhaps you’ll change your viewpoint, or maybe not. But, no matter what, there is SOMEONE out there who will choose to do business with you. Your choices are wide, and not limited.
Leanne,
Haven’t you thought it a bid out of whack for WA Law to say “you represent” a buyer, and yet for the fee to still be to “procure or find” a buyer? When do you think those two will become in sync? Obviously never unless we have a few more of these “train wreck” type blog discussions.
The rules and lingo have not changed one iota with regard to the fee structure pre-buyer agency to post-buyer agency. Why not? Clearly there was plenty of time over the last 15 years or more for someone to at least take a stab at it, don’t you think?
Question Leanne or anyone,
If the seller pays you to FIND a buyer, then who pays you to REPRESENT a buyer?
# 49 Craig, you said “Leanne, please don’t read further — already low-cost alternatives to agents such as flat fee attorneys” …
Craig, I don’t care what you charge to your buyers, or even ask for from my seller. All I care about is that you bring an enforceable contract, and then my seller and I will discuss how to react to your buyers offer. My seller client will counter your clients’ offer/accept/or/reject as makes sense regarding your clients’ specific offer.
There are no guarantees in life, and I have no objection whatsoever to you representing buyers, or how you want to bill for that. You are one of the choices I like to have buyers consider. Perhaps you win some, I win others, but there is no reason for our different approaches to cause us any inability to meet for the benefit of our respective clients. The terms of the offer will be what is considered.
# 50 Ardell, not true. FSBO’s often sell at fair market price, with no commission to anyone. And just as often, they sell at below fair market price, with no commission.
# 96 Kary, why aren’t you using a Buyers Agency Agreement signed between you and your buyer client which state what your commission will be, and if seller doens’t pay that, that the buyer agrees to? You can also put in a statement that says if the sellers offered commission is higher than what you and your buyer client negotiates, that extra will be used to reduce purchase price or go towards closing costs, etc. Rebates? Well, you’d better disclose those to the lenders, as they can be considered a concession against purchase price if seller is paying all buyers closing costs.
# 71Craig, nothing is “artificially” high. The commissions are based on market response, but of course are individually negotiable.
Ardell wrote: “P.s. Kary…that shoots a big hole in your “variable rate” issue. If every buyer agent established an undisclosed and different commission with their buyer clients…variable rate rules would be irrelevant.”
Not at all. The listing agent would still have an unfair advantage, because it’s the seller getting the extra money, not the buyer.
Leanne wrote: “# 96 Kary, why aren’t you using a Buyers Agency Agreement signed between you and your buyer client which state what your commission will be, and if seller doens’t pay that, that the buyer agrees to? You can also put in a statement that says if the sellers offered commission is higher than what you and your buyer client negotiates, that extra will be used to reduce purchase price or go towards closing costs, etc. Rebates? Well, you’d better disclose those to the lenders, as they can be considered a concession against purchase price if seller is paying all buyers closing costs.”
I don’t use buyer’s agency agreements because my relationship with my clients is based on trust. Strange thing is, my clients actually seem to like me!
I’ve never done a rebate–but you’re right–if I did then I’d probably need to disclose on each property. I’d probably have to on each property with any buyer agency agreement.
This following the money still bothers me. I think it’s a false argument. And it’s what set up the old stupid system where the selling agent typically represented the seller!
But how about this? Often insurance companies pay for the defense of a party. Because a third party is paying, does that mean the attorney doesn’t represent the insured? Hardly. There are some conflict issues which arise, but the insured is represented.
Not so. I already told you that my “variable rate” is that I don’t take the buyer agent fee and neither does the seller. So if I don’t have to disclose when I have a different BA fee than you, because the seller’s not getting it, then I don’t have to tell you if as the listing agent I’m not going to keep the BA fee if there is no buyer agent. If the underlying issues is higher net proceeds to seller, then there is no reason I need to damage my seller client by posting “variable rate”, since the buyer or the buyer agent is getting it, not the seller.
As to the artificially high argument, arguably in some slower parts of King County (and the country) 3% is too low, because in a slow market an agent with a buyer is even more valuable.
And I think you might see some of that. In a hot market sellers might be more willing to offer 2.5%. Has anyone noticed 2.5 becoming less popular lately, and more 4% listings?
Ardell wrote: “Not so. I already told you that my “variable rate” is that I don’t take the buyer agent fee and neither does the seller. So if I don’t have to disclose when I have a different BA fee than you, because the seller’s not getting it, then I don’t have to tell you if as the listing agent I’m not going to keep the BA fee if there is no buyer agent. If the underlying issues is higher net proceeds to seller, then there is no reason I need to damage my seller client by posting “variable rate”, since the buyer or the buyer agent is getting it, not the seller.”
In your system, if two buyers offer $400,000 for a property, but one is not represented (or represented by you) and the other is represented by a third party, which offer gives the seller more money? It’s yours. That’s unfair to the other buyer and the other agent.
If your system doesn’t work that way, do the math for me to show how the seller would get the same amount of money.
Leanne #108,
Unless the buyer agent fee is negotiated with the buyer, it remains artifically high. If every office posted the avg listing agent fee and the avg buyer agent fee (SOC), I’ll bet the former would be lower than the latter. Do you really dispute that?
Kary 114,
I list a property at 2/3 – 5% with 2% to the listing side and 3% to the buyer side. Price is $500,000. Gross price less commissions is $475,000.
You bring a client. You get $15,000 I get $10,000 and the seller gets $475,000.
Buyer walks in the Open House with no agent. I still get $10,000, buyer gets $15,000 to go hire an agent or whatever he chooses to do with his BA fee, seller still gets $475,000.
Kary said: “because in a slow market an agent with a buyer is even more valuable.”
The BUYER is more valuable…not “the agent with the buyer”. That is leftover language from when we all represented sellers and we were paid to “bring” a buyer to the seller. Can’t you see that? The BUYER is more value, not the guy “who drug him in and twisted his arm”.
That’s a prohibited variable rate commission IMHO, and I suggest you talk to SKCAR before you do that. One thing about this industry is that the fines are pretty steep.
Also, I suspect that’s probably illegal under state law. Your broker probably can’t pay commissions to unlicensed third parties, which is what that would be. Maybe Craig knows the answer to that one.
Anyway, ignoring the ethics and legality, if I bring in a buyer as a third party agent and offer $500,000, the other buyer’s $485,000 offer is the same as mine.
Yes it’s true the same thing happens with Redfin, but the difference is that’s the agreement with the selling agent. The selling agent could be charging more or less than the offered commission. The listing agent wouldn’t know, and therefore there’s nothing to disclose. Rather obviously buyer’s agents know some agents work on different terms. The problem arises when the non-standard term is from the party offering you the commission. It’s part of full disclosure.
P.S. I do believe it is the seller’s right to insist that the buyer use the 3% (or 2.5% or whatever it may be) or a portion thereof to hire an agent, as I will when I sell my house. The seller does not have to accept the increased liability of a buyer with no representation.
Ardell wrote: “The BUYER is more valuable…not “the agent with the buyer”
Apparently you still don’t understand my “Fishing While Backpacking” piece. Buyers are more important to FSBOs. Agents with buyers are more important to sellers with listing agents. That’s the whole point of the entire MLS system. How long have you been an agent?
Ardell wrote: “P.S. I do believe it is the seller’s right to insist that the buyer use the 3% (or 2.5% or whatever it may be) or a portion thereof to hire an agent, as I will when I sell my house. The seller does not have to accept the increased liability of a buyer with no representation.”
Then what’s the point of the seller setting up the system? Why not do what I do, which is tell them their options?
BTW, I don’t think the agent could refuse to write up the offer. Yet another interesting question I don’t know the answer to off the top of my head. Clearly we have to present all offers, but if a buyer comes to you and says I want to offer $400,000, does the agent have to write that up? I would (after explaining who I represented and their other options), so I don’t need to know the answer to that one. But it’s an interesting question.
Ardell is right (as usual). Buyers are not property or pets of agents.
I’m sure someone already said this, but too many posts to review. Many buyers are of the belief that agents are generally overpaid for the effort and true skill set involved, especially on higher priced properties, and especially if the buyer is doing most/much of the work themselves, etc., blah, blah.
Maybe they are right, maybe they are dead wrong, but that is the perception of many, and that is why posts like this get people fired up (on either side). Some would say, if Redfin can kick back 2/3 of the commission, this demonstrates that the agent is 2/3 overpaid, which helps to explain why billions of people become agents (at least for a while).
If agents tell me their tale of woe about all the unpaid time they put in for other “clients” for which they did not get paid, that does not justify (to me) that I should overpay them now just because I’m the guy who closes. If they tell me (the buyer) that the seller is paying, then I get a new agent. (Sorry, that’s a different thread).
It all comes down to the lenders. If they keep allowing commissions to be financed as part of the “purchase price” like they do now, you agents are probably safe. You know this. If lenders suddenly require the commission to be substracted from the home price, you guys are in trouble, because buyers will now have to come up with their own cash to pay you….
PatentGuy wrote: “Maybe they are right, maybe they are dead wrong, but that is the perception of many, and that is why posts like this get people fired up (on either side). Some would say, if Redfin can kick back 2/3 of the commission, this demonstrates that the agent is 2/3 overpaid, which helps to explain why billions of people become agents (at least for a while).”
Apples and oranges. Redfin is for people who want to find properties on their own. They charge less because they do less.
Also, the fact that so many people become agents only “for a while” sort of indicates that the pay isn’t too high. Think about it. There were only 1,500 transactions of SFR in King County last month, and I’d guess there are probably 10,000 active agents in the county. Whatever the number, not that many are doing multiple transactions per month, unless perhaps they represent a builder (and even then maybe not).
PatentGuy wrote: “Ardell is right (as usual). Buyers are not property or pets of agents.”
No one said they were. But if you’re trying to sell your property, and it’s listed on a MLS system, the agents with buyers are the ones that you want to attract. There’s probably a 90% chance that’s how you’ll sell your house if it’s listed.
If you don’t care about selling your property, you can do things that some of them might not like. The choice is up to the seller, but the choice is pretty damn clear, IMHO.
Ardell, buyers have every right to choose to be unrepresented, in which case you would represent your seller alone. The SOC has no effect on what the buyer chooses for representation.
Kary,
I have no reason to speak with SKCAR…I’m not a member of SKCAR.
Kary,
Old fashioned. You think the agent can “hide” a house from a buyer these days?
“If you don’t care about selling your property, you can do things that some of them might not like. The choice is up to the seller, but the choice is pretty damn clear, IMHO.”
And how is that different than Vinnie and Guido saying “Well if you don’t want to be protected, ‘the choice is up to you, but the choice is pretty damn clear, IMHO’.”
Kary said: “No one said they were. But if you’re trying to sell your property, and it’s listed on a MLS system, the agents with buyers are the ones that you want to attract. There’s probably a 90% chance that’s how you’ll sell your house if it’s listed.”
Nope. Wrong. If I am selling my house, I do NOT want agents. I want buyers. I am stuck with agents (unless the agents are themselves the buyers, then OK). I’ve sold a number of homes in the past, some on the MLS, some not. When buyers showed up with agents, it was not because the agent “brought me a buyer” (and this is back in the pre-internet days), it was because the buyer brought along the agent, whether they needed to or not.
Sorry.
I thought something went wrong with post #1. I had cut and pasted from my word processor, hit “Post,” and the page hung. So while I meant what I wrote, I didn’t mean to say it here. Sorry.
But I do sincerely appreciate the warm fuzzy feelings from Ardell and Craig. Maybe we should all get a room together …
- – - – - – - – - – - – -
We / you / somebody may be able to lead a revolution in compensation for real estate brokers, but I think that most of this talk is just pot-stirring. This discussion is only of value in markets with all-inclusive MLSes, which are a minority throughout the US and most of the capitalist world.
The MLSes do not exist to serve buyers or sellers, they exist to serve brokers; real estate brokerage being a business, not a mission. In markets like New York City, brokers have found that it is in their interest to shop listings themselves before co-brokering; this seems to be more to the detriment of buyers than the Western Washington situation.
This is an important distinction, because membership in an MLS is voluntary, and when a major brokerage decides that it is not in its best interest to participate, the whole system collapses.
Here’s the grown-up truth: Brokers transact real estate as a business. When it is profitable to show and list and sell real estate, they do. If you want somebody to work for you, regardless of the field, you have to make it worth their while – in their eyes, not yours. I’m still trying to sign Frank Thomas to my softball team …
[...] Speaking of sharks, this guy at RCG may have jumped it with this one. [...]
Ardell wrote: “I have no reason to speak with SKCAR…I’m not a member of SKCAR.”
Oh, okay. If you don’t subscribe to the code of ethics, then you’re probably free to do that commission arrangement. The ethical rules for “Realtors” only apply to members, not to real estate agents.
There is still that legal issue hanging out there. I remember that my broker could not pay you (an agent at another broker) directly, but I don’t know if that means he couldn’t pay another third party, or if there are licensing issues involved.
I wrote: “If you don’t care about selling your property, you can do things that some of them might not like. The choice is up to the seller, but the choice is pretty damn clear, IMHO.”
Ardell wrote: “And how is that different than Vinnie and Guido saying “Well if you don’t want to be protected, ‘the choice is up to you, but the choice is pretty damn clear, IMHO’.”
The difference is in the first case, don’t follow the instructions and you don’t get what you want. In the second, don’t follow the instructions and you get your kneecap broken.
Pretty silly really Ardell. You should clean up your house prior to putting it on the market, because most buyers don’t like it messy and dirty. If you don’t do that, some of them might not like your house. The choice is up to the seller, but the choice is clear.
How is that coercion? Stating reality is not coercion.
PatentGuy wrote: “Nope. Wrong. If I am selling my house, I do NOT want agents. I want buyers. I am stuck with agents (unless the agents are themselves the buyers, then OK). I’ve sold a number of homes in the past, some on the MLS, some not. When buyers showed up with agents, it was not because the agent “brought me a buyer” (and this is back in the pre-internet days), it was because the buyer brought along the agent, whether they needed to or not.”
Simply put, you don’t understand the system, especially the system in the pre-Internet days, but it’s not that different today.
The NWMLS attracts agents. Craigslist attracts buyers. Which is more effective.
I’m guessing (based on my practice) that approximately 90% of sales occur where the other side had an agent.
Of course your house needs to appeal to buyers when they see it, but to get the bites on your listing you need to attract the agents.
Mack wrote: “In markets like New York City, brokers have found that it is in their interest to shop listings themselves before co-brokering; this seems to be more to the detriment of buyers than the Western Washington situation.”
I’d imagine that wouldn’t work too well for sellers either. I’m surprised they tolerate it (I’m presuming they don’t know).
I don’t think Craig and Ardell are just stiring the pot. What they are doing is becoming more attractive to buyers. Buyers are the valuable client in the current market and, from the way things look, into the next few years.
If I am paying for someone to represent me, as a buyer, I would expect them to show me any house for sale whether it is listed on MLS or is a FSBO or, even, is not even advertised but someone in the neighborhood knows that someone is interested in selling it.
This service is what I would expect my agent to provide me. I can go out and find all of these homes myself online and pay someone by the hour to open the doors for me and then hire Craig at a flat fee to write up the contract if I wanted to take on the work myself.
I think that the main reason buyers use the traditional system is that they are not educated in how things work. These discussions are really opening our eyes though and I have a feeling that the tide will turn from the old system.
Mack wrote: “The MLSes do not exist to serve buyers or sellers, they exist to serve brokers; real estate brokerage being a business, not a mission.”
I’d disagree, Mack. They exist to attract listings, so they are designed to benefit the seller so that the seller will join the game. Sure that benefits the brokers/agents, so maybe it’s a matter of perspective.
One benefit of the current system that Craig and Ardell hate so much is that it makes it more likely that buyers will be represented. Change the system and it’s more likely they would go it on their own. That’s likely to lead to over-reaching and flat out mistakes, in what is probably one of their most important and largest financial transactions.
People representing themselves Pro Se usually isn’t pretty when it happens in court, and it’s not necessarily pretty when it happens in a real estate transaction. The current system makes that less likely to occur, so that’s a good thing. It’s sort of like dental insurance–people are more likely to have better teeth if someone else is paying for their visit to the dentist.
Peter wrote: “I don’t think Craig and Ardell are just stiring the pot. What they are doing is becoming more attractive to buyers”
Again backwards. It’s a trick to represent sellers (at least for agents, not attorneys). I’ve seen it taught in listing courses (without reference to the ethical issues). They didn’t quite script it this way (I changed the last part):
Agent: “And if I find the buyer for you, you won’t pay 6%.”
Seller: “Gee, that sounds great. By the way, what’s the chance of that happening?”
Agent: “Oh, don’t bother yourself with silly details.”
Peter wrote: “I think that the main reason buyers use the traditional system is that they are not educated in how things work.”
I think the main reason they use agent is they don’t want to do the work, and they want guidance. It’s sort of like the difference between going to Nordstrom and going to Wal-Mart to buy a suit (assuming Wal-Mart sells suits–I don’t know)
That’s not the main reason they should use an agent, however. The main reason is because even if they’ve bought four properties in the past, they probably don’t really know what they’re doing. An attorney could fix part of that, but not all of that.
Kary — just FYI, another remarkably patronizing statement by you regarding the SOC: It “makes it more likely that buyers will be represented.” Represented, yes, but poorly and for more money than the service is truly worth (if commissions were not insulated from market forces). I’d rather see a system where buyers have a meaningful ability to choose the price they pay and the service they get.
This thread may be just about spun out — everyone is re- and re-re-hashing their original point (myself included). Besides, I gotta get back to work today (#92!), so my input will be limited from here on out. Thank you everyone.
Mack: “In markets like New York City, brokers have found that it is in their interest to shop listings themselves before co-brokering; this seems to be more to the detriment of buyers than the Western Washington situation.”
Last I looked, NYC didn’t have buyer agency. In WA the law of the land says all agents represent buyers, except the listing agent. Each State determines the focus, and some have Transaction Brokerage (FL) where the agents can broker transactions and not represent anyone.
Yet every state seems to have the same commission system and mls system and thinking that buyers are “3rd parties”, i.e. the seller and agent run the show and the buyer is outside of the loop. This system made absolutely perfect sense when all agents represented sellers. My complaint is that it has not changed one iota as we shifted from all seller agency to mostly buyer representation.
Kary wrote: “That’s likely to lead to over-reaching and flat out mistakes, in what is probably one of their most important and largest financial transactions.”
I think realtors may want to layoff on that line for a while.
There are tens of thousands of buyers who paid ridiculous sums for houses during 2004-2007 that they cannot now afford to pay back. That the price bubble would pop on its own weight was obvious to anyone not looking at it through self-interest-colored glasses.
For the most part, these buyers had a realtor represent them for “their most important and largest financial transaction.” Good thing, huh? Those realtors really saved the day and made sure that their “clients” made wise decisions! We can afford it, honey, Suzanne-the-Realtor did the research.
Karl, if you’re still around, I wrote a piece on why you need an agent here:
http://blog.seattlepi.nwsource.com/realestate/archives/137262.asp#comments
Admittedly the piece says agent or attorney, but at least one of them is one where only an agent would likely help.
Craig wrote: “Kary — just FYI, another remarkably patronizing statement by you regarding the SOC: It “makes it more likely that buyers will be represented.” Represented, yes, but poorly and for more money than the service is truly worth (if commissions were not insulated from market forces)”
Not patronizing at all. Buyers trying to save a few bucks are the ones that go to agents directly, and they end up not being represented at all. If you made it so the buyers actually had to pay out of pocket, they’d be even more likely to do that, and be unrepresented at all.
That they might be poorly represented, that is possible (and actually addressed in the thread I linked before reading your post). Again, the same is true of people represented by attorneys. In the agent situation I think a possible partial solution would be to do away with clock hour courses (what you would call a CLE) that have anything at all to do with being able to get clients. Also, requiring the “Practices” class within the first six months of getting a license would help, or other changes to the education system. I don’t see that the quality of representation is a commission issue, but I do agree it can be a problem.
PatentGuy wrote: “I think realtors may want to layoff on that line for a while.
There are tens of thousands of buyers who paid ridiculous sums for houses during 2004-2007 that they cannot now afford to pay back. That the price bubble would pop on its own weight was obvious to anyone not looking at it through self-interest-colored glasses.”
Which is why I don’t think agents should make predictions as to where the market is headed! Which is why I think there should be ethical rules preventing it!
BTW, I don’t know where you’re located, but I assume it’s not the Seattle area from your comments about the market and going back to 2004. The areas you describe going back that far and still being in trouble probably experienced a sustained runup in price of over 15% a year for a significant period of time, which is a clear danger sign.
Many bad points are being made here. If you don’t understand the commission based system of compensation for a Real Estate transaction leave the subject alone.
Maybe this is to generate interest in this site or the Real Estate Professionals site. This is just drama by volume. There is no substance here. The public can view this at any time. Consumers, or clients, buyers and sellers can have a laugh about how ridiculous we all are.
It makes us all look bad. It’s not a discussion. It’s not helpful. It is what it is, if you want to change it fine, if not leave it alone.
Kary – I’m in Saratoga, CA (Silicon Valley).
David Losh – Allowing the free airing of opinions is what makes the blog great. If this or any blog only allowed PC comments, they will not be visited or cared about.
From what I can tell by the comments, most everybody very much understands RE commission system, just that some like it more than others. But, it’s not all that complicated to “understand.”
Since you are worried about “Consumers, or clients, buyers and sellers can have a laugh about how ridiculous we all are”, you should tell the NAR to knock off their “great time to buy” ad campaigns, and to put some duct tape over mouth of Lawrence Yun. Those two small steps would go a long way.
Regarding buyer agency in New York:
http://www.dos.state.ny.us/LCNS/pdfs/1736.pdf
There certainly is buyer agecy in NYC. I can’t find any State that doesn’t have buyer agency.
——————————
Regarding this discussion: it simply reinforces that buyers and sellers have many choices for how they want to be represented, and how they want to pay for those services.
This is an incredible post which has certainly put a stick in the hornets nest. The point of the original post was that buyers are not getting proper representation due to the current commission structure…right? The simple solution is for the buyer to sign a buyer agency agreement which specifies, in advance, how much the buyers agent is going to be paid for their services.
The buyer can sit down with their agent and negotiate a fair commission prior to seeing houses. They would sign a buyer broker agreement which would take the uncertainty out of the buyer agents compensation. For example the buyer broker agreement can specify that the agent will receive 2.5% of the purchase price as compensation for their services. If the selling office commission, as opposed to the listing office commission, is 3% the remainder is rebated back to the buyer. If the selling office commission is 1% the buyer then would have a choice. Either add the additional 1.5% to the contract requesting that the seller pay it or pay it themselves. The NWMLS rules allow for a buyer who has a buyer broker agreement to ask the seller, in their offer, to pay the buyer broker fee.
The buyer broker agreement can also specify in detail what the duties and services are that the buyer broker is providing much like most listing presentations present to sellers.
The real root of the problem is that the general public does not want to compensate brokers for their time and expenses unless there is a successful outcome. There arecompanies attempting the pay as you go model. I hear they haven’t made a profit yet however. A buyer who requests that Redfin show them homes can be charged $250 for their time. They are now modifying their service with other options that offer initial tours for free and then reduce your rebate if you tour more than two times and charge $250 upfront for more than 4 tours. The rub is that buyers don’t want to compensate their agents for their time or expenses. It is assumed that an agent will show homes, write contracts, research properties and generally fulfill the buyer wishes indefinitely until a suitable property is found, contracted, inspected and funded. The same goes for listing agents and their expenses. Buyers who have to pay for showings will use deceptive tactics to get commission agents to show them houses and either fail to disclose or even lie about their intention to us a different agent who is offering them an incentive. You can imagine an agent showing several home just to find out later they were duped and ended up with nothing. Only a few agents are making good money. In the commission model, much as in any other industry, only the top 5% really make the bucks.
One could argue that the market place would be much more competitive with brokers being compensate for their time and not on contingency. People would be much less inclined to request frivolous showings, ineffective selling strategies and or make those late night calls that agents routinely handle. Since agents bear the risk and cost of a commission not being paid based upon the contingency model the fees are higher when they are successful. There are pay as you go, and flat fee services available to any buyer or seller who wish to engage them. I’m sure most buyers would benefit greatly in a pay as you go only system because they would likely be much more responsible and responsive in locating and contracting a new home. This service is available, however buyers are choosing the commissioned agent because of the low upfront cost, ability to get services without a reciprocal obligation, and access to an experienced professional for as long as needed to find the perfect home.
In the end the easiest way to resolve the buyer representation issue is for the buyer and agent to agree up front and consummate a buyer broker agreement.
“Many bad points are being made here. If you don’t understand the commission based system of compensation for a Real Estate transaction leave the subject alone.”
It’s not about “understanding” it, David. It’s about a buyer not having any say in it. It’s about buyers being told it’s “free” and then they pay for it.
If someone gives me a coupon for a free day at a spa, and when I leave I am handing over a big fat check…it just doesn’t feel like it was “free”. If I’m paying for it, then I should have some say in the matter.
Why do we talk about these things from time to time? Because “market forces are supposted to prevail” and they haven’t. If we always do things the same way, whether it is a seller’s market or a buyer’s market, then things stay the same without market forces coming to bear to change things from time to time.
Everytime we leave a “hot market”, we need to rebalance the power. Clearly buyers have very little say when there are 5 buyers who want the same house. It’s “put up and shut up time”, for the most part. When the market slows and softens, then the pendulum has to at least come back to center, but usually “and then some”.
When something doesn’t change with market forces, it is being artificially controlled, and conversations like this one help to move things in the right direction. “seller’s market”/”buyer’s market” should offer different choices. When they don’t, it’s because someone has their foot on someone’s neck.
Will this post change anything? You’d be surprised how planting a seed of doubt in the way the system functions, works its way through slowly and to a positive result. Conversations don’t guarantee change, for sure. But without them, change is less likely to happen.
We know “how it works”, what I want to know is why does it still “work” the same way as it did when all agents represented sellers.
I agree that a buyer’s agent agreement, where the agent agrees to x% commission and the balance of the SOC is rebated to the buyer, is one way to address the problem. That would at least theoretically create some downward pressure on selling agent commissions (where there is virtually none now) and should eliminate the quality-of-representation problem (where agents only show certain houses based on the SOC). However, why would any but the absolutely most enlightened agents so modify their practice? It is not in their interest to do so– they will be undercutting their own successful and self-sustaining model. Now, if the legislature were to REQUIRE a buyyer’s agent agreement…
That said, this is still just a work-around for what is the obvious solution: buyers pay buyer’s agents. Until that is the case, the system still depresses competition as it still makes it difficult for qualified non-agents to participate in the process.
Leanne,
NY STATE certainly doesn’t preclude it, by common practice in NYC does not include it.
Craig,
I’d be happy with it being mandatory for agents to stop saying “it’s free” or to stop the practice of not disclosing the buyer agent fee issues at all. It’s been swept under the rug because often, if not most times, the agent and buyer have NO discussion whatsoever regarding commission under the guise that it is “free”.
That the buyer pays for the commission is just a matter of perception. Unless the seller likes leaving money on the table, they’re going to try to get the buyer to as high of a price as they can, regardless of whether the commission is a straight 6% or only 3% or 4% if they find the listing agent finds the buyer.
There would be exceptions to this, of course, such as full price offers or situations where the seller needed X amount to pay off a mortgage. But for the most part, they’re going to negotiate the buyer as high as they think they can. I’ve yet to have a seller say: “This offer will net me $24,000.00, I don’t really need $27,000.00, let’s accept the offer.
In case it’s not obvious, this connects up with my prior post saying variable commissions are more a scheme to attract sellers to a particular listing agent, not something designed to attract or help buyers.
Finally, the buyer’s agency agreement is a possible solution, but the NWMLS form for that is on of the worst forms they have.
PatentGuy wrote: “Since you are worried about “Consumers, or clients, buyers and sellers can have a laugh about how ridiculous we all are”, you should tell the NAR to knock off their “great time to buy” ad campaigns, and to put some duct tape over mouth of Lawrence Yun. Those two small steps would go a long way.”
LOL. What’s particularly funny about those things is that you don’t really have to talk the average person into wanting to buy real estate.
I’d think an information campaign would be better. Such as in Sept-Dec., pointing out that it was still possible to get a 100% loan. Later pointing out that for transactions that need PMI, that 97% is the new limit, but that there are exceptions where you can still get 100%. And balancing that by pointing out the exceptions, such as there are some states/areas where PMI is tough to get because they’ve been designated a declining market. But I guess we live in a society with too short of an attention span, which is why political ads turn nasty.
Kary,
Your #154 makes no sense to me. The seller is concerned with their net proceeds, not the sale price. And the “listing scheme” you are talking about is something else altogether.
That’s the old 6% commission or 5% if you buy and sell through listing agent or 4% if you buy and sell AND the buyer comes direct.
That is not what we are talking about at all. In fact it is the OPPOSITE of what we are talking about.
In your “listing scheme”, the seller and the listing agent gain the advantage of an unrepresented buyer. The buyer gets nothing, seller gets part of the money they saved on the buyer being unrepresented and the listing agent gets the rest.
That is not at all what we are talking about here. In fact that class you took on the “listing scheme” is really outdated and inappropriate for today’s market.
You mentioned before that this post was a ploy aimed at sellers referencing that “listing scheme”. I think you are missing the point as it has absolutely nothing to do with sellers or listing agents gaining the advantage. It is about the buyer controlling the SOC, not the seller, once put into play by the seller.
Kary said: “That the buyer pays for the commission is just a matter of perception.”
YES! Correct! It is just as easy to see it as the buyer paying it as it is to see it as the seller paying it. So why the argument against seeing it as the buyer paying it?
Ardell wrote: “Your #154 makes no sense to me. The seller is concerned with their net proceeds, not the sale price.”
Right, but they’re going to want to get the net proceeds as high as possible. That means they’re going to try to get the buyer to pay a gross price as high as possible. They aren’t going to want to leave money on the table.
Maybe this exchange will make it clear what I’m saying:
Client: Can you try to get the buyer up another $3,000.00?
Agent: I can just cut my commission $3,000.
Client: Thank you! But can you try to get the buyer up another $3,000.00?
Aargh! I’m getting dizzy by all the running in circles!
It is NOT perception. The seller is paying the commission to the listing agent and the buyer has nothing to do with it!!
It’s obvious that the sides here aren’t ever going to agree and the repetitive nature of the comments are getting annoying.
The buyer will never have anything to do with the commission unless the buyer has contractually hired their agent and is paying them out of their pocket.
This is the exact same conversation from the blog that the OP quoted … the seller has hired the listing agent and is paying the listing agent to bring in the buyer. If the listing agent decides to pay the buyer’s agent to do that, great. If not, great. The house gets sold either way and the seller is happy. He pays what he agrees to pay the listing agent.
I do understand Ardell’s (and others) viewpoint … There are plenty of agents who will tend to look out for their own interests first and this is definitely a problem but there are laws on the books that address this already.
Buyers should be educated as to what rights they have and should be aware of how the current system is set up. If they were you would probably see buyer/broker agreements become more popular and the chances of the buyer getting taken advantage of and they’d be aware of what signs to look for in case they hooked up with one of these unethical agents.
In fact, when you come right down to it, the whole underlying issue isn’t what an agent is getting paid, it’s how that they are conducting business and treating their clients. Education is the key and discussions like this help. However, let’s focus on the actual problem – unethical agents – and not what an agent is paid.
This is a free market and the market always changes according to supply and demand – if there is enough companies out there that provide excellent service for a lower fee then that model will become the ’standard. ‘ Obviously there isn’t enough outcry for the current fee structure to change. Is that our fault or is it the fault of the people that hire us? Just as any business owner, I will charge as much as I can for the service I provide. My ethics, however, are not for sale for any price.
- James
James — if this is a “free market,” why are buyer’s agents still routinely paid 3%? That is no longer true for listing agents, but still holds true for selling agents. Why? Given the many, many agents looking for business, and given that 3% is a lot of money (i.e. you can charge less and still make a living) you would expect some agents to offer their services for less than 3%, which would drive down commissions generally. This has not happened. Why not? Because the method of compensation of buyer’s agents is not a “free market” at all — it is specifically insulated from market forces by the existing fee structure. There is no incentive — at all — for an agent to charge a fee lower than 3%. In fact, it is just the opposite: since the seller pays the commission, there is an incentive for 3% or GREATER (e.g. the 4% SOC), and lower commissions are ignored (to the detriment of buyers).
It is certainly not your fault for taking advantage of a system that benefits you. I am much less the crusader than Ardell — I just have a personal interest in changing the system. In fact, my associate Marc is investigating the possibility of being a broker given the gobs of money available through the existing system (which largely excludes attorneys). That said, you — and all the other defenders of the current system — really should accept reality, just like Kary: “As to your main point, that this system is bad for buyers, that’s not really a big surprise.” (#10) Ironically, even Kary seems to have backtracked in this thread, but the point remains true. Participating in a legal and long-standing system to your benefit — and the detriment of buyers/clients — is not unethical. Just recognize it for what it clearly is.
Finally, I agree with you — the thread is exhausted. Rather than posting further, how about everyone discuss the points raised on OTHER blogs and link back to this one?
If you don’t understand the commission based system of compensation for a Real Estate transaction leave the subject alone.
I read the post and some of the comments. All you’re doing here is stirring around for some purpose I can’t figure out.
Some of you who have made comments to this ridiculous post are licensed Real Estate agents, so it’s even more troubling.
Kary said: “Maybe this exchange will make it clear what I’m saying:
Client: Can you try to get the buyer up another $3,000.00?
Agent: I can just cut my commission $3,000.
Client: Thank you! But can you try to get the buyer up another $3,000.00?”
Kary, I have never in 18 years had a client who would see it that way. Maybe it’s the way you explain it. If I’m $3,000 apart on anything and find a way to bridge that gap, I never have clients who don’t understand that the issue is resolved.
Are you just making that up as a hypothetical? Or do you really have clients who have said that?
David,
What part of this are you not getting? You don’t seem to be asking a question or adding to the conversation. You just keep complaining that we are having a conversation.
James said: “It is NOT perception. The seller is paying the commission to the listing agent and the buyer has nothing to do with it!!”
That is NOT the way buyers feel about it anymore! Get with the program or stop complaining that we are discussing it. It is an idea whose time has come. If you are not ready for it, go back into the cave.
Of course, I’m so stupid, I just read about the guy who diliberately posted this nonsense, he’s an attorney who is claiming some insight into the Real Estate business.
You took the bait, but why?
“The buyer will never have anything to do with the commission unless the buyer has contractually hired their agent and is paying them out of their pocket.”
NOT TRUE! The buyer DOES have something to do with it at Redfin and other progressive and forward thinking companies. That you are not moving forward does not mean that you are correct and we are incorrect.
The buyer is the one who brings the bag of money, and therefore they are paying the commission. Unless the agent(s) get paid if the house sells or not and for a flat non-price related fee, its the buyer paying.
Do you believe that you are not paying the commission of a car salesman just because the dealership cuts the check? Its just semantics at that point. I am not sure why this is so hard for real estate agents to understand from a buyers perspective, I am sure all of you have purchased items from commissioned salespeople many times before. If you were forced to hire a “buyers” car salesman to unlock the doors at the dealership for you, I am pretty sure you’d want them to be on your side with you determining the price for their services.
craig: If buyers decide to take control of their destiny, as it were, and hire their agent for an agreed fee and insist upon contractual representation the system will change.
Sellers will realize that they may not have to pay listing agents as much because the listing agent is no longer paying the buyer agent. Free market.
The key here is the buyer needs to want it and recognize WHY they want it and then they can change it. It should have nothing to do with the compensation, but a guarantee that their agent is truly working for them.
I’m tired of hearing that agents get paid too much. What’s too much and why is it anyone’s business what anyone else makes? This is a country based on Capitalism last I checked – even though the Democrats would have it otherwise
I don’t hear a huge debate over the money that actors or athletes are getting paid to do what they do.
You said “There is no incentive — at all — for an agent to charge a fee lower than 3%.”
I say a buyer’s agent isn’t charging anything under the typical system – they’re receiving it. Once again, when buyers step up and actually hire an agent then buyers can negotiate the fee and a buyer’s agent can have the same rights as a listing agent and actually charge a fee. That is when you will see change and that is when buyers and sellers will be on an even playing field when we’re discussing representation fees.
- James
Ardel said: “NOT TRUE! The buyer DOES have something to do with it at Redfin and other progressive and forward thinking companies. That you are not moving forward does not mean that you are correct and we are incorrect.”
If the Redfin model becomes so popular with buyers and therefore becomes the norm the listing agents will either drastically reduce the compensation to the buyer’s agent or cut out the compensation altogether. Why should I, as a listing agent, pay a buyer’s agent when he is already getting paid by his client?
When that happens, the Redfin ‘rebate’ model will become moot because there won’t be anything to ‘rebate’ and they’ll be just like every other flat-fee company.
I am not saying you are incorrect. I’m saying the basis of your argument is flawed. I can’t tell if you are advocating change for the buyer’s sake or if you’re a closet Socialist.
You need to decide what you’re arguing for. Is it lower fees to agents because we get paid too much for the service we provide or are you genuinely concerned for the welfare of your clients? The more I read your postings the more unclear I am.
If you want to be an advocate for buyer’s rights, preach education and teach the importance of the buyer/broker agreement. If you want to go to a flat-fee buyer representation model, be my guest, I’ve got no issue with it. In fact, a flat-fee pay-for-service model would be an excellent protection for agents as well. I’d LOVE to have a guaranteed weekly paycheck … bring it on!
I think you and I probably agree much more than it seems. I do believe that a buyer deserves professional representation. I get furious when I have to deal with buyer’s agents who don’t do a damn thing during the transaction and put their client in bad situations and I still have to pay them. If the buyer was footing the bill they could fire the non-performing agent mid stream and pull someone else in that will do the job and earn their fee.
- James
Ardell,
There is no conversation here. It is attorneys attempting to generate fees. You are proving a point that Real Estate agents squable about commissions, nothing more.
It’s unbecoming of our profession.
Real Estate is not a commission sales position.
Please move on.
Thanks
David,
Let’s not play shoot the messenger. You either have something meaningful to add or you don’t. So far, you don’t.
James,
It IS the buyer’s business what the agent who represents the buyer makes. To think otherwise is ridiculous and insulting to the buyers in this Country. Yes…”this is a country based on Capitalism”, but the buyer agent fee has to date been shoved down the throat of consumers in “have to” fashion.
Everyone knows the listing fee is both negotiable and negotiated. Why the agent outcry against the same fair practices to come to bear on the buyer agent side? The seller is told he can’t negotiate it or it will be counter to his purpose…and I agree. So for “capitalism” to have its day, it must be within the buyer’s right to negotiate it.
It can’t possibly be that David and James don’t “get” this. Every single person who ISN’T an agent…”gets” this. Coming out and saying “stop talking about it” (David, not James) only PROVES that you DO get it.
James said: “…that is when buyers and sellers will be on an even playing field when we’re discussing representation fees.”
There is no reason why this issue must wait. Kary makes me laugh when talking about Code of Ethics meaning I HAVE to keep an “even playing field agent to agent”. Until the powers that be worry MORE about ethics buyers to sellers and sellers to buyers and agents to BOTH buyers and sellers, than agent to agent…I’ll thumb my nose at it.
Ethics is not more important agent to agent than it is agent to the public, and if one has to step outside of the fray to believe and practice that…so be it.
BTW,
I did not agree with Craig on the “too much” issue. Sometimes it is and sometimes it isn’t. That’s for the buyer and their chosen agent to decide. I think Redfin’s is not enough, particularly on lower priced properties, and I think they know that. It’s not about how much it should or shouldn’t be, as I believe price of property is largely the issue on that count. It’s about it being “the buyer’s business” what his chosen agent is paid.
The method of payment is totally irrelevant and should not be used as an excuse to push the buyer out of the discussion.
b said: “The buyer is the one who brings the bag of money, and therefore they are paying the commission. Unless the agent(s) get paid if the house sells or not and for a flat non-price related fee, its the buyer paying.”
The seller pays out of his proceeds from the sale unless there’s a line-item on the buyer’s closing statement showing that the fee is part of their closing costs.
b said: “Do you believe that you are not paying the commission of a car salesman just because the dealership cuts the check? Its just semantics at that point.”
I guess I’m paying the cashier at McDonalds when I buy a Big Mac too. Oh, wait, I never signed their paycheck …
b said: “If you were forced to hire a “buyers” car salesman to unlock the doors at the dealership for you, I am pretty sure you’d want them to be on your side with you determining the price for their services.”
Definitely – if I were ABLE to hire a buyer’s agent to help me negotiate with a car dealership I’d do it in a heartbeat and I’d pay him to work for me.
Do not compare real estate agents with car salesmen. A salesman is just that – someone who’s job is to get as much for the dealership as possible with absolutely no responsibility to the buyer at all.
There’s no one on my side going into a car dealership and I’m aware of that upfront. If they were car AGENTS and had a fiduciary responsibility to ME then we’d have something to talk about here.
- James
James,
My position is about:
1) Transparency – Say 3% equalled $9,000. Then I would simply say $9,000. It’s more transparent. It’s a “flat fee”, but that isn’t the point…the point is it’s honest and easy to grasp and it doesn’t change if the buyer pays more or less for the house. To round the percentage to a dollar amount takes the uneasiness of “agent makes more if I pay more” out of the equation. That’s the transparency part.
2) Respect -To me it is a breach of relationship to look in the eyes of your client and say “what I am paid is none of your damn business.” You can’t represent someone that you do not respect enough to discuss your commission with.
It’s that simple, and frankly I don’t see how anyone can possibly disagree with me on those two points.
Please Ardell,
move on, please.
Let me address the attorney. I have some dealings with attorneys from time to time. Attorneys can only do what I tell them to do, nothing more. Attorneys can tell me what the law says, and advise me according to what the law says, nothing more. Attorneys generate fees by talking with each other which they seem to do a lot.
An attorney should be looking to champion the under dog, or fighting for the rights of others, or some type of noble cause. They don’t. Attorneys generate fees by scaring people or stirring the pot or causing trouble.
This is the United State of America. You either contribute or live off the fat of the land. Our founding fathers recognized the danger of the legal profession and provided us with a checks and balances system. The judiciary is one part with limited powers.
Attorneys main function in this country is to keep people out of jail. We can not be jailed for being in debt so most of the nonsense attorneys try to scare us with is off the table.
Man, get a job and leave my profession alone. Get a job, or contribute something, anything, to the good of the people.
James,
As part of #1, I do personally feel it is ludicrous for a real estate transaction to have a total commission of $105,000 on a residential property (commercial not discussed here) unless it has complex issues beyond a normal residential transaction. But that’s just my opinion. I’m not saying what anyone should charge for their services and I’m clearly not saying Redfin charges the “right” amount and other people charge the “wrong” amount.
I’m saying the buyer deserves to have a discussion with their agent about commissions the same way that sellers do. And until they can, Craig is correct that the current method is “bad for buyers” .
The minute the agent for the buyer gets pissed off that the buyer raised the issue of his fee, the agent and the buyer have a breach in an important relationship. And we both know that agents do that every day and yet proceed to work FOR a person they can barely stand to be in the same room with. That is going to hurt the buyer somewhere down the road during the transaction.
As a recent home buyer, maybe my perspective on this would interest folks…
Personally, I found it a little strange to learn that “my” agent would automatically receive 3% of the sales price, whether we found a house the first week or the tenth, whether the negotiation was easy or hard. Maybe from the agents’ perspectives, this helps “even out” the variability, but I think it would be more fair for everyone if a buyer could just pay their agent for the work s/he did for them.
In fact, reflecting on this, it seems to me that the current system sets up an incentive for the agent to get the buyer into a house quickly (and ahem, also for a “good” price) so as to reduce their hours spent and increase their “earnings per hour.” I know from when I was a mechanic that a flat-rate pay scheme encourages a quickly-completed job over a good-quality job.
Anyway, you can trot out the old, “I’m in the business for the long haul and I rely on referrals so I wouldn’t do that” excuse, but it doesn’t make the incentives go away.
Okay, I guess I drifted off the point a bit, but I think a system in which an agent’s pay was more directly linked to the actual services they provided would be welcomed by buyers, and probably sellers as well, although maybe not agents (since many probably see a pay cut in it).
-Rick
Ardell: I’m not going to say I disagree with either point, but I’m going to have to come back to this discussion after I finish up some work – I just didn’t want you to think I ran away!
Ardell,
$105,000 commissions are the exception to the rule with a 1.75 million dollar deal. The attorney posting the topic would charge $525,000 for their 1.75 million dollar verdict. Now that’s ridiculous!
I agree buyers need to have the discussion with their agents about compensation. Education is key to helping the buyer understand this. The speed bump you’re going to run into is the buyers reluctance to make a committment to an agent, and the agents fear the buyer will walk if they discuss it.
I don’t understand why you think an agent would get pissed off about a buyer bringing it up? Ohhh …. you mean when the buyer and seller are a few grand apart and the agent and buyer didn’t have the agreement inked ahead of time. Then the buyer pulls out the “you’re making soo much money” card and plays it to fill the artificially created “gap” in the buyer/seller position. Hmmmmm …. maybe thats why the buyer avoided the subject in the first place!
If they had agreed ahead of time the agent would be in a compramised position. Buyers are not stupid and are quite adept at getting the best value possible from their agents.
Kary said: “Maybe this exchange will make it clear what I’m saying:
Client: Can you try to get the buyer up another $3,000.00?
Agent: I can just cut my commission $3,000.
Client: Thank you! But can you try to get the buyer up another $3,000.00?”
Ardell wrote: “Kary, I have never in 18 years had a client who would see it that way. Maybe it’s the way you explain it. If I’m $3,000 apart on anything and find a way to bridge that gap, I never have clients who don’t understand that the issue is resolved.
Are you just making that up as a hypothetical? Or do you really have clients who have said that?”
No I was just making that up to show what a buyer would want–more money! I’m not sure why that’s so hard to understand. It’s not so far fetched if you separate the time a bit, with the offer to reduce the fee being when the listing agreement is signed, and then an offer comes in.
As I mentioned, you could just have a client with a certain goal for the net amount, or you could be dealing with a full price offer. But other than those types of situations, there’s no reason to assume that if the commission is less that the seller will accept less. Most people don’t walk away from dollar sums that have three or more zeros behind them.
Rick,
You’d be supprise to know how many agents would love to get paid for the work they actually do as well. I would welcome it since you could build a much more predictable service on that basis.
The average agents pay would also increase quite a bit. Heres a quote from Realtor.org “Members who have been in business for 6 to 10 years earned a median $58,700 in 2004, up 18.6 percent from 2002, while those who have been in the business for two years or less earned only $12,850. Realtors® with at least 26 years of experience earned $92,600, up 37.2 percent from two years earlier.”
I couldn’t find any more current stats but Realtors are not getting rich selling houses.
Ardell wrote: “NOT TRUE! The buyer DOES have something to do with it at Redfin and other progressive and forward thinking companies. That you are not moving forward does not mean that you are correct and we are incorrect.”
I’d perhaps call Redfin an innovative company. They give buyers a choice.
Contrary to the theme here, I think most buyers don’t mind the system. It allows them to look at houses cheaply, without committing to anything or any expense. But those that do have a problem with the system have choices, such as Redfin. You seem to be arguing for a system that removes possibly both choices (I’m not sure how Redfin would fare under your system)..
b wrote: “The buyer is the one who brings the bag of money, and therefore they are paying the commission. Unless the agent(s) get paid if the house sells or not and for a flat non-price related fee, its the buyer paying.”
So when I went to Safeway today buying herbs and wine, I was the one paying the cashier? I get to determine what the cashier gets paid? It was my money.
Another response would be I guess the real property that the seller brought isn’t worth anything. They brought nothing of value to the table, and are giving nothing up letting the agent get a commission, because it’s the buyer’s money.
Rickb wrote: “Personally, I found it a little strange to learn that “my” agent would automatically receive 3% of the sales price, whether we found a house the first week or the tenth, whether the negotiation was easy or hard. Maybe from the agents’ perspectives, this helps “even out” the variability, but I think it would be more fair for everyone if a buyer could just pay their agent for the work s/he did for them.
In fact, reflecting on this, it seems to me that the current system sets up an incentive for the agent to get the buyer into a house quickly (and ahem, also for a “good” price) so as to reduce their hours spent and increase their “earnings per hour.”
As to the first point, the thing is you get that without being obligated to pay for anything. If it’s not going to be a percentage of the sale price, it’s going to be hourly, and you’re going to owe that regardless of results. That’s just the way things work. (And there’d probably be a gas surcharge too.)
As to the second point, the goal for both the agent and the buyer is to get a buyer into a house quickly. That’s why agents preview houses and only show the clients the ones that they think fit. That’s a good thing!
I’ve mentioned this before, but on this second point I had a client on the selling side where my commission was based on how long it took to sell. When the buyer proposed that I had to ask him whether the commission was going to go up or down the longer it took. He was contemplating it going up, while I was thinking he was probably thinking it should go down. He was thinking the work I had to do, and I was thinking results.
Simple Question:
If I make an offer on a house can I have a breakdown on how I came up with my offer? For example, if my offer is 10% below the asking price but I am submitting it through an attorney without a buyers agent, or used a buyers agent that I paid by the hour, could I show the offer is 7% below asking and the 3% came from not paying the buyers agent commission?
I disagree with Kary where he says that the seller wants another $3,000 but doesn’t listen when the agent says they will reduce their commission by $3,000. I doubt any seller is really that stupid. What they really want is the bottom line. What price will be transferred to their bank account after the property has sold. If the offer is $15,000 less but the contract states that the $15,000 less is coming from the commission they won’t have to pay to the buyers agent then why would the seller care? They would only care if their selling agent was trying to get a piece of that $15,000 buyers agent fee.
From reading this thread I am assuming that the sellers agent would have to agree to this since they were promised 6% or whatever to sell the house. The ethical question comes into how they explain this scenario to the seller. If it is all spelled out in the offer and the seller is actually shown the offer in an ethical manner by their agent then the seller is really considering an offer that is 7% below asking and not 10% below asking.
Is a sellers agent required to actually show and explain an offer or can they legally just say “the offer is for 10% below asking.. I think we can do better.. don’t accept it.”?
Peter wrote: “I disagree with Kary where he says that the seller wants another $3,000 but doesn’t listen when the agent says they will reduce their commission by $3,000. I doubt any seller is really that stupid. What they really want is the bottom line.”
In answer to your first question (not quoted) what you’d want is a CMA showing that 7% below was a reasonable price. You might have some other argument too, such as I have cash and can close within two weeks.
As to the quoted material, it’s not the seller being stupid. It’s the seller being interested in their bottom line–they want it as high as possible. That means what they really want is your top dollar.
Now obviously not all sellers will act that way. I’ve had clients accept counter-offers that I didn’t recommend. Some sellers may be just happy to get rid of the house.
I was just trying to point out the fallacy of the claim that a reduced commission will result in a lower price. A FSBO has zero commission, but they still want the most a buyer will pay (despite whatever they might say to make you think you’re getting a good deal).
Kary, I think you and Peter are in violent agreement. Seller wants as much $ as possible. Whether that dollar comes from increased Buyer cash or reduced agent commission, or both. Either way.
Peter,
The Seller has contracted the listing agent to sell the house for and agreed commission. The listing agent, through their membership agreement with the MLS, designates a portion to be paid to a buyers agent member of the mls if they procure a buyer.
If no buyers agent is party to the transaction the listing agent retains the entire amount. This is according to the listing agreement the seller signed. The listing agent and seller can agree to modify the listing agreement in your sceario above and often do.
What I am finding curious is the assertion that the buyer has some sort of right to the buyer agent commission via the listing agreement. Under what possible theory does this exist. The buyers agent is entitled to a commission if they procure a buyer via their membership agreement in the MLS. If there is no buyers agent, who is also a mls member, then there is no right or obligation to the co-broker portion of the commission.
Reading this thread gives the impression that every potential home buyer in the market is entitled to an equitable interest in the listed homes and can decide how they want to use their interest. The fact is they don’t have an interest in the property or the listing agreement since they have no legal basis for the claim.
If a buyer wants control then the vehicle is a buyer broker agreement. I don’t know why Puget Sound area agents are so inclined to work without them. I do business in a number of states and only here do you find this type of expectation of unrepresented buyers expecting representation without a broker agency agreement and clearly defined compensation in advance. Can a buyer even claim representation without an agreement?
Ken, in Washington the agent represents the buyer by default, unless there is an exception applicable. The main exception is the agent has a listing agreement with the seller. In that case the agent represents the seller, unless there’s also a written agency agreement with the buyer, in which case there’s a dual agency situation.
Love the lawyer bashing!! Unfortunately —
— it’s all very much off topic so I won’t address it. However, I will say, “david losh — how about actually responding to the issues raised or contributing some way — ANY way — to the conversation?”
Yes, I’m an attorney — GASP! Yes, I am trying to build a business that competes with agents — HOLY CRAP! Yes, in doing so it is to my advantage to point out some of the significant flaws with the current system by which agents, and particularly buyer’s agents, are compensated — OH MY GOSH! Get over it. Other than some “fringe” commentators, everyone here seems to recognize that I, Ardell, and other forward-thinkers (whatever their motivation) have some legitimate points.
Finally, as to whether agents are paid “too much”: I’m not saying that agents are paid “too much” for the work they do or the service they provide (although that may be the case, that is not my point here). Rather, they are paid too much — and again, in this context, particularly buyer’s agents — because of the bias in their favor built into the system. If buyer’s paid their own agents, market forces would put downward pressure on fees and you would quickly see a decrease in buyer’s agents commissions. Does anyone here really dispute that point?
Craig, I don’t necessarily dispute that point about a different system resulting in lower commissions to buyers’ agents. Remember, my whole thing is the current system is designed to attract those agents, not the buyers directly.
But I do continue to believe two things:
1. Fewer people would be represented under another system, because they’d have to directly pay for it and many would try to avoid that.
2. Fewer houses would be sold (and/or they’d sell for less) because the current system is the best way for a seller to sell a house.
What I don’t understand is why you aren’t happy with the alternatives that are in the system now? Specifically, rebate brokers and buyers agency agreements. Even if I’m incorrect in my belief that most buyers like the current system, the fact that there are options out of it is a satisfactory solution.
PatentGuy, re-reading what Peter wrote, you might be right.
James / Kary -
Except that you are working on a COMMISSION and anyone who is interested in a rational discussion would understand the difference between a salaried cashier and a commissioned salesman.
I believe that is the entire point of this entire debate. Buyers want a RE agent is that is more like the Safeway cashier, they get paid a salary if you buy the wine or not and they have little to no interest in you buying the $30 wine or the $300 wine. The fact that you are trying to conflate your COMMISSIONED SALES POSITION with someone who is agnostic to a sale and paid a straight salary shows neither of you have any idea how buyers actually feel about agents.
b–people that want that can go to Redfin, $500 Realty, etc. Or they can sign a buyer’s agency agreement. Why isn’t that the solution?
Why should the majority of buyers change to please a small minority, when the small minority has a solution that works for them?
Kary -
I believe the entire point here is that buyers are going that route because of the current system and that RE agents need to look at changing their business model or they may find themselves out of business in 10 years. Maybe you don’t believe that is the case, but from my perspective and those of my cohort (Gen X / Gen Y), RE agents are going the same route as travel agents in 1995. Floundering around trying to justify a broken system is going to mean your demise. Redfin and such are just the beginning of RE innovation now that the MLS stranglehold is being broken. My suggestion is to start changing your model now before its much too late.
b — Right on! POWER TO THE PEOPLE!
Kary — I’ll address your points in the same order:
1. Yes, fewer people would be represented overall, but those who were represented would be getting better representation at a lower and “fair” price (i.e. a price that is determined by market forces and not artificially supported by the system of compensation). If people in that system choose to be unrepresented, well, they’re adults and should be able to easily make that choice. Ironically, today, it is not so easy to choose to be represented. I think your argument is another facet of agents’ patronizing attitude toward buyers. What else to call it when you argue that widespread representation of a lower quality and at a higher price is best for consumers?
2. I agree, they would be sold at a lower price — which would be the true market price of the houses free of the corrupting influence of the current compensation system. I think the same number of houses would be sold, as the listing agents would still act as traditional “salespersons”. Buyer’s agents, though, would no longer be in the “selling” business.
3. I’m not happy with the alternatives because they are very poor substitutes for correcting the system. Markets thrive on efficiency, and an inefficient market fails to provide the true price for the goods or services being sold. If we rely on rebates and agreements, we are still tethered to an inefficient market. Besides, WHY will agents suddenly start using these agreements? Under the current system, they have little incentive to do so as they continue to benefit from the existing bias towards 3% (or greater, for that matter).
b / craig: I do believe this is exactly what I said already. If the Redfin model becomes popular with buyers the model will change.
The key is that buyers, not agents, need to insist on an agreement. Of course, why would agents want to give themselves a pay cut on their own? Just like any other supply/demand type situation, the demand for lower cost services needs to be there for the supply to exist.
Most buyers are running away from the agreements, not embracing them. Do I think this will change? Yes. But like I said, you’re wasting your time yelling about fees when you should be evangelizing the benefits of a flat-rate buyer agreement. Once that becomes the norm the prices will fall due to agents competing for the buyer’s business.
- James
Craig, I don’t think it would improve the quality of the representation.
b, I believe Redfin and $500 collectively have less than 2% of the buyer market in King County (SFR and Condo). But Redfin is rather well known, much more that Zillow in my experience. Buyers know about Redfin, but only a tiny percentage of buyers are going that route. You’re not going to see the market change until those percentages increase a great deal.
BTW, the travel agent example is a really bad analogy. About the only thing difficult about buying an airline ticket is trying to redeem your frequent flyer miles.
Kary -
All I am saying is that those percentages likely will increase a great deal and it will happen much more rapidly than I think realtors anticipate.
Travel agents are a perfectly good analogy. RE agents and travel agents both operate(d) by controlling information. Once you could go to Expedia and search every airline and possible combination of flight easily, their information lock became worthless. Its the same with RE, agents controlled the MLS and only played ball with other members of the NAR. Trying to FSBO, or buy without an agent, etc was and still is very difficult because of this monopoly. Now you guys are losing control of the MLS and the ability to force people to play ball and I think its going to unwind a lot quicker than you expect, especially in the housing climate we are going to have over the next 3-7 years. Clinging to traditional business models that your customers dislike themselves, and hoping that monopoly or information control will save you, is foolish indeed. A better analogy for such stubborness might be the RIAA. Instead of trying to adapt to a rapidly changing business landscape, they fought as hard as possible to keep the status quo. They have lost a lot more than they have gained and will likely go extinct because of it.