The Commission-Based Fee Structure: it’s Bad for Buyers

Reduced SOC[This post updated 12/2014 and 3/2016 and 9/2016]

This post is not legal advice. For legal advice, consult an attorney in person, not a blog.

Originally, all real estate agents  represented only the seller. The “listing” agent signed the contract with the seller that entitled the agent to sell the house and earn a commission. This agent worked for and had a duty to the seller, of course. The listing agent informed other agents about the house now available for purchase by posting it 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. Upon the sale, the listing agent would split the commission required by the listing contract with the selling agent. After all, they cooperated in making the sale.

The system made sense – least back then – as an efficient way of selling property. 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 the old, historical system – echoes of which are still heard today – buyers usually mistakenly believed that “their” agent represented them in the transaction. In reality, “their” agent, the selling agent, worked only for the seller, and the buyers had no representation at all.

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 still 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)).

There are other implications. A buyer selects her agent and works closely with the agent to find and buy a house, an intimate and expensive proposition. The agent works for and owes a duty to the buyer. So 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. This leaves the buyer with no ability to match the fee paid with the services provided. Yet most buyers now do their own initial home search themselves on the internet.

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 (SOC), 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 significant 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 SOCs of less than the “full” 3% — have that conversation with their clients? So consciously or not, brokers provide inferior services to buyers where sellers offer less than a 3% SOC.

That said, there is some early downward price pressure on the SOC, thanks to the Seattle startup scene. Surefield, a licensed broker and member of the NWMLS, now offers a $2000 SOC. It is able to do so thanks to its patented 3D virtual tour technology that powers its listings. This “virtual” tour makes it easier to sell the house, so Surefield offers a much lower buyer’s agent’s commission.

There is the “granddaddy” of Seattle startup real estate firms, Redfin. It’s been around for more than 10 years, plugging away at the issue and in the process making it clear that sellers don’t necessarily need to offer the “full” 3% SOC. Although the amount has dropped significantly over the years, Redfin still rebates a portion of the SOC to its client at closing.

And there is Seattle real estate firm Added Equity Real Estate (formerly Quill Realty),which is at the forefront of change. Added Equity withdrew from its local Multiple Listing Service in June of 2015. Since then it has been the only real estate firm in Western WA to sell houses without offering a buyer’s agent commission. Seattle startups are leading the charge on lowering the SOC!

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 an attorney or self-represent. Given what is at stake, an attorney is the prudent choice. Some lawyers are marketing themselves to buyers who want to buy without an agent in order to save the 3% SOC.

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. But changes are on the horizon.

Image above © Iqoncept | Dreamstime.comCommission Percent Sign Ball Earning Bonus Pay Rate Photo

301 thoughts on “The Commission-Based Fee Structure: it’s Bad for Buyers

  1. 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?

  2. 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.

  3. 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.

    .

  4. 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.

  5. 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.

  6. 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.

  7. 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.

  8. 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?

  9. 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.

  10. 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.

  11. 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.

  12. 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.

  13. 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.

  14. 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.

  15. 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

  16. 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

  17. 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.

  18. 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.

  19. 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?

  20. 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.

  21. 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.

  22. 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.

  23. 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.

  24. 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.

  25. 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.)

  26. “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.

  27. 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.

  28. 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. 🙂

  29. 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.

  30. 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.

  31. 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.

  32. 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.

  33. “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.

  34. 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.

  35. 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).

  36. 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?

  37. 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.

  38. 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.

  39. 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.

  40. 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.

  41. 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.

  42. 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.”

  43. 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.

  44. 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!

  45. 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.

  46. 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.

  47. 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.

  48. 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.

  49. 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!) 😉

  50. 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.

  51. 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.

  52. 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.

  53. 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.

  54. 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”?

  55. 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.

  56. 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?

  57. 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.

  58. 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.

  59. 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

  60. 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?

  61. 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…

  62. 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

  63. 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

  64. 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.

  65. 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.

  66. 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)?

  67. 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.

  68. 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.

  69. 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.

  70. 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.

  71. 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.

  72. 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! 😉

  73. 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.

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  75. 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.

  76. 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.

  77. 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?

  78. 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.

  79. 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.

  80. 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

  81. 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.

  82. # 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.

  83. # 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.

  84. 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?

  85. # 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.

  86. # 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.

  87. 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.

  88. 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.

  89. 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.

  90. 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?

  91. 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?

  92. 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.

  93. 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”.

  94. 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.

  95. 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.

  96. 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.

  97. 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….

  98. 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).

  99. 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.

  100. 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.

  101. “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’.”

  102. 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.

  103. 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 …

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  105. 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.

  106. 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.

  107. 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

  108. 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).

  109. 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.

  110. 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.

  111. 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.”

  112. 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.

  113. 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.

  114. 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.

  115. 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.

  116. 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.

  117. 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.

  118. 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.

  119. 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.

  120. “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.

  121. 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.

  122. 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”.

  123. 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.

  124. 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.

  125. 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?

  126. 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.

  127. 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?

  128. 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

  129. 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? 😉

  130. 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.

  131. 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?

  132. 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.

  133. 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.

  134. 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?

  135. “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.

  136. 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.

  137. 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

  138. 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

  139. 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

  140. 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.

  141. 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.

  142. 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

  143. 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.

  144. 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.

  145. 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.

  146. 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

  147. 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!

  148. 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.

  149. 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?

  150. 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.

  151. 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)..

  152. 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.

  153. 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.”?

  154. 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).

  155. 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.

  156. 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?

  157. 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.

  158. 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?

  159. 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.

  160. 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.

  161. 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?

  162. 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.

  163. 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).

  164. 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

  165. 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.

  166. 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.

  167. James –

    The possible pay cut comes at the expense of keeping your job in 5-10 years. Back to my analogy, if you were a travel agent in 1996 and saw the writing on the wall would you take 80% pay to work for Expedia, or try to live it up for 2 years as a travel agent still? When your customers themselves do not like your business model but feel they are forced into it, what is going to happen when viable alternatives show up? It won’t take long for the tide to turn…

  168. b, you might be right about the future, but personally I think both the bubble bloggers and many agents think rebate brokers are a bigger deal than they are.

    And again, it’s not just the information. We have better search tools, but that’s not really a big deal–it just saves us time, and consumers can spend the extra time if they want. It’s knowing what to do, and what not to do after you find a house. Even my attorney clients have had a lot of questions about the process and the options.

    Again I’ll analogize it to filing bankruptcy. The forms are easy. Knowing when to file, what to do before you file, the tax implications, the discharge implications, etc., that’s hard. Only a small percentage of attorneys are knowledgeable as to the process. So yes, like buyers, some bankrupt debtors try to do it on their own. Often they screw something up.

  169. When I looked, this would make the 200th comment on this ridiculous red herring of a post. So here goes:

    My first phone call this morning was from a client, smart guy, nice family, who is facing a Judgement of Deficiency for a property he bought last year, but had to sell. He picked it, bought from an on-line brokerage and got an e-loan. The brand new house was built in a wet land that flooded last year. WooHoo!!!

    My first appointment this morning was with a client who bought a house from another person with a Real Estate license because I wouldn’t sell it to him.
    He bought in 2004, brand new, refied in 2006, took money out, and I told him in 2007 to sell. He didn’t, now we will be in a deficiency situation again.

    I have another, and another, and another, on my desk of smart people who made bad choices these past few years. My attorney referred me one and the one who wouldn’t sell last year referred me another. I have two more that are attorney referrals.

    I get bad deals because I’m a known ass hold in the world of Real Estate. Pit bull, or not, I’ve been around for a long time doing deals.

    Some people think short sales are a way to generate commissions; they are not. The attorneys who refer these need to establish fair market value. In many cases the value paid was never there to begin with.

    It would be funny if so many people didn’t get hurt. People with real Estate licenses are a national epidemic. Some people want to blame banks but the people with licenses are the ones who did the deal.

    So a rodfun promises to do nothing for a fee, isn’t that special?

    Buyers come into my office with a set of properties they want to look at. When I tell them that only two out twenty that they have brought in are economically viable they get upset and look for a person with a Real Estate license who will tell them what they want to hear.

    There again, I’m an ass hold.

    I did the numbers one time and figured I get about five dollars an hour working with buyers and sellers. My money comes from buying and selling Real Estate myself. I have six investors who are my core clientele and have been for over twenty years.

    By all means tell me how smart you are about my business. I’ve only been doing it for over thirty years, but you know more about it than I would.

    Can you believe I would even put this in writing, well you baited me, congratulations.

  170. Kary –

    Sorry, but the legal field is far more in need of true expert advice than a simple home purchase real estate transaction. Last time I checked, you could not become an attorney very easily with a 3 month long night school class. Nor are there very many part time attorneys, or people who become attorneys to just save money on handling their own case. The level of knowledge required is orders of magnitude larger. I am not saying that RE agents will be totally extinct, they will not be. I am saying that for 80% of people simply buying a single house the added value of a RE agent is not comparable to the prices charged. The only reason this system has not changed yet is the monopolization of information and the buddy network of the NAR.

  171. david –

    Is your point that there are a lot of stupid people in the world? Because I would agree with you on that one. Agents make no difference if there is someone with a bucket of money and no brain and may even make the situation worse if they feel like taking advantage. Do you think we need to force everyone to buy stocks through a stock broker instead of etrade because some people make poor decisions? How many other people buy homes without problems, agent or not?

  172. What isn’t being discussed here is the skill of the buyers agent. A good buyers agent will educate their buyer client, and negotiate for the best property possible for that buyer. Just saving money isn’t enough, you’ve got to buy the best place possible.

    The thing buyers really need to be looking for is not the agent or attorney who will “do it” for a relatively small amount. What buyers should be looking for is the smartest agent they can find, with a track record of satisfied clients.

    To be honest, I tell my buyer clients that it’s going to be tough to find the ‘right’ property, since it is my opinon that only 3 out of 100 are the best. And you do want the best.

  173. Agreed on the schooling, but you know what? The percentage of bad agents is not all that much different than the percentage of bad attorneys. The schooling doesn’t seem to matter a lot. Although I will say the average skill level of attorneys is much higher. I’m just talking about the percentage of bad ones–that’s not that much different.

    It was one of my complaints when I switched from law to real estate–real estate wasn’t that much different. I still had clients to serve, still had to deal with another professional on the other side, and there was still about the same chance that the person on the other side would drive me nuts. About the only difference was I didn’t have to keep track of my hours, and now you’re going and trying to promote a system that might require that! I hate you! 😉

    Seriously, I do think you’re underestimating the skill required to be a good agent. And I would like to see changes made that would improve the average level of agents’ abilities. I just don’t buy Craig’s argument that changing the method of payment will do that.

  174. KLK –

    The big difference is that a shit lawyer can be sued for malpractice, whereas a shit agent still gets 3% and maybe a bad word or two to the buyers friends.

    As for skills involved for good agents, I think there are plenty. The problem is that 80% of the agents are not good agents but are supported by the system that is entrenched. In my future scenario, the 20% who are good agents will still be around doing good business for the people who need/want an a full service agent. The other 80% of agents are unemployed because the other 80% of clients are not using them anymore.

    Most peoples dissatisfaction with the RE industrial complex is that agents charge the 80% a whole lot of money to make up for losing money on the 20%. The rebalancing that needs to occur is for the 20% that have difficult transactions (or are just difficult people) to pay more to better qualified (and less amount of) agents, while the other 80% can get the service/value they would like.

  175. b: You’re missing my point. Buyers, for the most part, do not want to sign an agreement with an agent. You can’t tell me that most buyers feel forced when they’re given the option and they run away.

    Are agents just supposed to arbitrarily cut the fee that they receive from the seller and still not have a guaranteed income from the buyer?

    – James

  176. Agents or attorneys can be sued. I think there are relatively few suits regarding real property because typically both parties are happy, where in the law one party is typically not happy at all.

    I’m just not seeing how a new system would force out the bad agents. It doesn’t happen with attorneys, where they use an hourly system. Sometimes they’ll screw up so bad they get into ethical issues that force them out, but the word of mouth thing doesn’t seem to work. And the reason is most people don’t have a clue whether their attorney is any good. I once had a client going through a divorce and he thought his wife’s attorney was really bad and his really great. I had to go to one of their court hearings, and discovered it was just the opposite. But his attorney was making arguments that he liked, so he thought she was really good!

    Maybe Craig can address how a different system would force the bad agents out.

  177. Kary — the change (buyer’s agents paid by buyers) would not force out bad agents — at least not directly. That’s not my point at all. Rather, the current system (buyer’s agents paid by sellers) ENCOURAGES bad representation. Like you said (I think — no way am I going to review the comments at this point), whether consciously or unconsciously, buyer’s agents discourage the purchase of a 2.5% commission (or less) house, regardless of whether that house is one of the 3-in-a-100 perfect houses. Similarly, I think we can agree that some buyer’s agents encourage the purchase of a 3.5% (or greater) commission house, again regardless of the client’s actual best interest. And I’m not talking about “bad” agents here (unethical, unscrupulous, etc.). I’m talking about regular people who generally do a good job. The system provides an incentive for poor representation. People are people, and if you provide them with an incentive to act, they will act, whether consciously or unconsciously.

    If we changed the system as I suggest, I’m not sure whether “bad” agents would be forced out of the business or not. I do know that fees charged by such agents would drop significantly (listing agent commissions are down, right? Why?) and the overall quality of representation would improve.

  178. Craig, you are fighting a battle over who pays what to whom regarding agents, and this battle would need to be fought with lenders. You know that already, you’re just fighting for a niche.

    You don’t even need to fight, your niche isn’t one that other attorneys seem interested in filling, so you’ve got an open playing field, or does that mean that other attorneys have already figured out, much like Marc, that working the existing system is more productive than reinventing the wheel?

    Your clients will be the buyers who figure they don’t need ‘advice’ on which house to buy – just a contract writer. It’s a good niche for you and for those buyers.

    Other buyers want the full meal deal, and if they are first time buyers, can’t likely afford the fee now, but when they become sellers, they can pay then. We didn’t invent this structure, attorneys did.

    The current structure is all an evolution. It took what, about 70 years to move from agents only representing sellers? And, now we’ve got about 10- 15 years where agents represent sellers, and agents represent buyers. Even attorneys represent both buyers and sellers.

    Whether you effect any change in the current system won’t get rid of “bad” agents or “bad” attorneys.

    What will get rid of “bad” will be a societal change in expectations, and not using a real estate purchase as a 1-armed bandit slot maching pouring out $$$$ every year. Can we get our current must-have society to change their ways?

    Bad agents exist because many buyers just want to jump on the same bandwagon they saw their buddies jumping on, and these same buyers (and sellers) wanted to hear “ya ya ya, rah rah rah, prices never go down”.

    Good agents don’t use those words. You want fees to go down? Get rid of 80% of the agents, and let the good 20% do the transactions.

    The good ones are tired of supporting the morons.

  179. Craig, I wouldn’t agree the commission affects all agents. Two stories I’ve told in the past.

    1. My wife (who is also an agent) and I are driving together. I ask her what the commission is on a property our client has a pending offer on. Her answer: “I don’t know.” We do sometimes notice it, but it’s not something we actively look at.

    2. We’re showing a client houses, and there are two he likes. This time we did notice that one is a 2.5% commission. We don’t disclose that to our client because we don’t want that affecting his decision. He ends up picking the 2.5% commission house, because he likes the lot better, and it’s slightly cheaper. But again, he did like the other house too. We didn’t try to influence his decision based on the commission.

    Maybe I missed it (or forgot), but did you ever try to address my concern about disclosure of the commission? In the case above I purposefully didn’t want to disclose it because I didn’t want it to affect his decision (e.g. I didn’t want him concerned that we wouldn’t get as much money, or have negative thoughts about the seller being a cheap, etc.) But somehow I do feel more compelled to disclose a 4% listing, and I don’t know why. Thoughts?

  180. Pardon me for not going through all 200+ comments here but the first 50 got redundant so I’m going to guess this may not have been covered. Why does everyone continue to post that the seller pays the buyer’s agent? They don’t. The listing agent does via a portion of the total fee they collect in their listing agreement and that they advertise within the cooperative brokerage terms of the NWMLS.

    I, for one, have other language for our clients if we have an unrepresented buyer that provides for a discounted commission structure because I will not provide dual agency in a transaction. Therefore, if there is no buyer’s agent, my client gets a portion of the commission back. Granted, not all agents run their business this way, but we feel it is fair to our clients. We have a specific fee for our services to them as a single agency provider.

    For anyone who wants to start asking about what this structure might be, I’m not planning on sharing it because this is my own private business and between me and my clients – not the public’s domain.

    With regard to showing properties as a buyer’s agent that state a commission to the buyer’s agent less than I typically state as my fee, we show all of them. No matter what the commission amount. I’ve also successfully negotiated my fee from a seller in several FSBO situations even while letting them know I only represent the buyer and that they have opportunity to have attorney review or to get their own representation. In fact, I have a deal like that right now where I brought the buyer to a seller, my fee has been negotiated and the seller decided for another 1% to hire an agent to review the contract, etc.

  181. 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

    How?

    If a lawyer takes a case on a contingency and wins, the fee is paid out of funds that came from the other side. No conflict there.

    It’s an issue of fiduciary.

  182. Or if the insurance company pays the attorney, as I mentioned before. Better analogy. There are some issues that arise, but you don’t see people turning down their insurance company paying the attorney.

  183. my goodness its still going on. ridiculous red herring of a post and there are a bunch of comments. i just like to bring people up to speed, they for sure don’t read this.

    ok the buyers commission is for the liability of the transaction. if you are wronged and injured financially in a real estate transaction do to the incompetence of your real estate agent then you have the right to sue that agents Broker.

    if your buyers agent misrepresented a property to you for any reason including incompetence you have the right to sue that agents Broker. if a buyers agent told you the property you are buying was worth x number of dollars when in reality it was not worth y you have the right to sue your agents Broker. if your agent told you that low interest rates were a reason that property values were higher than normal you have the right to sue your agents Broker. if your agent told you the price of property is worth what ever a buyer will pay you have the right to sue your agents Broker.

    i am not nor have i ever been an attorney. i am a real estate agent. i have been sued, i have two real estate attorney that i use consistently. i refer them work, because people have the right to competent representaion in a real estate transaction.

    an attorney can only do what you tell them to do, nothing more. an attorney can tell you what the law is, that’s it, nothing more. real estate agent and real estate transactions in the State of Washington are by Agreement, not contracts. attorneys are pretty useless in a real estate transaction in the State of Washington. if you want to do it yourself you are better off doing it yourself and making your own agreements between you and the buyer or seller.

    don’t let these people fool you. these are fee generators, nothing more.

  184. So David, since I haven’t been sued in 18 years, if “the commission is for the liability” and I haven’t had any, do I owe 18 years worth of clients a refund?

    Talk about a red herring…

  185. My wife and I are trying to buy a house or condo right now. Three previous offers didn’t quite make it to closing. Here’s the way we WISH the buying process worked for single units/houses.

    1. By using internet, open houses, and driving around, buyers narrow their search to certain houses in one or two neighborhoods.

    2. Buyers contact listing agents to show them houses they might want to buy. Listing agents act happy to show buyers their listings and are professional, honest and well-informed about their listings.

    3. If buyers like a house, they get comparable sales from internet, make a judgement on price trends, and tell the listing agent what they want to offer, with what contingencies.

    4. Listing agent fills in the standard forms with buyer info and emails to buyers to execute.

    5. Buyers fine tune offer and bring in a transaction advisor/agent/attorney/whatever at buyers’ expense to review the docs; buyers send the offer with a 1% earnest money check for listing agent to put in escrow.

    6. If negotiations produce an agreement, buyers secure the loan and fulfill escrow and insurance responsibilities under guidance of their transaction advisor and loan officer. When contingencies are satisfied, that should do it.

    The above is just a wish list. All we know about the laws/regulations/practices that govern real estate transactions comes from this blog and our experiences trying to buy a house. I realize on review that steps 1 – 4 are pretty similar to what we do when buying a car from a dealer.

    — denismurf

  186. Dennis, #1 and #2 should occur, I’d question your ability to do #3, #4 should occur (email optional), #5 should occur (but 1% may be low or high depending on the property). You didn’t mention commission at all, however, so I don’t know what you think this is getting you.

  187. you see comment 222. these people are getting information from this site. that’s what makes this site dangerous. yes i want real estate agents to know they are on the hook for a real estate transaction even after it closes. there are laws that say that closing closes the book, but not in cases of fraud and misrepresentation.

    i’ve come to the opinion that mortgages or low interest rates did not drive up the price of real estate; people with real estate licenses did. these people who are searching on line for a home know that 99% of people with real estate licenses they contact have nothing to contribute to thier transaction. that’s what bothers me.

    i’ve also had a real estate license since 1984. i’ve never considered myself a good real estate agent until reading stuff like this blog. in the past couple of years i’m beginning to realise there is just a lot of bad information about real estate, real estate agents, and the real estate industry.

    i have been sued. i’ve been threatened with law suits, i have gotten letters from attorneys threatening law suits. it’s a part of the real estate business. i always say if you’re not getting sued you’re not doing enough deals.

  188. oh yea, BTW, my question again is: why do i have a listing on my desk where to buyer paid $430K for a property that was only worth $350K to $360K tops at the time that they purchased the property? was that because of low interest rates or teaser rates or was that a person with a real estate license misrepresenting the value of the property?

  189. David,

    If you email me the address, I’ll answer your question. You can’t post it on the site though.

    On the one hand I’m not happy that your’re posting about how “dangerous” this site is. On the other hand, it’s kind of a compliment 🙂

  190. Denis said :My wife and I are trying to buy a house or condo right now. Three previous offers didn’t quite make it to closing. Here’s the way we WISH the buying process worked for single units/houses.”

    “1. By using internet, open houses, and driving around, buyers narrow their search to certain houses in one or two neighborhoods.”

    My experience is that most people know about where they want to live, unless they are in town briefly to pick a house as a relocating family. So for the most part having a rough idea of where you want to live is not necessarily a big time saver for an agent. I rarely work with people who say I want to live “anywhere”.

    “2. Buyers contact listing agents to show them houses they might want to buy. Listing agents act happy to show buyers their listings and are professional, honest and well-informed about their listings.”

    That’s a good way to get the worst houses, and a bad plan to get the best houses. If it’s a good property that is going to “blow away” with a couple of offers in the first week, not likely you’d be on the winning end with that strategy. If you are looking for “a bargain” that has been sitting on market with no nibbles…the listing agent will be happy to run over and even help you “write it up” for free.

    “3. If buyers like a house, they get comparable sales from internet, make a judgement on price trends, and tell the listing agent what they want to offer, with what contingencies.”

    Works for newer housing, condos and townhomes where there are sufficient “like kind” comps. Still I’d have a hard time keeping my mouth shut if you were asking me to help you shoot yourself in the foot. I have a situation now where there is a property on market that is $80,000 overpriced. My clients kind of like it, but not likely the seller will take $80,000 under asking.

    If you looked at “the comps” the way the seller did when he priced it, you’d likely ask me to write that at at least $50,000 over what it’s worth. The reason it’s worth $80,000 less is because of another neighborhood. Neighborhood “A” was worth $700,000 until the better Neighborhold “B: was built. So looking at close comps would give you a false sense of accurate pricing.

    Now am I just supposed to “write down your order and go get it for you” like a waitress bringing you ham and eggs? Even as a waitress I’d feel obligated to tell you if the cook dropped the ham on the dirty floor…so how about steak and eggs today. I don’t think you can remove my obligation to tell you it’s not worth it. I don’t think I could sleep at night if I were just taking and placing orders that way.

    “4. Listing agent fills in the standard forms with buyer info and emails to buyers to execute.”

    That’s OK for most clients who you have spent enough time with to explain the contracts and process with before it is emailed. Especially if it is a second time doing an offer in a short period of time. But a stranger I just met yesterday could later claim he didn’t understand what he was signing, as it was merely faxed with no explanation. I’d want to be sure the client understood what was binding and what wasn’t before they signed it and fully understood their “legal outs” and timeframes.

    “5. Buyers fine tune offer and bring in a transaction advisor/agent/attorney/whatever at buyers’ expense to review the docs; buyers send the offer with a 1% earnest money check for listing agent to put in escrow.”

    Again…good way to get the worst property. Most people don’t want to leave time for another offer to come in while they go get other opinions…especially if they find the house on Saturday and can’t get an appointment until the following week with qn attorney. Better to have a 3 day attorney review clause, if the seller will take an offer that way. If there are any other buyers who want the house…that wouldn’t work. So great way to get the house no one wants. “Note: listing agent doesn’t get the EM check. The buyer agent is responsible for getting it to escrow.”

    “6. If negotiations produce an agreement, buyers secure the loan and fulfill escrow and insurance responsibilities under guidance of their transaction advisor and loan officer. When contingencies are satisfied, that should do it.”

    Works well for well and overly qualified buyers with substantial downpayments Otherwise the listing agent would not accept an offer where the buyer agent is going to disappear during the escrow process and say “I don’t know what’s happening, the buyer is running the show.” It will hurt you when it’s time to negotiate the inspection, even if the offer makes it through the first negotiations. It will KILL you if you need an extension at the end, and likely but your EM at risk of default. Note: You missed the home inspection.

    The above is just a wish list. All we know about the laws/regulations/practices that govern real estate transactions comes from this blog and our experiences trying to buy a house. I realize on review that steps 1 – 4 are pretty similar to what we do when buying a car from a dealer.

    I don’t know much about buying cars. Seems if you are waiting in line for a “hot” hybrid with a waiting list, you will do it differently than if you are buying the car no one wants and they are building up inventory and need to unload them. Clearly used cars and resale houses are different than ordering a new one from the factory.

    Buying new is usually easier for both cars and houses.

    Sorry for being so late to respond. The courtesy here is that we give the “poster” (in this case, Craig) time to respond first, especially if the comment is as long as the original post 🙂

  191. Ardell — fire away on any comments — I’ll try and stay involved but this post is now moving down my priority list…

    I would just add to your comment that, if that’s the way denis wants to proceed, then he should be able to easily do so, notwithstanding the fact that you believe representation would be to his benefit. He’s an adult can make his own decisions in this regard.

  192. Craig,

    I totally agree and I also feel that most of my clients are at least as competent in that regard as most agents. Having an agent in the mix offers no guarantees that the outcome would be different than if Denis followed his desired formula.

    I just gave my honest, shoot fro the hip answer based on my experience. HMMV

  193. Pingback: Monday Reading 04-28-2008 | Real Central VA

  194. Hey Craig, all this you and I agreeing so much is giving me the creepies. Can you write that last in the series where we duke it out? The one where you are not representing the buyer as part of the contract.

    I’m up to my eyeballs too…but we don’t want people to think we are in cahoots or best buds or anything like that 🙂 I like the Punch and Judy act MUCH better than this whole Chip and Dale rut we’re in.

    Who’da guessed there was something we both agree on…must have been something you put in my coffee.

  195. Sorry this is really dangerous. This is not a buyer beware state. You should be very careful about information you get from the internet concerning leveraging yourself into a half a million dollars transaction.

  196. Kary says my wish #2 should occur. I agree. If, most of the time, listing agents acted the way the second sentence says, it wouldn’t be on my wish list 🙂

    Just to clarify:
    We never got price agreement on the first offer.
    The second fell apart because of long-term financial irresponsibility by the homeowners asso, the kind described in last Sunday’s paper.
    The third foundered over major water damage whose extent could not be determined without tearing out undeterminable portions of floors and walls. They offered a small price reduction. We insisted that the sellers tear up whatever necessary, show us the damage, repair the damage, and put everything back together. No deal.

    Maybe fourth time’s the charm.

    Thanks for your responses, and thanks to whomever for allowing non-agents to access and post here. — denismurf

  197. If it wasn’t for one exception, I would be able to go along with this premise. The one exception is, as much as I would like to see the buyer pay to be represented, the reality is they don’t and therefore a very high percentage of them are happy to have the seller pay an offer of compensation through the listing agent. Most surveys I have seen support this by showing that in a majority of transactions, the buyer is happy with their agent and would use them again when they are ready to buy or sell.

  198. i came back to see if any of the attorneys would challenge my rather outlandish claim that an attorney can only do what the lient tells them to do. just like an accountant you have to ask the right questions to get the right answers. it’s all about liability.

    You have the right to represent yourself in court or any business transaction. As you are finding you are ending up in situations that can be frustrating.

    I look at a report of properties on the market each morning from Beacon Hill to Shoreline. Every day I have a list of properties to look at as a potential source of income for me. I can’t count any more how many Real Estate transactions I have been involved in. I stopped counting around three hundred something.

    There are tricks to any trade. I started doing my own “deals” back in 1986 because I could not find a competent Real Estate agent to assist me. I knew several good agents, but they are busy. There are rules that most really good agents follow. I was asking too many questions.

    It does take trial and error. Some times you win some times you lose. It’s a long race so just keep at it. You can always ask, but you may not get the answer you want to hear.

    Best of Luck, contact me any time, I consult on a regular basis, many times for free.

  199. david — I didn’t take the bait because I’m not quite clear about your point or how it relates to this discussion.

    Michael — more buyers might be willing to pay their own way if they understood how the current system works to their detriment. Buyers THINK that their agent only acts in the buyer’s best interest. However, the agent may have a powerful self interest that is in conflict with the buyer’s interests. For example, do buyers know that their agents are offered “bonus” commisssions on some properties for full priced offers? On those offers, the buyers must surely WANT to know that the advice they get from their agent is tarnished, to say the least. The favorable opinions held by most buyers is based in part on ignorance of how the system really works.

  200. sorry to take the bait but a buyers agent has to disclose an added inducement or they further thier liability.

    i have this discussion all the time. i don’t look at commission or compensation to me in a transaction. as the saying goes don’t count your money until the dealings done.

    offering a 4% commission does nothing but tarnish the transaction. a buyer’s agent can offer the 1% or other incentives to the buyer if the property meets the buyers wants, needs, and desires, but it’s risky for a buyer’s agent to just keep the “extra” commission.

    i always disclose an “added” commission or incentive to me as the agent, rarely do i disclose a low commission and try not to let it effect my performance. it has to do with the deal and what’s in my buyer’s best interest. the added to me is more of a problem than a lower commission.

    bait or not this is a red herring post.

  201. david — I’m not clear at all as to why this is a “red herring” post. It apparently raises some legitimate issues in light of your latest comment. You identify one aspect of the current method of compensation (a greater than 3% SOC) that is inconsistent with buyer’s representation. I agree 100%. You also admit that a LOWER than 3% commission creates an internal conflict in an agent, although you “try not to let it effect” your performance. You further indicate that a lower commission is less of a “problem” than the higher commission. So, we agree that this commission structure is a “problem” that impairs an agent’s ability to provide quality representation. That is my point exactly. I think you and I are actually on the same page (except for the “red herring” refrain…)

  202. You two are finally hitting on the issue I was addressing, where I don’t disclose lower than 3%, but do feel like I should disclose the extra commission. But that just seems inconsistent. It’s also problematic for me in that I might not notice the extra commission until after a deal is signed.

    (BTW, I’ve never received 4% commission, or made an offer on a 4% property that I recall, so it hasn’t come up.)

  203. Kary — yes, you raised this issue earlier. You absolutely must disclose the extra commission — and, I’d argue, the lower commission as well. As somebody (you?) noted above, the lower commission can (and, to some extent, does) affect the agent’s input and advice about the property with the lower commission. Your client’s absolutely have a right to know about this conflict of interest when they turn to you for your input. RCW 18.86.050 requires a buyer’s agent to “timely disclose to the buyer any conflicts of interest.” If you’re standing in the house with a lesser SOC and you’re counseling your client about the property, I’d say that’s the time to disclose this clear conflict of interest (if your client buys this property, you make less commission than if the client buys any one of the vast majority of other properties). I’d be interested in hearing your argument to the contrary, Kary — this seems like a pretty straight-forward issue with little room for argument. But I could be mistaken…

    The good news is that the odds of you getting caught and facing liability for not disclosing a lesser SOC is MUCH less than exposure based on not disclosing a greater SOC. In the former, the client probably never finds out (seeing that the MLS guards commissions so closely — ever wonder why they’re not posted on the publicly available MLS?) and never sustains any injury. In the latter, the buyer at least has an opportunity to determine the commission (at closing) and more importantly the buyer has suffered a compensable injury: he just overpaid for a property, particularly if the bonus was paid for a full price offer (I think a buyer could find an appraiser to prove the point). In that instance, I’d argue the buyer’s agent clearly breached his statutory duty to disclose a conflict of interest, and that this failure caused injury to the buyer. Accordingly, the agent is liable for the difference between the price paid and the value of the house, plus treble damages up to $10k and an award of attorney’s fees and costs (the latter two under the Consumer Protection Act).

  204. Kary the problem with this ” where I don’t disclose lower than 3%, but do feel like I should disclose the extra commission.” is it makes 3% some kind of sacrosanct and fixed industry percentage.

    You are pre-determining the definition of “extra”, when it is your client who gets to determine what is or isn’t “extra”. 3% is .5% “extra” if your client thought you were getting 2.5%. If you never discuss the commission with them, you don’t have your client’s definition of “extra”.

    That is why there should be a discussion (not necessarily a written agreement) about what fees are expected to be, and a meeting of the minds between you and your client regarding what they WILL be be before going out to view property.

    Who would wait to have a discussion with a seller about fees when an offer comes in on a property? Who would assume their charge is not “extra” when dealing with a seller? No one. So why the double standard when your client is the buyer?

    Agents often confuse discussion and negotiation with “discounting”. That is because the fear that the discussion will result in less than 3%, and largely the reason why they choose not to talk about commissions with their buyer clients. In fact, a disucussion and negotiation of commissions with a buyer client does NOT autmatically tranlate into “discount”. In fact the word “discount” should not be used for an amount less than X%, so there is no such thing as “a discount” if there is no “fixed” pricing.

  205. ok, wow!!!

    the point is that Real Estate is not a commission sales position. Many agents, many think it is. the commission, in my opinion, i’m not an attorney, is for the liability of the transaction. i do charge up to five per cent for my end depending on my exposure to a lawsuit.

    people pay me to represent them to the very best of my ability. i work in thier best interest. it’s about them not me.

    there again i learned the Real Estate business in a time when the courts would take a case of misrepresentation, as i think they should now.

    the red herring is the commission being compensation. the commission goes to the broker for the reason that the broker is liable for the transaction. the money changes hands with the broker, not the agent.

    the broker in turn is on the hook, in my opinion, for the agent who is telling a client a full price offer is in the clients best interest when it is not. they want the 4% commission even though they know the builder will take less.

    my point is that i know the builder will take less. the buyer may not know that so i have a value to that buyer no matter how much they pay me. if i can get the builder, let’s say, to take a fifty thousand dollar price drop why not pay me a commssion?

    there again it’s who you know more than what you know. there is no legislation against insider trading in real estate. if i know the builder has to make payroll and i disclose that to a buyer that’s ok.

    i could really go on and on, but my point is, you seem like a nice person, but i’m objecting to the idea that paying less commission is in the buyer’s best interest. it’s not just you, it’s an internet trend.

    there is a guy claiming to be a real estate expert, he has a brokers license, real estate company, charges a flat fee, and makes outlandish claims about real estate values. he charges a really cheap flat fee for a transaction but what does that have to do with a real estate?

    we are seeing zestimates can be massaged daily and yet that’s a national site. how is any of this good for the consumer?

  206. Again, one buyer’s point of view.

    After we decided to move to Seattle and take a house hunt trip, I phoned the listing agent for a house that looked interesting on realtor.com and asked for a showing. Before we even exchanged pleasantries, he told me, in so many words, that a commission would be paid to a buyer’s agent and that I was not permitted to be my own buyer’s agent. If he showed us the house himself, then he would be our buyer’s agent for that house. If we wanted somebody else to be our buyer’s agent, then that person, not the listing agent, would have to show us the house.

    I found the whole conversation bizarre and unpleasant. But it, and subsequent encounters with other (not all) listing agents, FORCED me to think about the commission structure and led us inevitably to Redfin.

    A side note to Ardell: I didn’t respond to your #227 because it contains so many built in perceptions and assumptions about the buying process that differ wildly from mine. No disrespect intended. You sound like a competent agent and a nice person.

  207. I’m not viewing the 2.5 as a discount. I don’t disclose it because it might cause the buyer to view the seller in a negative light. They might think “I don’t want to deal with a tight-XXX jerk–what are they going to be tight with?” Or they might think: “Kary has worked hard finding me a place, it’s not fair he doesn’t get 3%.”

    The only time I have disclosed it is where the house has been on the market for some time, and we’re considering a lowball offer. Then I’ll say: “Part of the reason why the property hasn’t sold might be the commission.” I might say the same thing if the commission comments had a “Redfin clause,” the listing had only one picture, the house had bad paint or wallpaper, etc.

  208. denismurf wrote: “Before we even exchanged pleasantries, he told me, in so many words, that a commission would be paid to a buyer’s agent and that I was not permitted to be my own buyer’s agent. If he showed us the house himself, then he would be our buyer’s agent for that house. If we wanted somebody else to be our buyer’s agent, then that person, not the listing agent, would have to show us the house.”

    Well you ran into a bad agent. It seems they don’t understand agency law or their obligations as a listing agent.

    As I’ve said elsewhere, if I run into that situation I show the house, and upon meeting the buyers inform them they have three choices:

    1. My writing an offer, in which case they’d be unrepresented, and the seller wouldn’t necessarily get a reduction in commission.
    2. Their presenting an offer through another full service agent, who would represent them.
    3. Their presenting an offer through a rebate agent. who would represent them.

    My goal is to sell a house for my client, not confront a buyer.

  209. Kary — regardless of what the client might think, they are entitled to know that there is a conflict of interest. You will make less money on this particular house. This self-interest may influence the advice you give the buyer. The buyer is entitled to know. If you disagree, please point out the flaws in my analysis.

    You don’t resolve a conflict of interest by saying, “Well, it won’t affect the service I provide so I don’t need to disclose it.” That is a fundamental misunderstanding of the term. A conflict of interest exists where a person’s actions MIGHT BE influenced by self-interests or the interests of a third party (specifically, a signficant risk of such influence). The conflict arises and exists based on the situation, regardless of whether there is an actual conflict or whether the conflict actually influences the agent. Where there is a conflict of interest, you must disclose it to the client. Pretty simple.

  210. Well again, part of the problem is I probably don’t know what the commission is when I show the house. I don’t look for that any more than I look to see who the listing agent is.

    But let’s say an attorney advises his client not to accept an offer to settle a lawsuit. Does the attorney have to say: “I have a conflict of interest. If you don’t settle now, I’ll make enough money more off your case to buy a 25′ boat.”

    Lots of people you work with are affected by a conflict of interest in that your decision affects their income. I don’t see that’s something that needs to be disclosed–at least in the 2.5% case.

  211. Woah! You folks should tread lightly. All the talk about “extra” and “discount” are based on the assumption that there is a fixed rate in this business. There isn’t.

    The only time you can say that you are getting paid more or less is if you have a fee agreed upon by you and your client. Anything else and you are walking into a price-fixing discussion and that would be illegal.

    Under the current system, the buyer’s agent is getting paid what the listing agent is offering. That could be a percentage or a flat rate. Either way, it is way it is. There are no standard offerings.

    If the buyer’s agent has an agreement with his client that he will get paid $5000 for his services then anything more would be extra and anything less would be a discount. If there is no agreement then the agent accepts what the listing agent offers whatever that may be.

    Watch your step … You guys are headed into dangerous waters.

    – James

  212. There is a fatal problem with your anaogy. First and most importantly, a contingency fee agreement with an attorney (essentially a “commission” based fee) MUST BE IN WRITING and must be signed by the client. RPC 1.5(c)(1). This is a hard rule and there are significant penalties for failing to comply. Why the rule? Obviously, it is to insure full disclosure of this inherent conflict of interest.

    And WOW! what a contrast with agents. Not only does the buyer-client rarely if ever sign any sort of agreement that discloses a commission, but the agent-run organization (the MLS) specifically prohibits dissemination of commissions on specific properties. In other words, agents actively work to keep their clients in the dark about this clear conflict of interest.

    Your solution is a novel one. Rather than discuss the conflict of interest with your client, you choose to insulate yourself from the information that creates the conflict. In your case, I’m sure that works to insure you provide the same advice to all your clients based on the property at issue and you do not — whether consciously or subconsciously — allow the commission to influcent your advice (because you don’t know the commission).

    Do you think this would work on a widespread basis? I don’t think so — temptation is a powerful thing. I can tell you that, if I made my living as an agent, I would be very conscious of the commission I would earn on any particular property. Hey, I’m human — I will want to know that information. Would I then disclose it to my buyer clients? You bet — they have a right to know.

  213. David said: “I could really go on and on, but my point is, you seem like a nice person, but i’m objecting to the idea that paying less commission is in the buyer’s best interest. it’s not just you, it’s an internet trend.”

    Just so you know, David, my mission is about equal rights for buyers and sellers. Both deserve to have a conversation about what we are charging for our efforts, with our respective client. If the seller is my client, we talk about what I will be paid. If the buyer is my client, we talk about what I will be paid.

    For me, it’s mostly about equal respect for our clients, and not a double standard for sellers vs. buyers.

    It’s not about price being higher or lower. Each client is different and each scenario is different. If someone truly requires less service (not “wants” but requires) then my fees are different for different clients. Price also has an impact on maybe not dollar price, but how that translates to %. If I charge two clients the same amount for the same service, say that is $10,000, it could be 3% on one and 1.5% on another. I don’t base fees on % of sale price and overcharge when someone is paying a higher price.

    But my Passion is about fairness and treating our clients with equal respect without regard to their being a seller or a buyer. A client deserves to have a conversation about what the person they are hiring is getting paid. It shouldn’t matter if they are a seller client or a buyer client. They deserve to have the conversation.

  214. James — riiiggghttt, there’s no “standard” commission. Every fee arrangement is negotiable. Nobody fixes prices, and commissions are subject to market forces. Yep — no illegal conduct here, officer.

    While this may be the “official” line, it bears little resemblance to reality. Read the comments — there is clearly a system-wide bias towards the standard SOC of 3%. People are treading in “dangerous waters” because they are forgetting to keep only to the official line and instead are discussing the system as it really works.

  215. James,

    I assume you are talking to Kary 🙂 I say “extra” is in the eye of the beholder, and the beholder should be your client and not you. “your client” being the buyer.

    As to not talking about fees, not talking about them is how they stay consistently high. Funny how companies can go on 60 minutes and talk about fees, but to have an intelligent discussion that might cause lower fees is always perceived as “against the law”. Sometimes I think we as agents were brainwashed about not talking about fees, as the discussion would cause competition and lower fees.

    In any event, there is no secret that agents have to recommend an mls offering to a seller, and that fee becomes the buyer agent fee. When you discuss that offering with the seller, you have to explain the potential consequences of that amount, as it attracts or doesn’t attract agents to show their home. The assumption that everyone will show the property regardless…is clearly a misrepresentation. There are negative consequences to “offering a dollar” as example, and not talking about that has kept the system at status quo for 100 years.

  216. denismurf,

    I’d love your thoughts on this scenario.

    I list a property and have three offers I’m presenting tonight. I’m in the middle of reviewing the contracts before meeting with the seller.

    You could at the same time be looking at the house with your agent. You like it. Your agent calls me. I tell them to get the offer over within two hours as I have to present tonight or the other offers will expire. He says no problem and we arrange for your agent to either fax me the offer, or bring it to the house while I am presenting.

    Your scenario:

    You call me to go see the house while I am doing the above. I call the seller and say I’m reviewing the three offers, but someone wants to see your house and I can’t stop everything I’m doing to do that. Seller says, “Are the three offers we have good ones”. I say yes, all are full price or better and good buyer qualifications.” Seller says “then why do we need a fourth offer? Don’t stop what you are doing to show my house. What you are doing is more important to me than having a maybe fourth offer..”

    So I call you back and say sorry, no can do. You would have to have an offer here within 3 hours to get in the show at 6 when I am presenting offers, and if you don’t have your own agent, that can’t happen. So go get an agent quickly if you want to have an offer in by 6.

    As the agent for the seller in that scenario, I cannot accommodate your WISH of my dropping everything to go open the door for you. As the agent for the seller it is not my job to open the door for you. Yes, often I do…but it is not the best strategy for you as a buyer to rely on that “if I and when I can”, is it?

    For my clients, be they buyers and sellers, I move mountains and drop everything so they don’t “miss” an opportunity. But as your “not agent” you don’t get the same level of service. If you are representing yourself, or using a buyer’s agent who won’t show you the property before offers are being presented at 6:00…how is that my fault or even my problem?

    When the seller hires us, they don’t hire us to show their property as a primary function. When the buyer hires us, the DO hire us to show the property as a primary function. Yes, I will show the property to you even if you are not my client…but only when it serves my client’s purpose. And it doesn’t always serve my client’s purpose to do that, as in the scenario I mentioned above.

    Yes, it has happened. In fact the buyer who wanted me to show in that example (We had 5 offers in hand) was an “agent” with no lockbox who couldn’t let themselves in the property. I said go hire an agent to get you in there, after first confirming with the seller that he had no objection to that response.

    So it CAN happen the way you WISH, but often for the worst properties and less often for the best properties.

  217. Kary — well, that makes no sense. I can see comparing a contingency fee to a commission, as they are very similar: no pay until there is a successful outcome, and amount of pay determined by outcome. But comparing a commission to an hourly fee is comparing apples to oranges.

    Nonetheless, I’ll address your point and point out the obvious flaws. You agree that the client is aware of the hourly rate, right? I can’t imagine a scenario otherwise. So I guess your point is that an hourly fee structure also creates a conflict of interest — but isn’t that conflict obvious, apparent, and recognized by the client? Client gets bill showing work done and hourly rate. Client thus sees that more work equals more legal fees. It’s an open and obvious arrangement, so, to the extent that an hourly fee arrangement creates a conflict of interest (a point I dispute but accept for purposes of this discussion), it has been disclosed to the client.

    Compare that to the SOC: not disclosed, not discussed, not even available to the client. Client never gets bill or anything else to reveal amount of compensation until closing, if then, when the deal is done.

    I can appreciate your desire to defend your business model by claiming that other professions (such as mine) have similar problems with their systems of compensation. Unfortunately, that is simply not true. I think agents are unique in having a legal duty to their client (apparently a fiduciary duty in some states and in the minds of some agents) that is in conflict with their method of compensation.

  218. I’d agree with Ardell that a listing agent doesn’t need to drop everything to show a property to an unrepresented buyer. But they should make reasonable accommodations, even if there are other offers in. But I’d add that an unrepresented buyer would be at a disadvantage in that scenario if they weren’t pre-approved, and so I think it would be reasonable for the listing agent to ask if they were pre-approved if even one other offer was already in and it was a decent offer.

  219. Kary said: “Well again, part of the problem is I probably don’t know what the commission is when I show the house. I don’t look for that any more than I look to see who the listing agent is.”

    What would you say if you called a Title Company and asked the cost of Title Insurance for a $500,000 house and the person said “I don’t look”. What if the Title Person wanted to not look because they wanted to give you the same service whether the fee was higher or lower? What if the Title Person answered, “Kary, I’ll let you know IF it is “extra”. LOL! No way you’d be happy with that answer. So why should your buyer clients be happy with that answer?

    I used to do that, but I changed to my new policy of the “buyer’s right to know”. I “fixed” the problem by agreeing to a fee with my buyer client up front. Now I HAVE to tell them, because it DOES affect them and I “have to notice” what it is.

    So I totally “get” where you are coming from. I used to be most any agent at one time or another. I used to do just about anything most good agents do, in my 18 years in the biz. Let’s talk about how you can do it better 🙂 Set a flat dollar amount. This way there is no conflict if the fee is more or less or the price is more or less. Removes lots of conflicts of interest to have a flat dollar amount established with your client up front.

    I leave it up to my client whether they want that as a written contract, or if meeting of the minds is sufficient. Always they trust me, as I trust them. I like relationships of mutual trust and respect. But it is their call as to whether or not they want it in writing. Usually an email exchange on the topic is sufficient for both of us.

  220. Craig, there’s no reason the SOC has to not be discussed or disclosed. If a client asked of course it’s disclosed. And I do sometimes discuss commissions with clients, just not typically at the per house level.

    But I don’t see the comparison as being apples and oranges at all. The conflict is greater for the attorney because they’re assured of being paid, where the agent has to have a successful offer to get paid, and not showing certain properties is going to make that less likely. Perhaps our difference is I’m thinking back to a particular attorney, who really would blow smoke up the client’s XXX until they couldn’t see straight, thereby generating more fees (there’s more than one way to be a rainmaker). And other attorneys who never seemed to settle anything and were always going to trial. Maybe attorneys should have to disclose up front how many of their cases they take to trial versus settle?

    Another example my mother brought up recently. Years ago a doctor mentioned surgery, so she got a second opinion, and the second doctor said it was totally unnecessary. She’s still alive, so apparently the second doctor was right. Should the first doctor have to disclose that her surgery would have allowed him to buy a new boat (that was her comment last night–which is why I mentioned that above.).

    People know that there are conflicts regarding pay. I don’t think you need to disclose the obvious.

  221. as i say many times when i come here, it just gets worse.

    every client i work with gets representation to the very best of my ability. i don’t count commissions until the dealing is done, and you just never know.

    i do look at listing agents because some agents either over price or under price properties. one listing agent i did three deals with before being told by the company that he and i should avoid each other.

    i’m a grinder. i offer fair market value or, if the buyer insists less than fair market value. if it’s a strong buyer i’ll write a low offer. i said fair market value, i research every property before the offer and determine fair market value. just because some other real estate agent says so, doesn’t make it so.

    like i said it’s what i do, the commission goes to my broker, my broker pays me according to my negotiated agreement.

    in the process yes there are dollars that effect my negotiations. those are the buyer’s dollars. the buyer is the one bringing the money to the table. i remember that as a part of a buyer or sellers best interest.

    my bigger motivation is the deal. i can’t do deals for free because of the liability issue. i can’t charge consulting fees because the system isn’t set up that way. i do charge between 1.5% to 5% for a transaction.

    i disclose my fees to every buyer, but it’s my call, and a part of my negotiation with my buyer. i have rules. the buyer and i interview each other.

    if that property is perfect for the buyer at a price that’s good, or in the best interest of my buyer we do the deal. i’ll grind it for fun. in the big scheme of things it all works out.

  222. you know as i got up and began to walk away:

    I’d pay to do this Real Estate thing. There is nothing like it in the world. That first night after making an offer when nobody sleeps; the fun, the excitement. There’s nothing like it!

  223. Actually, I stopped following who said what about 100 comments ago 🙂

    It just appears that the discussion has degraded and is now headed in a bad direction.

    I can’t speak for anyone else, only myself. Our office has a recommended fee schedule that we try to adhere to when it comes to listings. What we offer to buyer’s agents is up to the individual agent.

    In the up market I offered less, now I may offer more. However, with REO listing contracts the banks do tend to tell me what they want me to offer to buyer’s agent.

    Which brings up another point … I often receive offers where the buyer’s agent tries to negotiate their commission up (wrong place to do it!). I’ve had some do this by putting in language like “commission to be split equally.” What they don’t realize is that many times they are receiving more than I am. They are, in effect, negotiating their fee DOWN. If I were less of a person, I’d just let it slide and fulfill their desire for an equal split just to prove a point!

    – James

  224. Kary,

    If you are presenting offers, you could let the buyer see it when you get to the house with the offers. But that doesn’t give them much time to think about it, so their offer would be “thin” as in maybe they will change their mind, their not having had adequate time to think it over.

    Anyway you slice it, my accommodating that buyer would be a disservice to them, as anything I might be able to do for them, would be lesser than if they got their own agent in advance of offers being presented. It would be worse than Dual Agency to do as they ask instead of telling them to do what they should do.

    I can get an agent in my office to do it while I’m getting the offers ready…but not for free most times. Nor is it reasonable in most cases to ask them to do that for free.

    So denismurf. No, it really isn’t OK to ask the agent for the seller to work for you for free 🙂 That’s my bottom line…today.

  225. When it’s FREE, you do get what you pay for. A kind act, if and when, is not a good strategy to go on for an expensive purchase.

    There are two fees. One to do the buyer stuff (including opening the door) and one to do the seller stuff. The buyer stuff isn’t the seller stuff. If all you want the agent to do is open the door and stand there for 30 minutes and maybe answer questions off the top of their head without due consideration of the subject matter of the question, then come up with a fee for that, that isn’t ZERO.

    I once had a client who bought a property. The listing agent was representing the seller for FREE ( a rare event, but happened in this case). My buyer client got a great deal.

    Free rarely, if ever, offers a sufficient exchange. $10 could get you $10 worth, but free almost always leaves you short on something.

  226. James,

    Degrading is in the eye of the beholder. You are so not on the same page as this conversation, that it is hard to address your comment.

    The main issue is that YOU do not get to decide, your client does. You getting the whole thing and you “giving to” the buyer’s agent is technically correct, but THAT conversation is degrading to the buyers and sellers of the world.

    I know we’re turning the world upside down, and you want to think you run the show once the seller gives you a total commission contract. But that is not the way the World is going to work in the future…or now for some of us. You don’t get to hold all the cards irregardless of your buyer client’s or someone else’s buyer client’s negotiation.

    Yes, you are technically correct and it’s been that way for 100 years. But if you are not willing to open your mind up to a different way, then this conversation will appear “degrading” to you, and your response will appear “degrading” to “us”.

  227. holy cow,

    i’ll get over it and go on.

    OK attorney you have enough evidence here to open many lawsuits, but please sue me first.

    like i said you can charge a fee for filing in paper work or you can go after some these scoundrels.

  228. James wrote: “Which brings up another point … I often receive offers where the buyer’s agent tries to negotiate their commission up (wrong place to do it!).”

    That violates either a NWMLS rule or an ethical rule–I don’t remember.

  229. No Kary, if you have a signed buyer agency agreement that states the seller is to pay the buyers agent, that can be any amount, and that can be part of the offer buyer has you present to seller. Per NWMLS rules.

  230. Buyer May Request Seller to Pay Buyer’s Commission Obligation. Only if the buyer so requests as a condition of a written buyer representation agreement, the selling office may negotiate on behalf of the buyer to obtain the seller’s agreement to pay the buyer’s commission obligation to the selling office, to the extent that obligation exceeds the published selling office commission.
    12/01/01

  231. Let me make another thing clear, actually my wife would like to make another thing clear. We pay for me to be in the Real Estate business.
    For me Real Estate is like an addiction. I’m an obsessive compulsive personality. I love the fact that I’m an idiot who has a ton of useless knowledge about construction, Real Estate, Real Estate law, Real Estate practices, Real Estate transactions, and Real Estate people.

    There are three transactions on my desk that will take me hundreds of hours to complete. i do them because it’s the right thing to do. Friends of mine make fun of me all the time because i do the deals no one else wants.

    The reason anyone is in the real estate business is to buy, sell, and trade it. That’s where the money is. We do deals to keep doing deals. It’s the greatest thing in the world.

    If somebody is filing out paper work for a fee they aren’t in my business, so don’t trust them. Don’t pay them for something you can do for yourself.

  232. Leanne wrote: “No Kary, if you have a signed buyer agency agreement that states the seller is to pay the buyers agent, that can be any amount, and that can be part of the offer buyer has you present to seller. Per NWMLS rules.”

    But the buyer would have to pay (or receive) the difference. The offer cannot change the SOC the seller has to pay.

  233. it’s ok, i do use it from time to time because i deal with problem properties. as i said, in my opinion, and i was never able to get this clear, but Real Estate is not a commission sales position. In my opinion, the commission is set to cover potential, exsisting, or past liability in a Real Estate transaction.

    The second point i would really like to make clear is that the agent is not being paid by the buyer or seller. i’m paid by my broker who is on the hook for the transaction financially. i can make pretty much any outlandish mistakes i want but it’s my broker who is responsible.

    the most vivid memory that i have of this was from the seller of a property that i had sold to a client and it closed. he was sitting on a bar stool one night, literally, he called me from the bar, to be told by the guy who was sitting next to him that i had cheated him.

    the next call was a week later from an attorney who wanted to meet with the listing agent and i. it was surreal. we waited almost an hour for the attorney to show up, we went into the office to watch the guy hang up his coat and unpack his lunch. he then proceeeded to go through the listing agreement line by line, before he got to the Earnest Money Agreement.

    i got up, left and turned the thing over to my broker. as i recall the case went on for almost two years and the seller lost, or ran out of money. it was a joke around the office to ask how the case was going, but i had nothing to do with it.

    by the way it was an FHA transaction and the point was that the seller should not have contributed to the buyers closing costs, which was a requirement of FHA.

    Real Estate is a complex business. 75% of transaction go smoothly, there again i see many bad deals being made every day, but hey, it’s a free country. There are those 25% of transactions that can cost a buyer thousands, or hundreds of thousands of dollars in liability.

    as i say: the paper work is 10% of a Real Estate transaction. a buyer or seller should be paying for experience, wisdom, knowledge, and ability. In my opinion that is something that is missing in today’s Real Estate world.

  234. Sorry, Ardelle. Your scenario in 256 (“I list a property and have three offers I’m presenting tonight.”) is completely out of touch with the reality I’ve been experiencing in the real estate market here (as buyers) and in St. Louis (as sellers) over the last 5 months. In fact, it does not even remotely resemble our experiences the other 6 times we bought houses. I have no way to respond to it rationally.

  235. Thank you denismurf. I can certainly understand that. While our market is starting to weaken, I can honestly say that the last three situations involving my buyer clients were multiple offer scenarios.

    “Going to look at houses” is not even in my vantage point, and has not been for a years. For me and my clients it is still about a house that came on market within the last 12 hours. In fact we are writing such an offer as I type this (my partner is writing it).

    While people read RCG nationally, my perspective on this topic must stay grounded in our current reality. But I SO VERY MUCH appreciate your comments here, and your giving me the respect that our markets are simply so different at present, that we are simply coming from different places at the moment.

    Kudos to you for not “whacking me upside the head” for having a different perspective than you. That is a quality rarely found today, and so makes you that much more “standout”.

  236. Ardell wrote: “Thank you denismurf. I can certainly understand that. While our market is starting to weaken, I can honestly say that the last three situations involving my buyer clients were multiple offer scenarios.”

    And the reason for that is nicer houses sell quickly, and are the exception rather than the rule.

    We’ve had at least four multiple offer situations on our listings since the mortgage mess in August. One the buyer lost out because of their agent. Two we thought the buyer would be better on inspection items. Only one was decided by price (although the difference in price on the others was less than $2,000.00 in each case).

  237. I think most multiple offers are often decided by things other than price, and that the agent for whichever buyer gets the property is often one of the strongest factors involved. The best agents know how to write the contracts most likely to succeed in multiple offer situations.

    So many offers that come in are not written well, and are not even legally enforceable — if you were the buyer with that offer, you likely won’t get the property in a multiple offer situation. Best foot forward as they say, no room for errors, and most likely, no chance for a second try.

    I think all of us have stories about multiple offers, even in todays market, and we also have a consumer who posts here who had multiple offers a week or two ago on his home!. I think before that happened, he actually thought his house would not sell quickly.

  238. Leanne, sorry about that–I somehow accidentally posted under your name. 😉 (Meaning I agree with 100% of what you wrote.)

    Interesting question would be: House is listed, and two offers come in at the same price, which is acceptable to the seller. One offer is written by a very good agent, and the seller can sign off and have a binding contract. The other is written by a FSBO, but is not legally enforceable, does not show that the buyer is pre-approved, etc.

    How many listing agents would try to push their seller to the FSBO offer, to get a larger commission? I think it would be naive to think the answer to that would be zero, but I’d hope the answer would be a small percentage.

  239. Some of my listings have had multiple offers. Some times when there is no inventory mulptiple buyers make offers on a property. We take the offer that makes sense and has the highest probablity of closing, true enough.

    The multiple offer strategy is used unfortunately in our market place “List ’em low and watch ’em go.” Yea I went to the “sales” meeting that day.

    I have never put a buyer into a multiple offer situation. It involves me telling a buyer that it’s a bad idea. I also say to make the best offer you can if it’s the property you want which changes people’s thinking.

    The last twelve hours, WOW.

    I’ve got an idea for buyers today, why not shop?

    Go through the expired or cancelled listing sheets and make offers on some of them. A smart agent could list the property then write the deal because the finding and negotiating is being done on a property out side of contract.

  240. i’m not an attorney but actually found this in a part of the post.

    “This subsection does not limit the liability of a real estate broker for an act, error, or omission by an associate real estate broker or real estate salesperson licensed to that broker.”

    My question is: how is a multiple offer situation good for anybody?

    Though out this ridiculous red herring of a post and comment period there have been little asides, like this, that segue into other forms of liability.

  241. David,

    If your client is looking and waiting for their dream home, in just the right place, not likely they want to pick over the expired and cancelleds. That’s like rummaging through the clearance table for your wedding dress or prom gown.

  242. David, when we’ve been talking about multiple offer situations, we’re not talking about the marketing strategy where the property is listed at a very attractive price, with a date to review offers. I agree that’s not typically good for buyers, and lately it hasn’t been too good for sellers either! 😉 (Although there was on recently I’m keeping my eye on that seemed to work, at least as finding a buyer, I don’t know price just yet.)

    What we’re talking about is houses that happen to get multiple offers, typically within the first 30 days. It’s a result not of the property being more attractive than most the junk that is part of our inventory today.

    BTW, Ardell, it can happen that you’ll find something in cancelleds and expireds, but you’re right it is unlikely. The house we bought was on the market for over 4 months, because it was over-priced and dated. The owner was about to take it off the market when he finally came down to a price we could live with. We’re still living with most of the dated–but we did get rid of the hot tub this week:

    http://blog.seattlepi.nwsource.com/realestate/archives/138000.asp

  243. there are in fact thousands of houses that have come and gone off the market that were over priced.

    nice houses excellent deals and there they sit because people with real estate licenses don’t know how to find them.

    you could generate the property your buyer wanted by working the neighborhood they were looking in. you could go door to door.

    there are many things an agent can do for a buyer rather than wait for the right house to come on the market at the right price. the probability is astronomical that will happen,

    what’s been surprising me these last few years is how many times that has actually happened.

    the fact is it doesn’t happen. waiting for the magic listing to come on the computer doesn’t happen. hype happens. buy now or lose that deal happens.

    in my opinion it’s just wrong.

  244. Ardell and the wedding/prom dress analogy is absolutely correct. I’ve always felt that the best homes were likely to be the most recent ones hitting the market (although, they often are not priced properly at that stage). The ones still sitting around, or cancelled/expired are mostly the ones nobody else wanted.

    When it’s a pet, the ugly duckling may be the best, but for a home, not so much.

  245. When locating homes for a buyer I think you need to look at all of the available properties. Sellers sometimes want a property sold quickly and value that rather than a couple of percent increase in purchase price. David’s comment about avoiding multiple offers indicates he’s willing to drive past a really good deal in order to avoid having to mix it up in a competitive bidding situation.

    Some buyers would agree, and avoid the uncertainty of multiple offer properties, but others would seek to attempt to get that property. As an agent I am going to educate them on the processes and pitfalls and let the choice be theirs. If they choose to make an offer on that type of property I’m going to go in and use every bit of experience and talent I have to negotiate to a successful bid. If we lose, so be it, we know the odds going in. If we win my client gets a great deal.

    I’m curious, David, do you get a buyer agency agreement specifying your compensation before canvassing cancelled and expired listing? Seriously, I work them every day and you rarely find great deals searching through properties that failed to sell. Either they have decided not to sell for reasons unrelated to the home sale, or they have poorly priced or prepared their home for the market. Selling these properties is hard work and takes time and patients to get the property positioned in the market for a sale. BTW, how many sales have you made this way? Taking a step back you avoid really great deals because of the multiple offers and then go prospecting in the failed listings bin looking for the undiscovered gem!

    A real estate agent is a commissioned sales person. The liability associated with our product is just a part of the job and not the reason for compensation. I’m proud to be a Realtor and associated with the history and accomplishments that Realtors have made to our communities and our nation. It surprises me to hear the Realtors bashing Realtors in this blog in a vain attempt to make their phones ring. Seems like there’s a whole school of red herrings in this blog.

  246. Ken,

    Can you point to the “bashing” part? I thought we were talking to each other…publicly. It’s different and new to do that, but doesn’t equate to “bashing”. Just takes some getting used to.

    Quote the who bashed who line. I’d like to see your definition of “bashing”. I think you guys are allowed to bash me though…cause I’m just an Associate Broker 🙂

  247. Kary says in 284: “The house we bought was on the market for over 4 months, because it was over-priced and dated. The owner was about to take it off the market when he finally came down to a price we could live with.”

    That’s exactly the philosophy that’s guiding our current house search.

    House = wedding dress? Not in my world 🙂

  248. Nice write-up Craig. We were doing a little keyword research when we found this discussion. I agree with you that the incentive are all wrong and we recently launched prooffer.com to try to better align incentives within industry practice. Of course your suggestion that buyers pay their own way is spot on. Let me know what you think of what were are doing.
    Cheers!

  249. Have buyers pay their own agents and sellers pay their own agents….I don’t think you can imagine the radical changes this would bring on. If buyers had to pay a fee to a buyer’s agent, virtually none would use one. On the other hand, with no one representing buyers, I think the importance of the MLS would go away since money would be made on the listing end (or maybe it would just be opened up where all buyers could have access to all data). The one potential curve ball is the lockbox system and the need to still access a lot of properties in a short period of time.

  250. Jonathan — on a million dollar house, the commission is $30k. That’s a whole lot of dough. At $150 per hour (a VERY fair wage for a job that requires a GED, a 60 hour junior college class, and a passing grade on the test), that equals 200 hours of work. For a $500k house, that’s still 100 hours of work. If the buyer finds his own home to purchase using the excellent search tools available for free on the internet, and the agent simply writes the offer and shepherds the deal through to closing, will the agent REALLY spend 100 hours on the deal? I really, really doubt it.

  251. I can’t wait to see your business cards in my listings after your showing tours! I think attorneys have the right idea. If the customer wants to keep the commission they can pay an hourly fee. If they want to forego the cost or are in doubt of their purchase they can have their agent paid from commissions. Everyone gets what they want.
    Better agents could charge more per hour, based on market forces, and customers could get by with less cost by going with a less expensive agent.

    Now if we can only get the customers to agree life would be great!

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