The "Goldilocks" Principle

[photopress:images_1.jpg,full,alignright] I know that applying the “Goldilocks Principle” puts me in the category of “hopeless utopian”, but hey, for one solid year, until December 31, 2006, I am going to stay in this thought mode.

I’ve tried various commissions with various people, and for the most part disregarded anything I’ve ever known, and everything that anyone has to say on the subject. I say “for the most part” because you really can’t erase your brain. But you can test and try varied options, just like Goldilocks rested herself on the three beds before deciding which one was “just right”.

I find that all of the rhetoric available on the topic is pretty much bunk. Reality is, it depends on the sale price/purchase price. I plan to do a “year in review” on 1/1/07, my blogging anniversary, to post my experiences and conclusions. But since this topic keeps coming up in the comments of various articles with everyone spouting out percentages, or flat fees, or hourly fees, etc., I thought I’d at least post that the results of my experiments are absolutely hinged to price of property.

The other reality is that my “awakening” with regard to commission issues started three months BEFORE I started blogging, and being in the Blogosphere really isn’t what turned my head with regard to commission issues. What turned my head was when I, myself, purchased a house for $850,000 with $59,500 of commission issues plus $22,000 of other credit issues thrown into the mix. Trust me. There is no question in my mind that I, the buyer, am the one paying for that whole $81,500 in my mortgage payment. I’m not complaining. I structured everything that way for a reason. But overnight I realized that the buyer pays the commission…no question.

I also realized that it didn’t bother me on the 10-12 properties I purchased before this one. So price of house does matter. The experience revolutionized my whole thought process with regard to real estate commissions. Nothing causes you to “get real” more than putting yourself into the equation, and experiencing it personally, from the inside out. So for now, I’m trusting my own judgment and using “The Goldilocks Principle” when determining the fairness of commissions. A full year of experiments, and then I’ll come out the other side and see where I’ve been and which feel “just right”, which were too high and which were just not enough.

For now…price matters is the key, and almost none of the discussions anywhere, focus on different fees for different home prices. So basically, they are ALL wrong.

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ARDELL is a Managing Broker with Better Properties METRO King County. ARDELL was named one of the Most Influential Real Estate Bloggers in the U.S. by Inman News and has 33+ years experience in Real Estate up and down both Coasts, representing both buyers and sellers of homes in Seattle and on The Eastside. email: cell: 206-910-1000

54 thoughts on “The "Goldilocks" Principle

  1. After talking with Dustin Luther at the Pacific Northwest Educational Conference this Morning, his invite to blog and interact is timely. Commission on an individual sale is often the focus, yet it is the annual return for annual time, sweat and intellectual contribution which is the driving force to enable use as realtors to continue to serve the public in coming years. No client has ever complained about not paying commission after months of work has resulted in a terminated transaction. It is unfortunate that under todays commission structure the successful clients help pay the expenses on those unsuccessful transactions. Maybe Russ Cofano and other attorneys have the right idea to bill for time and expenses as the process goes. This sets up the idea of individually negotiated Buyer’s Commission as a part of the Buyers Brokers agreement. This could well be a real estate standard by 2016.

  2. Great post again. Nothing like participating in all facets of a transaction both on a professional and personal level as an active participant.

  3. Christopher,

    The problem with that thinking is that it doesn’t account for an agent’s ability to perceive these things in advance. Clearly some agents have very, very few failed transactions…even NONE. While others, due to their own ineptness have many. So should a client pay for an agent’s ineptness? Clearly not.

    I cannot even fathom “months of work has resulted in a terminated transaction”. Has that ever really happened to you? Or is that a hypothetical “could happen to someone”?

  4. Galen,

    Rarely are commissions presented as flat fees. You say “a flat fee + a small percentage”, but it is usually the other way around. A percentage with a maximum dollar amount. This way pushing someone past a certain purchase price, does not benefit the agent in any way, once the max cap is reached. Buyers find more comfort in the fact that the agent doesn’t receive morem if they pay more for the house.

  5. Now that the market is showing a “definite slowing” (today’s Seattle Times) would you still go with 100% financing?

  6. Will,

    100% financing is not really about hot or slow markets. It’s about being able to purchase AND afford the payment. If you can’t afford the payment, then you shouldn’t buy, whether the market is moving up or down.

    If the price to rent is much, much lower than a mortgage payment AND you can’t really afford the mortgage payment…you should rent.

    If you want to own your own place, paint walls, make it your own and never have someone say “You have to move because I want to sell the place”, and you can afford the payment, you should buy.

    Maybe I don’t understand the question? What does 100% financing have to do with slower market? I bought my first place because I wanted to stop living in apartments and own my own place. I really didn’t give much thought to which way the market was headed when I did that. And I bought it with only $500 cash out of pocket, because I could.

    I’ve never seen someone use 100% financing that could have put 20% down and have only a first mortgage. It’s not usually a “choice”.

  7. I think Will’s question is rooted in the equity buffer of a rising market when financing with 100% LTV. When the market was appreciating at a 10% annual clip or more, all it took was a couple of years to build up 20% equity. At that point, an owner could refinance with a 30 year fixed, 80% LTV and substantially reduce his payment and provide certainty in his payments (with 100%, the last 20% of the loan is typically tied to the prime, LIBOR or other floating rate).

    With appreciation flattening, it’s much more dangerous to finance at 100% LTV, since there is no equity buffer being built rapidly by double digit appreciation. If the buyer loses his job, or if rates go double digits in combination with a flat or depreciating market, then foreclosure/bankruptcy would become more likely, I would imagine.

    In my opinion, if a buyer has to use 100% financing to buy their own home, especially now, they would be better off saving until they had at least 10% to put down. I think there’s just too much exposure, especially given that 100% products typically include ARM components.

  8. Thanks Eric,

    Buying a house whose value can be improved (ugly house) is a better buffer than depending on the market to push you upstream. Then if the market goes up, all the better!

    There are many lenders with 100% financing without ARM components. In fact most that offer HELOCs as seconds, also have fixed products if you ask.

    Using downpayment as a “buffer” doesn’t help, because that means you will be throwing that money away if the market goes down. Better to look for a house you know you can improve if you have to sell, than one that is just too picture perfect.

  9. Yes, Eric’s right – I was talking about the “equity buffer” that one needs to build themselves when market appreciation doesn’t do it for them. Since you’ve moved alot in the past and currently have a loan (40 year ARM fixed for 2) that you can’t reasonably expect to pay off during your natural lifespan without accelerating the payment schedule – it’s a safe guess that you expect to sell your current house well before paying it off. (based on the terms it looks like you’re planning on selling or at least refinancing before your rate adjusts up towards 9% next summer).

    The question was, given the current market, would you still finance 100% of the purchase price?

  10. A flat fee or flat fee plus a percentage are nothing new in the commercial real estate industry. Also, each party paying for their own real estate counsel isn’t new in the commercial realm. As the value of the deal increases, so does the likelihood of both compensation scenarios. It is probably a matter of time before this practice is becomes common in the residential industry.

    Michael P. Lindekugel MBA
    Financial Analyst
    RE/MAX Commercial
    Team Reba – RE/MAX Metro Realty, Inc

  11. On the commission subject…

    I just signed a listing agreement with a client today. I presented my commission, marketing plan, research and suggested a sales price. I included current market condition, interest rates, “what we are asking the buyer to pay a month essentially”, and home condition and features vs. the competition.

    She accepted my reccomendations and commission structure (I have also represented her in a single family home purchase as a Buyers Broker that went great). I received the price I feel, in my professional analysis, (including discussing it with my brokerage), the property will sell at top dollar.

    I guess my commission structure is based on the entire year of “being very accessible and available” to my clients… which is true. It is also based on the large database of real buyers I procure each weekend at over 60 open houses I do a year.

    So, it is difficult for me to adjust a commission below what that effort is modestly worth each year in, and year out.

    The two situations where and adjustment may occur is definately in PRICE of home as Ardell suggests, or, if the client is willing to really price 5% to10% below market comps in a slowing market and invests in improvements I suggest. If we are on the same page to price great and blow the home out… then this is negotiable.

    The rason price of home matters… I will spend more time and effort to sell a one bedroom $178,000 Lake Shore Drive condo then a three bedroom $600,000 duplex (two level) condo in the Lakeview neighborhood. At the later, I will also meet higher end buyers, thus becoming their Buyer’s Agent and so on…

    Otherwise, I usually spend more marketing dollars and time than agreed to do what it takes to move the home. If the client doesn’t trust my analysis, wants too price to high, and wants a discount up front… they got the wrong guy.

  12. Eric,

    As you state, being “available and accessible to the clients” is key. There is a limit to the number of transactions anyone can do and do well. Consequently the small flat fee commissions some yearn for, are not my cup of tea. I would need to do too many of them to do any of them well. Finding the balance where one does not sacrifice quality for quantity is key, for me.

    All I ask everyone to do is to come up with their own answer of what works for them and their client in every situation. I don’t want to see one “standard” one size fits all fee traded in for another “standard” one size fits all fee. Just a reasonable discussion with every client, including buyer clients.

    Your comment is very long…but only talks about sellers. Seller commissions are a no brainer. I want to see more people discussing buyer agent fees with buyer clients. I don’t care if you charge them the same after the discussion. I just want to see buyers included in the commission talks, whether they sign a buyer agency agreement or not.

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  14. Ardell,
    Thanks for bringing the buyer side into the fold. I am primarily a buyer’s agent and earn listings from buyer’s that meet me at open houses they’ve wandered into (little did they know…).

    Riddle me this… in my position as a buyer’s agent (I’m a licensed sales agent, not a “broker”), my broker is paid the sales commission and I get a split based on the contract I negotiated with my broker.

    As an agent, the only time I can negotiate my commission, is, by the act of rebating an amount after I’m paid out at closing. Agents make rebate promises of course to wooo clients, without their brokers knowing after the fact (or caring I guess). There is a sign up service for this as well that issues the rebates.

    I know you have made very complex arguments towards turning the tide to the buyer side commission dicating who gets what in real estate transactions. It’s persuasive, and as you say, depends on each client relationship… and I agree with much of what you write about changing the thinking/culture on this.

    However, I negotiate the home to the lowest, or below market, point I can get it for my clients regardless of what I’m getting paid (co-commissions differ of course). If we are at the 11th hour, than I may pitch something in to get it done if it makes sense. 99% of the time, however, the owner/seller must adjust and understand they don’t get appreciation and net profit above and beyond their selling agents commission JUST because they think they should.

    So, the pressure is again on the selling agent commission side. They offered the co-commission, why should I give it back for finding a good buyer and getting the deal done for both sides (and as buyers agents, we do the listing agents job… ALOT). This just happened to one of my deals. The selling agent gave money back.. I didn’t budge. The co-commission was stated and the price my client would pay was just that… period. And they accepted. I mean, the amount I spend at Starbucks on my clients… I’m hanging on to every penny. Whakka whakka whakka!

    As for me writing long comments… I only use small words. I’m ducking for cover now.

  15. Eric,

    All I asked is if you disclose or discuss what you are going to be paid with your buyer clients. I didn’t ask you to give anything back. But I think you answered the question.

    My primary rant, Eric, is NOT that all buyers should pay less or that all agents should get less. My primary rant is that if the buyer is truly your CLIENT, don’t they at least deserve a discussion regarding what you are going to be paid to represent them? Shouldn’t they at least know if you are making 2.5% of the sale price or 5% of the sale price?

    Whether or not you will or should receive less than what is offered is between you and your client. But isn’t your client the buyer? Shouldn’t he be involved in the discussion? Isn’t that just basic disclosure of facts to your client?

    I often charge the buyer what the seller is offering, sometimes I charge less. Haven’t charged more, unless I negotiated that with the seller with the buyer’s consent, but that was a rare 9 month transaction.

    It’s not about what you get…it’s about the buyer being your client, and he should at least be told what part of his purchase price went into his agent’s pocket. If the buyer is not included in the discussion, doesn’t if feel like you are working for the seller, especially if the seller pays a bonus for you to “bring him a buyer”?

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  18. I don’t agree that you can get rid of procuring cause to resolve disputes between two agents chosen by the buyer. If the buyer works with an agent and then gets another one just to “write the offer” for a rebate…there has to be a means to resolve that problem.

  19. I do agree that Procuring Cause should stop hearing disputes initialed by the listing agent wanting to be the buyer’s agent or get the buyer agent fee as the seller’s agent.

  20. Good points, Ardell. Those are pretty much my thoughts, too.

    Although, a showing agent should protect themselves with buyer-brokerage agreements. If a buyer will not commit, the agent is taking a huge chance of not being compensated — and is nothing more than an escort.

  21. I don’t see the trend moving to all buyers signing agreements to see property…not from the consumer side of things…nor do I support that at present.

    Back in 98 I freaked out when CA tried to remove PC for this reason and NAR apparently heard all the screaming and moved in and stopped a law that would make it so. The change would have been that whomever had the buyer agency agreement would get paid, same as listing agent.

    That would have produced a slew of agreements sitting in a drawer and agents who just collected fees and did nothing else at all to assist the buyer (in exchange for a rebate, of course).

    The world is not positioned to that end, …uh…sorry don’t know your name. And I don’t see buyers moving in that direction.

    I have never had to “protect myself” from my buyer clients. If you need to “protect yourself”, they probably aren’t “your clients” and no paper is going to make that so, nor should a buyer be pressured to sign a contract just to view a property that is for sale.

  22. If the buyer chooses an agent based on a rebate, that is their choice. However, for showing agents who do not offer rebates, they should be prepared to protect themselves with a BBA that specifies compensation regardless of what the buyer does. The showing agent should not rely on co-op fees, but rather their BBA.

  23. Let’s stop talking about “the agent” and let’s start talking about “the buyer”. Forcing ALL to sign a contract to see a house is just not going to happen, nor should it. End of story.

    Absolutely the buyer should be able to CHOOSE any agent that they want…but not three at once for the same property 🙂 When they choose two or three in succession on the same house, then Procuring Cause is needed or we can’t have an mls system…and that would serve no one.

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