[Updated 3/2016]
This post is not legal advice. For legal advice, consult an attorney in person and do not rely on a blog.
I’ve written elsewhere about the practical steps in buying without an agent. The Big Question, of course, is this: Will that save me any money? If it does, then every buyer should at least consider using a real estate attorney rather than a real estate agent to buy a home.
As an initial matter, you must understand where the money starts and where it goes in a typical transaction. It starts, of course, with you, the Buyer. It’s not uncommon to hear someone say, “Oh, sure I used an agent to buy my house — he was free! I didn’t pay him anything!” As a practical matter, that is just not true .
Remember that, of all the parties involved in the transaction (seller, buyer, listing agent, buyer’s agent, title insurance, escrow, lender, mortgage broker, etc.) only one brings money — you, the Buyer. Everyone else gets paid from the Buyer’s money. So while you may not pay your agent directly, you most certainly do pay him out of your pocket (or, more accurately, out of the money you have borrowed from the bank, and which you must repay, with interest).
And exactly how does your agent get paid with your money? Well, the seller previously signed a contract with the listing agent where the seller promised to pay a certain percentage in exchange for the agent finding a buyer. The “typical” percentage paid is 6%, although there is some degree of variability with figure. Per the rules of the MLS, that commission is then shared with the buyer’s agent when the house is sold (or, more accurately, with the buyer’s broker, but I won’t get into that for simplicity’s sake). Most sellers and listing agents agree to give 3% to the buyer’s agent, on the theory that anything less will attract less interest from buyer’s agents (I’ll get into the ethical issues of that dilemma in a future post).
The listing agent has a contractual right to the full commission. If you go without an agent (e.g., drafting the offer yourself (discouraged) or using an attorney), then the listing agent will not need to share any portion of the commission. While the agent has no legal obligation to accept anything less than the full commission as set by the listing agreement, the agent is free to accept less than full payment if he is so inclined. So, the buyer can structure the offer such that, if the listing agent cooperates, the selling price is reduced by 3% (or whatever percentage was to be shared with a buyer’s agent). The seller will presumably lean on the listing agent to reduce the commission, as everyone gets what they expected out of the transaction.
All that said, clearly the seller and not the buyer pays for the buyer’s agent – suggesting otherwise is simply a helpful analytical approach. But equally true, the buyer can benefit by reducing the seller’s anticipated and already-accounted-for costs. When the buyer does so, the seller is likely to pass most if not all of those savings back to the buyer in the form of a reduced price.
So regardless of the perspective, in the final analysis a buyer can pay less by reducing the fee paid to the buyer’s agent. So smart buyers do so by skipping an agent and reducing their offer by the 3% to be saved by the seller.
Finally, what about all of the extra work for the listing agent? Yes, there may be a more work, such as being there for the inspection since there is no buyer’s agent. But don’t forget that, in any one transaction, a listing agent makes a very fair fee. What is the average amount of time a good listing agent invests in a listing? And, assuming a 1.5% commission to the agent (after the broker’s cut), what is the average fee? Given a median home price of $400k, the agent will make $6k. Assuming 50 hours of time, that’s $200 per hour. A little “extra” work (it is, after all, all part of the job) is not unreasonable if necessary to secure that amount of compensation.
So, if you’re thinking of buying a house, consider ALL of your options and figure out what is best for you. If you want to save a lot of money (we’re not talking pennies here), consider using an attorney instead of an agent (you should absolutely use a professional given the value of the transaction, and realistically these are your two options).
Craig, thanks for this timely information. Just so happens my elderly neighbor wants to sell her house and we have come to an agreed purchase price. What is my next step? A P&A agreement? We hear all the “players” involved through the traditional broker process, are they necessary? Is getting a deed transfered so difficult and scary as they portray?
Jeanne — give me a call (see my web site for more info — link next to my picture to the right) to discuss. In brief, no, you need not involve all the “players”, particularly under these circumstances where buyer and seller found each other and now just need a contract. That said, it is a legal process so it is a little difficult, but not scary (if you’ve got a knowledgable person to assist).
No, it is not all part of the job. It is the reason the commission is split. (Note, for all you procuring cause nuts, not an issue here). You are asking the listing agent to give away his time. Or, the sellers (who often engage an agent just so they do not have deal with this). And, as you have very carefully noted, the listing agent does not work for the buyer.
But of course, the listing agent should advise the seller to counter. Either striking the three percent price reduction OR striking any and all provisions which require his time because the buyer does not have an agent. He should ever so politely inform the buyer that just because he, the buyer, does not wish to engage a buyer’s agent, that does not mean the listing agent has to give away his time. And, if this counter is acceptable to the buyer, they shall next meet at closing. Remember, this is a counter. And this counter would, in no uncertain terms, highlight the issue for the buyer and hopefully elicit a more reasonable offer. My guess is the buyer comes back with a two percent reduction.
Does that make me greedy? Well, I wish I made as much money as the average attorney….
Of course, it all depends on the price of the house and the list-side compensation (which these days is often a lot less than three percent). But, I tell you what: You don’t tell me what to charge, and I will return the favor.
Reuben — the listing agent does not “give away” his time. He is hired to find a buyer and assist the seller in selling the property. That’s his job, and that’s why he makes thousands of dollars off of the transaction.
I’m certainly not telling you — or the broker/agent/MLS system generally — what to charge. I am merely pointing out that buyers need not be trapped in a system that does not benefit them and which forces them to overpay. You are apparently in agreement with that general principle. Even you seem to admit that a 2% reduction in the sale price for an unrepresented buyer is appropriate.
The agent is not a party in interested who can “counter” the buyer’s offer.
Craig I will call you. Thank goodness there is an alternative besides using a Realtor. My neighbor and I agree on that!
Craig – I certainly agree it’s not worth three percent.
Ardell – In order for Craig’s strategy to work, the listing agent must be willing to revise their agency agreement with the seller accepting a lower commission.
The nice thing about Craig’s strategy is that the buyer can actually negotiate with all of that money they are bringing to the table without everyone involved pressuring them to just make the transaction so that everyone gets paid.
If the sellers agent cannot come to an agreement on their reduction then the buyer can simply move on to the next property. There isn’t a shortage of properties right now.
Over on Redfin there is a post about Southern CA buyers tactics. Maybe ruthless tactics and a bit tongue in cheek but it definitely proves a point.
http://forums.redfin.com/rf/board/message?board.id=Seattle&thread.id=1853
I would sure hate to be the agent that tells their seller that the offer was just reduced by $2000 because I would not lower my commission for the ‘extra work’ I had to do. Or, even worse that the buyer decided to pass on their property and is looking at others.
It might have been a pure sellers market in the past but the momentum has definitely shifted in other parts of the country and seems on, or just over, the presipice in the Seattle area.
A couple of points.
First, $200 an hour might seem like a lot, but it’s contingent. Generally the fees for contingent services are higher than hourly services.
Second, you didn’t address the matter I mentioned in your first piece. Locally “Realtors” have to disclose that the listing is a variable rate commission. Thus, if the listing is 6%, but only 4% if sold by the listing agent, that has to be disclosed in the listing. The question is, does that prevent the agent from lowering the fee after the fact, when an offer comes in? I haven’t been able to get a formal opinion on this out of SKCAR, but what I do is tell my seller that any offer to reduce the commission to get a sale done is off the table if another offer comes in prior to acceptance. That way the ethical rule doesn’t stand in the way of getting a deal done, and other agents are not put at a competitive disadvantage if they bring in an offer.
Peter wrote: “If the sellers agent cannot come to an agreement on their reduction then the buyer can simply move on to the next property. There isn’t a shortage of properties right now.”
Nice properties still tend to go quickly. If you’re not picky (or willing to deal with fixers/cosmetic fixers), then there’s no shortage of properties.
Just because the market has shifted from buyer to seller, it doesn’t matter which way it goes, it does not mean agents are working any less. So why should an agent discount their time? A hard-working professional agent knows how to explain all of the work they do on behalf of their client and will never have to discount their commission. I would re-think working with the prospective client if they did not value my expertise.
Wendy, IMHO, clearly a listing agent dealing with an unrepresented buyer is less work than the work their agent would do if they had an agent. The only exception would be if the buyer happened to want to buy the first and only house shown. Then the amount of work would be equal.
I don’t have a problem with receiving less of a commission in the very rare instances where there is an unrepresented buyer. The trick is following the rules and not discouraging buyers’ agents from bringing their clients to your listing.
Kary,
I agree that the commission is contingent in that it is paid only when the listing agent’s efforts attract an acceptable offer and the property sells. However, by the time an offer comes in that calls for the buyer to get the 3% and is otherwise acceptable, the seller’s transaction just got a whole lot more certain and the listing agent is in a position to accurately foresee how much “extra” work he or she will have to do. The principal additional work is an initial showing, opening the door and hanging around for a few hours while the inspection is conducted, and then again for a shorter period when the appraiser needs in. All told, I suspect it’s no more than an “extra” 4 or 5 hours, if that much. The bulk of the listing agent’s total time is spent like any other transaction thus, I have little sympathy for the listing agent having to do a little extra to get the deal done.
Marc, I think I said much the same thing in the post I did a few seconds before you posted (and probably didn’t see because of timing). I wasn’t trying to address whether it should be an additional 3%. I was just addressing the $200 an hour figure in the OP that might seem high to people not in the business. Although those not in the business might also be skeptical that an agent could spend 50 hours on a listing. 😉
Kary,
Fair enough.
Regarding Wendy’s comment:
“Just because the market has shifted from buyer to seller, it doesn’t matter which way it goes, it does not mean agents are working any less. So why should an agent discount their time?”
Because they want to get the deal done. Your mind set is what I don’t understand. When this offer comes in you’re looking at only a few extra hours of your time to get the deal done. It amazes me that a person would effectively say to his or her client that he or she will be content with the 3% listing fee since there’s an agent on the other side to hold the buyer’s hand but if he or she has to open the door for an inspector and an appraiser he or she simply must have the other 3% as well.
It’s no less ridiculous to insist on getting a lesser portion of that 3% when you put real numbers to it: for an extra 4 hours of work on a deal with a list price of $400,000 do you deserve an extra $8,000 (at 2%), or $4,000 (at 1%)?
That’s $2,000 or $1,000 per hour and, in my humble opinion, no one deserves that as a simple matter of right.
Craig, in a changing market, everyone is going to be putting in a lot more time into their sellers and buyers and their transactions, everything is getting more difficult and time consuming. My guess is, it will mean a lot more buyers want an agent of their own.
We’ll see how next year looks.
Listing agent time example:
Meet sellers to discuss prepping house for sale: 1 hour
Meet sellers mid-way thru prep work to answer questions: 1 hour
Prepare market analysis on property: 1.5 hours
Personally visit comparables: 1 – 2 hours
CMA appointment with seller: 1 – 3 hours, depends on client
Take photos for lisitng: 1 hour
Input listing to computer: .5 hour
Photoshop or edit phots for listing: 1 hour
Add photos to listing, and to agent web site: 1 hour
Make flyer for listing: 1 hour
Print flyers for listing (I go to Kinkos): .5 hour
Order sign for listing: 10 minutes
Install keybox, deliver flyers: 15 minutes
Seller happens to be home: .5 hour more
Average time on market: assume 90 days for this example
7 open houses: 4 hours total (getting there etc) x 7 = 28 hours
4 brokers opens: 3 hours total each x 4 = 12 hours
1st price drop discussion & new CMA: 1 hour
2nd price drop discussion & new CMA: 1 hour
1st offer, doesn’t go thru: 3 hours
1st offer, comes back a week later: 1 hour
1st offer, mutual acceptance: 1 hour
Listing is now STI.
Discuss work from buyers inspection with sellers: 1 hour
Help sellers get bids for work: 1 hour
House is vacant, listing agent meets roofer and furnace company: 2 separate appointments, 2 hours (they were late of course)
Accept buyers inspection requests, move to pending status: 1 hour
Lender problems regarding buyers qualifications: 1 hour
Problems work out, but seller is asked for 2 week extension: .5 hour
Yea!! Closing, go to escrow with seller: 1 hour
71+ hours. And, this is not an unusual investment of time, nor does it take into consideration time spent the previous year meeting with sellers, and pricing property, but not moving at that time. Nor does it take into consideration time on phone or emails exchanged, nor most drive times to property. Plus, this property is vacant, so a good agent goes to the property at minimum of once a week, and also spends time (or hires someone) to clean bathrooms once in awhile and sweeps inside and on decks and porches if necessary.
And, in reading thru this list, there is quite a bit of time not mentioned, but this is just an example of typical time for a 90-day listing.
Agents, you do sweep don’t you? 🙂 It’s an irritant to me, to see a house that is vacant, and so neglected by a listing agent that they can’t be bothered to sweep the front porch or inside the house when needed. I’m just picky that way I guess.
And, I don’t think we get paid by the hour, if so, I’d charge less and get paid NO MATTER WHAT.
We get paid as we do since our time is necessary at fairly undesireable hours – nights and weekends for example. How many attorneys will even work Saturday night at 7:00 pm? I’ve been in many clients homes or they in my office, and while it would be nice to have the discussion wait till 9:00 am on Monday, real estate just doesn’t work like that.
We get paid to be patient, to be hand holders, advisors, and to be ready to JUMP at a moments notice. We get paid the theoretical big bucks because we work in spurts – but when the time is ready, we’ve got to be willing to drop our personal lives, and put on the real estate hat and go do our jobs.
And, the best agents do it with grace and flair, and skill.
Mark wrote: “Because they want to get the deal done. Your mind set is what I don’t understand. When this offer comes in you’re looking at only a few extra hours of your time to get the deal done. It amazes me that a person would effectively say to his or her client that he or she will be content with the 3% listing fee since there’s an agent on the other side to hold the buyer’s hand but if he or she has to open the door for an inspector and an appraiser he or she simply must have the other 3% as well.”
Exactly. An agent shouldn’t be too strict letting their commission get in the way of the deal.
Couple of war stories:
1. We had a client who didn’t listen to our advice on the list price of their house. It sat and sat, and they were getting to be a bit panicked. We’d done other business with them in the past, so I wasn’t that concerned about the commission–when another agent brought a deal in below what was acceptable to the client, we offered to cut our commission to get the deal done. Unfortunately, that deal fell apart, but the idea was it was better to have part of something and get the clients on with their lives. And eventually they did sell, but it was getting to the point where I was more embarrassed about having a listing go so long than I was concerned about the commission.
2. I had another client where we brought him two offers, and were recommending the lower one ($2,000. lower). He said if you think it’s better, how about reducing your commission a few hundred? I thought about it, and said sure–it showed I thought the lower offer was better–I was willing to lose part of my own money just to get the other offer.
Anyway, reducing commission to get a deal put together isn’t at all objectionable. But I guess I would wonder–if that unrepresented buyer does come in, and I write up a full price offer, why exactly would that be a situation where I should reduce my commission? If it were $2,000 less than full price, I could see it.
Kary said: “Thus, if the listing is 6%, but only 4% if sold by the listing agent, that has to be disclosed in the listing. The question is, does that prevent the agent from lowering the fee after the fact, when an offer comes in?”
I understand your reading of the rule, but I doubt many MLS members interpret the rule as strictly as you are. Many agents will take a commission haircut (forced by the lender) on short sale listings. How is that any different than what Craig is suggesting?
The short sale haircut wouldn’t apply (nor would some of the other examples in the other thread).
IMHO, the only time this clearly rule applies is if it’s pre-arranged at the time of the listing, and it probably applies if it comes up after the fact during the time another offer comes in (but that’s my strict interpretation of the rule).
I forget if I said this here already, but a 3% listing tells agents: “Bring me a buyer, and I’ll pay you 3%.” You have to say it if you really mean: “Bring me a buyer, and I’ll pay you 3%, but if I find a buyer myself, my buyer will have a 2% advantage over your buyer.” It’s okay to do that, but you have to let the buyer’s agent and the buyer know that they are possibly expending energy on a property where they may have the rules stacked against them.
BTW, if you really want to do what Craig is suggesting, I really think finding an agent and negotiating a rebate with them is a lot cleaner way to go. For one thing, you won’t be at a disadvantage if another offer comes in prior to mutual acceptance.
I believe there should be two models in this real estate business. There should be a per hour and commision on sold price. The client should be able to pick which model they want to choose. there are some clients who would say, I will do the leg work, do the search and maybe even do market analysis and come up with offer price.
The agent should be paid for advising the client, like an attorney does. For advising the agent can charge x hour for research etc. Maybe the client wants the agent to show the house during open house and that should also be charged per hour.
I was just talking to my neighbour(2 house away) yesterday. They had put the house on the market last week at 650K and with one open house on the weekend, they have 2 offers(one at 640K and anothe one at 642K). I was mentioning to her that she would be getting about 610K. So all was wondering with the house on the market for 7 days, how much did the agent really make.
I still think there should be some fixed cost, plus maybe incentive/penality for selling the house at higher price or lower price and days it takes to sell the house.
Maybe something like this. assume I want to sell my house. My house and I see this comparable at 650K and since my house is about 400sq feet bigger and one car garage extra and bla bla … I think I should get $725K.
This is how I will make the deal.
Selling agent: 8K flat fee if the house sells in 60 days in the range of 720K-730K.
If the selling agent thinks he/she can sell it at 730K or more, then anything more than 730K we split it 75%-25%. So lets assume he/she sells it for 750K, then he/she gets 8K+5K(25% of 750K-730K). If he/she cannot sell it for 730K in 60 days, then they get a penality and keep taking some money off the fees(maybe $1000 for every 30 days).
I think something like can be worked out, depending on the price of the house and area and how the market is.
Anyway I am sure Ardell will have some clever response to this.
srini, you can negotiate hourly, especially on the buyer side. I believe Redfin has that as part of their system. The problem is, few people really want to do that. It sounds nice until you’re out $1,000 and still haven’t found a house you like.
As to it sometimes being a lot of compensation hourly for the agent, that’s the way contingent fee matters work. When I was an attorney the partner I worked for once earned six figures with just a few phone calls on a contingent matter. Other contingent matters for attorneys work out to be less than minimum wage.
I really think that an hourly arrangement would work out best for the wealthy clients. They’d have the money to pay it, and the property they would be looking at would be high commission property. But even they seem to have little interest in such an arrangement.
As to your proposal regarding an increased commission over a certain price, the problem is there are very few clients who think their property is worth less than it actually is worth. I mentioned in one of these two commission threads I had a listing agreement that had the listing commission increase the longer the property was on the market. You could easily do it the other way too.
LOL Srini! You’re killing me!
Think about this. In your scenario the agent’s work is done when you have a Purchase and Sale Contract and begins the day you list it. In my experience most of the work is done before the property gets uploaded into the mls and after the buyer is a known entity.
In your scenario the seller who makes it harder on the agent by having a messy place and being unreasonable in negotiations would pay the agent less. I’m sure that wouldn’t work.
On market 4 months with smelly cat litter and a messy house…seller turned down offer for more money the first week…seller refused to fix something at inspection which killed the deal and we had to start over. In your scenario that seller would pay less than a stellar client. The agent would get penalized for the seller’s bad behavior.
Well, if hourly on the selling side ever became popular, Sign Pros would get a lot of work making A-boards for open houses. 😀
I agree we cannot have the same commission rates for a 200K home and 2M$ home.
maybe time to get creative and maybe even the agents should market themselves that way.
Ardell, then charge the seller for doing all the prep work(just dont send that bill to me now :))
What is happening in real estate commision world is that some people are paying for other people. So if a agent makes 3% commission on a house that sells in 7 days, he/she is covering up for the time/money he/she spent on the other client who has a messy place and takes 5 months to sell the house. This is socialism in RE world in a capatilist country.
My attorney bills me for every 15 mins conversation he had on the phone with me, and even for the time it takes him to get to my house. I dont have a problem paying for it.
Hmmm ..so they are called A boards.
Srini,
In reality the poor pay for the rich, more than the rich pay for the poor.
High priced homes often demand high priced advertising. There are 471 properties on the market In King County as we speak, priced at 2M or more. Expensive cost for the agent. 287 more expired or cancelled in the last six months. In all of those cases 471 plus 287, the seller paid NOTHING for the agent’s time and cost. Only 90 homes actually sold at $2M or more in the last six months.
So all of the people buying and selling real estate in the mainstream market of $200,000 to $600,000 (7,835 of those sold in the last six months) are paying for the high priced homes that don’t sell and pay the agent nothing.
Food for thought 🙂
Srini,
An “A” board is a “tent sign” that stands with it’s legs spread apart like an A. Ours cost $115 apiece. We just ordered new sign panels that hang from the “yardarm” post. They cost $85 before tax. Lockboxes are about $110 each. The little surgical booties we put in houses so people don’t dirty your carpet can cost as much as $1.00 a pair from real estate stores, but I get mine in bulk from a surgical supply. The new black ones look better than the bright blue surgical booties though, and have become more popular. I may have to trade up. 🙂
The riders that hang on the sign cost from $4.00 to $50 depending on what they are made of and what they say and where you get them.
Just in case you were thinking of getting a license and selling your house yourself LOL!!! You certainly could have gotten through the course and licensing process in the time that I have known you. Then you would only pay me 10% of what you charge yourself, and Kim and I would still have to help you as a “new agent”for only 10% of the reduced amount you charged yourself. Plus we’d probably lend you our A Boards and a lockbox and the booties as “your broker”. The screaming deal is the licensed agent who ends up selling nothing except his own house.
A better angle than hourly or results driven fee structure, and the real reason there are SO many licensed people in King County.
srini, the only problem I have with your hourly proposal is the thing I enjoy the most about not being an active attorney is not keeping track of my time. I have a couple of matters where I do have to track my time, and I hate it.
I disagree with hypothesis that it is the buyer’s money. Until the current system of doing business changes to where the buyer directly compensates the buyer’s agent, it is not the buyer’s money.
In accounting, finance, economics, and most often tax Substance over Form generally prevails for the treatment, recording, and reporting of a transaction regardless of the contract language. If the economic substance differs from the contract, then the economic substance is what matters.
In paragraph two, the discussion of the basic terms indicate a contract between the seller and the listing agent and the listing agent and the MLS with a cooperative agreement to share compensation with the buyer’s agent. The buyer is contracting to buy a house and is not contracting to compensate the buyer’s agent. The Form of the terms discussed indicates it is not the buyer’s money. The buyer does not directly compensate the buyer’s agent.
Everyone is not getting paid from the buyer’s money. The mathematical proof can be observed in the double entry accounting system used on the HUD form. The seller pays for their transactions costs. The buyer pays for a house and the buyer’s direct transaction costs. The debits and credits for each party balance. The seller pays the buyer’s agents fee. The form of the transaction is the seller paid the buyer’s agent. The substance is the same. Unless the buyer paid for a house and paid an additional amount directly to the buyer’s agent, it isn’t buyer’s money.
We can hypothesize house prices would be less by an amount equal to the buyers agent’s compensation if the buyer compensated his agent directly from the theory of tax capitalization (Oates, 1969). The theory of tax capitalization reports that homes with a yearly PUD special assessment that ends at some future date sell for an amount less than similar home just outside the PUD. They sell for an amount less that is equal to the present value of the discounted future cash flows. There is an observable problem with applying the capitalization theory to buyer’s agent compensation. There are observations in the residential market of one unrepresented party or two unrepresented parties negotiating the same price as two represented parties for similar homes indicating the FMV is the same regardless of how many agents are involved. In commercial real estate, direct compensation from the buyer to the buyer’s agent is becoming more common and the FMV doesn’t change. These observations seem to suggest the buyer’s agent fee paid by the seller is not capitalized in the price and it is the seller’s overhead transaction cost.
A NAR (probably biased) study indicates that unrepresented sellers typically sell for 10% less than the FMV. If the seller used a listing agent at 6%, then the seller would be 4% ahead (NAR). While unrepresented sellers like to believe they are knowledgeable on pricing, marketing negotiating, etc., the studies indicated they probably aren’t. If a property is overpriced when listed, it will take longer to sell and sell for less (up to 10% less) than if priced appropriately from the start. It gets stale and shopworn. Buyers new to market ask “What is wrong with it?” when it is finally priced appropriately (Yavas 1995, Glower 1998, Horowitz 1992, Anglin 2003). If unrepresented buyer’s are equally unsophisticated as unrepresented sellers, then are buyers paying too much because they lack an intimate knowledge of the pricing?
The idea of $200 an hour for billable hours is nice. $200 an hour fails to account for a lot. The typical Realtor(r) sells $2.5M with 6-7 transaction sides. That amounts to an average sale price of $416,k which is close to the average for the Seattle area. Assuming the agent earned 3% on each transaction the gross commission is $75,k. that is considerably more than the example of a $400,k house, 3% commission, and 1.5% to the agent. At seven transactions a year that is $42,k of gross compensation. I am going to be generous and say the agent keeps two thirds and gives one third to the broker. The agent recieves $50,k gross. In a 2000 hour year that is $25/hr. We are not done. The B&O tax is a gross receipts tax of about 2.5% depending on the city. The agent is down to $48,750. The typical agent direct and indirect overhead costs run 40%-60% for health insurance, marketing, advertising, legal costs, accounting/tax, supplies, etc. At 40% the costs are $19,k. the agent is down to $30,k. Most RE agents have self employment status. The real estate agent has to pay the Self Employment tax in addition to the Social Security, Medicare, and federal income tax. The agent is down to $23,k or $11 an hour. I think Starbucks pays a little better.
The reason the commission rates haven’t changed much is because the increase in number of new agents chasing a finite number of transactions in an industry with very few and very low barriers to entry. Agents have to charge the prevalent commission rate to make money. Agent compensation changes little for geographical areas when adjusted for the cost of doing business. Additionally, hot markets induce more new agents that compete for the finite number of transactions. As a result they earn about the same as agents in slower markets who have more transactions at lower price points and spend more time on transactions and less time on drumming up business. (study by Hsieh, 2003) The economic barriers to entry for education and licensing into the industry need to increase. The industry will have fewer mediocre agents.
Did the buyer who spent $1000 for an attorney and an airtight contract spend 10% too much for the house? Buyer paid FMV + 10% premium + $1000. Maybe the buyer should have hired a good real estate agent and an attorney? Buyer paid FMV + $1000.
Maybe the buyer should retian a good agent who retains a good attorney. the buyer’s agent pays the attorney to review each client contract as a benefit to the buyer? Craig and Ardell, who is paying the attorney? Seller? Buyer’s agent? The bank? the buyer? 😉
I am in West Toronto realtor team, so I am not neutral, but I hope I can say some words 🙂 I believe real estates is business like all other. You can sell/buy your house on your own, of course. But why all around are so many dealers? Why do you buy car not in factory, but from dealer? Why you buy holidays in travel agency? Because it’s convenient, safe and quick! And it’s the same for all business, including real estate. If there were no need for us, we wouldn’t be here…
# 30, Michael: YOU ROCK! Your arguments are exactly right.
$6K / 50 hours = $120 / hour (not $200 / hour). Agree with just about everything else.
“Given a median home price of $400k, the agent will make $6k. Assuming 50 hours of time, that’s $200 per hour. A little “extra
Some argue that the real estate commissions seem high to them.
What if you chose to be billed the actual time spent on your behalf by the real estate company and real estate agent?
Billable hours? What would we bill? All hours that real estate agents are called to work are not equal.
Here’s a look, with an example of what billable hourly rates might be:
* Meeting with seller or showing buyer various properties Mon – Friday, 9 – 5 pm, RATE SCHEDULE A ($150/hour)
* Meeting with seller or showing buyer various properties Mon – Fri 5 – 8 pm, RATE SCHEDULE AA ($200/hour)
* Meeting with seller, doing weekend open houses, or showing buyer various properties Sat/Sun/Holidays, RATE SCHEDULE AAA ($300/hour)
* Meeting with seller or meeting buyer Saturday night 5 – 8 pm to write offer, or discuss real estate, RATE SCHEDULE AAAA ($350/hour)
Incremental billings: Other meetings/conversations/clerical correspondence/faxes/: email, phone, mail: billed in 10 minute increments, billed at the $150/hour weekday hourly rate (for simplicity sake, since many of these emails and phone calls are after hours).
Let’s say we have a transaction of 50 ‘agent hours’ + 8 hours of incremental billings, and a client who rarely is available during regular business hours:
16 hours x $150 = $2400 A time (Mon – Fri 9 – 5)
16 hours x $200 = $3200 AA time (Mon – Fri 5 – 8)
16 hours x $300 = $4800 AAA time (Sat/Sun/Holidays 9 – 5)
2 hours x $350 = $ 750 AAAA time (Saturday night 5 – 8 pm, assume for this example the agent and buyer meet Saturday night to write this offer, spending 2 hours together)
Plus 8 hours of incremental billing: emails, phone calls, faxes, printing costs, etc. billable at $150 rate = $1200
GRAND TOTAL: $12,350.00.
Note: these rates are probably lower than what most would charge.
And, if the trend becomes fee-based, then billings lprobably include time spent no matter if a transaction results.
Real estate agents are just about the only professionals who are expected to work any/all of the 7 days, any hours between 9 am – 10 pm, and be available at least by phone or email nearly immediately. I see no way to successfully change the nature of real estate to a Monday – Friday regular business hours model. It’s just the nature of the job, because it works well for the consumer.
An average transaction might take 50 hours, others 30 hours, others 100+ hours. Scarcity of properties for sale? Multiple offers the norm? Don’t think for a minute the buyers agent only works a few short hours – they may have helped their client find, and write 5 offers, with no sale result.
A property selling in a week? The listing agent may have had 4 or more meeting with the seller prior to seller actually listing the property, including taking seller personally to see some of the comparable homes for sale. What happens ‘behind the scenes’ is not always evident.
Rarely is the majority of an agents’ “FACE” time with clients between Mon – Fri, 9 – 5, unless the agent works mainly with Builders, Relo Companies, REO’s and the like. And, I am not saying those agents should be working for less since they work less ‘intrusive hours’. No indeed.
Yes, there are some transactions that take far less time. And many that take more hours than you can imagine. Would you rather be billed, and find extenuating circumstances mean you need to use 200 billable hours? The real estate transaction is the goal, but you rarely can predict in the beginning how many hours it will really take.
Extenuating circumstances? You make 4 offers on various houses, and don’t get them for various reasons. 16 weeks later, you’re still actively looking at properties with your agent …
I mean really, are you going to really take your time to call 8 listing agents to arrange to see 8 houses each and every week? It’s much better time management to have your own agent, don’t you think? I know some buyers think they can see 5 houses and pick 1 to buy, but I wouldn’t recommend that strategy :-).
Or, if a seller, maybe you didn’t listen to your agents’ advice about pricing your house properly and it take 6 months or longer to sell … your billable hours could be really high (plus, you’d also be paying for advertising too).
Budgeting for the correct time spent by your agent can be difficult. Many find it easier to pay a commission, and many buyers simply could not afford to buy their properties if they also had to pay a commission out of their own pocket.
The market established commissions as a viable way to pay real estate agents decades & decades ago. Maybe longer. It’s the model used worldwide.
Today you can find agents willing to work with you on an hourly basis, or even a flat fee basis instead of a commission basis. I think that most people will keep wanting to use the commission model, but if you don’t – fine, that’s an available choice you can make. You can even go it alone, or have an attorney represent you.
Ain’t life grand? 🙂
Leanne wrote: “Real estate agents are just about the only professionals who are expected to work any/all of the 7 days, any hours between 9 am – 10 pm, and be available at least by phone or email nearly immediately. I see no way to successfully change the nature of real estate to a Monday – Friday regular business hours model. It’s just the nature of the job, because it works well for the consumer.”
Redfin. I think they’re pretty much 9-5. That’s what you get for 1%.
true on the last comment. as a buyer’s agent, trying to get additional info (or a redfin agent on the phone) on a redfin listing over the weekend can be a nightmare.
30 — Michael — great post. Excellent research and citations.
Craig — would be nice to hear some “real world” retrospectives from your clients who have been through this process with you, on listed properties, and without their own agents. If you have any.
I persist in thinking that there’s a bit too much fixation on agents’ commission and perhaps not enough on the actual merits of the house itself. Forest for the trees stuff. And that’s not trying to deflect attention away from my bread and butter, I think it’s just a better place for buyers to start — the deal for the house rather than the deal with the agents.
Gordon — Here are a few testimonials from previous clients who we helped to buy a house. We’ve accumulated these over the last 2+ years. Based on this anecdotal evidence, it looks like my pitch works pretty well in the “real world.”
Michael — the arrangement you suggest at the end would run afoul of the attorney Rules of Professional Conduct. Who is the client? To whom does the attorney owe a duty? What if the agent errs to the buyer’s detriment? What if the buyer is dissatisfied with the agent and asks the attorney whether he can get out of his committment to the agent? Who does the attorney counsel at the expense of the other? This comment — not uncommon among agents — points out one of the key differences between agents and attorneys: agents are comfortable acting as a dual agent to one extent or another; at the very least they generally do not appreciate the nuances and complexities of a “conflict of interest.” Lawyers, on the other hand, should appreciate these issues.
As to your larger point, Michael, you make a good argument (although links to your cites would be nice — like Reagan said, “trust, but verify”). My point is simply that buyers should have the ability to use whatever professional they want to use in their own attempt to get the best deal possible. Everyone is different and will approach the transaction differently. It’s unfortunate that we have a system so geared to one model (full service agent) whether or not the buyer needs the service or wants to pay for it.
What do you mean we can’t sue each other using the same attorney? That’s absurd.
None of the citations are from internet links. I prefer to read hard copy. Substance over Form can probably be found in any accounting textbook and from GAAP or Generally Accepted Accounting Principles. The accounting text will explain double entry bookkeeping used on the HUD. Citations for NAR can be found in NAR publications fairly easily searching the internet. The other citations are all from academic journals that pretty much never get printed in the mainstream press. I am fairly certain of the author and the year, but not the academic journal. The research papers can be found through one of the academic research search engines. I think you have to subscribe to them for a fee. The softcopy versions are usually in PDF. Some the research papers have to be purchased. Some are not available in soft copy or only the abstract is available in softcopy, so you’ll need to obtain a copy from the a library. I think the Oates study on tax capitalization is probably the easiest to find. The Oates research has been cited in probably +100 other research papers on many different topics from taxation, economics, 1031 tax deferred exchanges, etc. The other research papers might be harder to find. I would bet you can find hardcopies in a library at the UW.
Personally, I prefer only working on full service engagements. I agree with you clients should have a choice. I think each party should pay their agent directly.
Michael — well, I’m a little confused. If you agree with the larger point, then why dicker over the purely rhetorical point as to who “owns” the money paid to the buyer’s agent? Who cares who “owns” the money — the point is that the buyer is forced to pay — indirectly, as noted in the post — for a service the buyer neither wants nor needs, all to the benefit of the listing agent.
Besides, I don’t think there’s a legal or accounting dispute over the issue — clearly it is the seller’s money from both a legal and accounting perspective before it is paid to the listing agent. In retrospect, I could have put quotes around “your” and “buyer’s” when describing the money. The larger issue — that the buyer should not have to pay that 3% if they are not getting the service for which it pays, and on which we agree — is the point of the post.
The current system is flawed and each party should pay their own way. We both agree here.
I think what you are suggesting is the market values in general would be 3% less if the seller did not pay the buyer’s agent commission. For forget the legal and the accounting for now. Hypothesize that the economic reality is it is the buyer’s money and the price would be less if the buyer isn’t forced to pay it. Then Oates’s theory of tax capitalization could apply to the buyer’s agent commission. The seller paid buyer’s agent commission is capitalized in the price. The real FMV should be lower when the seller is not paying the buyer’s agent commission. The real FMV = price under the current system – seller paid buyer’s agent commission.
The hypothesis has a problem. When the seller is not paying for the buyer’s agent commission the residential market has just as many observations where the FMV decreased as did not decrease. In commercial, you are likely to find many transactions where the FMV did not decrease. I don’t think academics have studied the issue. The anecdotal observations suggest the seller paid buyer’s agent commission is not capitalized in the price. In other words, if we wake up tomorrow to find the law requires the buyer to pay their own way, the general market value will not fall 3% across the board.
Good arguments Michael. We all know that many buyers could not make their first transaction happen without the commission being paid by the seller. They agree in theory, to pay the buyers agent a commission when they sell in the future. Without first time buyers entering the housing market, the market may stagnate, so first time buyers with low cash reserves must be supported to reach the goal of ownership, and so that seller can move forward as a buyer to another seller.
Just as often, we also see buyers include asking a seller to pay their loan fees/closing costs in the offer made to seller. Even though an appraiser may note this fact when using this property as a comparable for another property, it doesn’t decrease prices by the amount of the closing costs.
Many like to argue just the opposite, that it ‘artificially’ increases prices.
Dual entry has nothing to do with the buy-side commission appearing on the seller’s side of the HUD statement. It simply reflects the fact that the seller agreed to pay commissions on the buy- and sell-side. Look at another post on this site that advises sellers not to agree to pay buy-side commission if a buy-side agent is not present. Then you would clearly see a single entry on the side of the seller for the sell-side agent. If a buy-side commission was paid, it would be credited from the buyer’s portion of the balance sheet.
Dual agency has a clear impact in listing agents continuing to promulgate the dual fee clause in their contracts with sellers. If I ask a RE attorney to represent me in the sale of my home (while using a flat-fee MLS listing service), the RE attorney will not contractually ask me to pay a buy-side commission. Only agents protecting their own interests demand or influence the insertion of a dual fee clause that gets paid regardless of the nature or existence of the buy-side representation.
Citing Oates Tax Capitalization doesn’t get you anywhere when numerous subsequent studies (e.g. Wales and Weins 1974, Church 1974, and King 1977) clearly demonstrate under- and over-capitalization due to misspecification of the tax effect and frequent assessment effects. Should you wish to continue to the FSBO point, the bias assertion of NAR must not be underestimated. Moreover, could you comment on how the NAR study estimated FMV?
As to the $200 (err $120/hour) statistic, surely the annual sales volume figures should be banded or regrouped for weekend warriors and full-time agents. Weekend warriors certainly pull the average down.
I dont know anything about Dual Entry. Double entry bookkeeping is the accounting system for record keeping in which the total debits equal the total credits. Double entry bookkeeping has nothing to do with the number of entries. One agent may reflect one entry one debit and one credit. Two agents may reflect two debits and one credit. Every line is accounted for with double entry bookkeeping. The reporting on the HUD proves a seller paid buyers agent commission does not belong to the buyer as there is no entry from the buyers side to account for the commission and no impact to the buyers balance sheet. There is a credit from the seller and two debits to the RE agent commissions. If there is no buyers agent there is still a credit to the seller and a debit for the agent commission. The number of agents may change the number of debit entries, but it does not change the double entry accounting system.
If a buy-side commission was paid, it would be credited from the buyers portion of the balance sheet. This is only true if the funds came from the buyer. You would see a credit to the buyer and a debit to the RE agent commission. Again, when the seller pays the commission then there is a credit to the seller and a debit to the RE agent commission. There is no impact on the buyers balance sheet.
Personally, I dont practice dual agency. I provide a discount to the seller when the other party is unrepresented. I strongly encourage the other party to engage professional representation from a competent agent or attorney.
Regarding tax capitalization, if subsequent papers indicate taxes might be included in the price or might not be, then buyers agents commissions might or might not be. The study by Quang Do and Sirmans, 1994 in the National Tax Journal is based on Oates 1969, Church 1974 & 1994 and King 1977. The Quang Do and Sirmans study indicates the amount of capitalization depends on the discount rate used to determine the present value of the future tax payments. If buyers agents commission are capitalized into the price, then the amount capitalized is dependent on the discount rate common in that location.
If I recall the NAR funded the study, but didnt perform the study. The researcher had access to the appraisal reports for the FMV. I am sure NAR cheery picked the data points to support their case.
By a listing agent [seller’s agent] agreeing to cut out the buyer agent’s portion, is this an attempt to keep the buyer in the dark about adverse facts that an unsuspecting buyer would be simply unaware of? Who is looking out for the buyer? Is the buyer being “penny wise and pound foolish
I just did one of these from the Open House on Sunday. Everyone is VERY happy and the place has a new heater, new hot water tank and many upgrades and better maintained than ANY other in the neighborhood. The 3% less was clearly a bargain for the buyer without costing the seller anything more. A great win-win-win. Inspection is Friday.
“When the are good they are VERY, VERY good and when they are bad they’re a horror” as the fairytale says.
Exactly, Ardell. You said “it did not cost the seller anymore
Is there such a thing as a “true” buyer’s agent in light of the system of compensation, where the seller pays the buyer’s agent, and the exact commission is not readily available to the buyer? We know that some agents will not show properties less than 3% SOC, and others will encourage their clients to buy properties with an SOC greater than 3%. Under those circumstances, is there any way to know who is a “true” buyer’s agent — i.e. an agent who will not allow this inherent conflict of interest to influence the counsel they provide?
A “true” buyer’s agent works without any consideration of commission. If, and that is a big if, the transaction closes, then the buyer’s agent receives compensation at closing.
“In light of the system of compensation”, the buyer bears some of the burden of real estate commissions through the sales price –whether a buyer’s agent is involved or not. The USDOJ & FTC have expounded in great detail; and, that is why they are such advocates of rebates.
However, if a listing agent agrees to cut out the buyer’s agent and surrender the 3% to the buyer, then one must ponder my aforementioned questions.
One can research the home buying process to a great extent and still miss many beneficial opportunities to save; only experience can extrapolate these opportunities on behalf of the buyer. That is why the prevalent consensus is “caveat emptor
“this leaves the buyer vulnerable.”
No…it left them with the property in a multiple offer situation. This buyer lost the last two properties she wanted. Didn’t get them at all. She has a 3% cushion. Maybe she would have gotton the house for 1% less if she used Redfin, but that was the agent’s 1% and not hers. So it didn’t cost HER 1% more…it cost ME 1% more 🙂
Ardell brings up a completely different point here: MULTIPLE OFFERS are still happening, with frequency, in today’s so-called “horrible market”. Buyers, if you’re sitting on the fence, you might want to rethink why you’re waiting.
** Supply of homes is good.
** The great ones still get multiple offers.
** Interest rates are excellent.
** FHA is a great way to buy today.
** Call your lender. There are lots of very favorable loans out there, and you DO NOT always need a 20% down payment.
In a few months will prices be lower? I don’t know.
In a few months will interest rates be higher? I think so.
Do you need to have your own representation, agent or attorney? I say yes. Get your own representation.
Learn the nuiances of a multiple offer situation, most of the time the listing agent will not be thrilled having you ask to have them be a dual agent, nor to have your offer be from an attorney.
Buyers or Sellers, if you want to be competetive? Then learn what you’re doing, and get yourself the very best agent or attorney you can.
BTW, I think we discussed this in this thread, but along with the changes that the NWMLS is making to the forms to comply with distressed property laws, they are also adding the SOC to the listing agreement form, so that it has to be separately broken out. That I think everyone would agree is a good thing.
(BTW, it apparently has nothing to do with the new law, but just something they’re doing since the form is being amended for other reasons.)
Leanne, maybe I’m missing something. Why are multiple offers good for buyers?
I for one am worry about whether a “buyer’s” agent’s priorities are aligned with mine. Since they are paid when they close the deal, would they really advise me to walk away from a bad deal if they thought they get me to buy? It could mean a lot more work for them. I am sure some agents would and some wouldn’t, but even with references and interviews with multiple agents, how do I know which category mine falls into?
Also, I am OCD enough that I will try to double check everything an agent tells me (or should tell me) about my $4 x annual salary purchase, so I am wondering if I really need a “full service” agent. I will do much of the research myself regardless.
If you worry about mulitiple offers to the point where you will only buy the ones that don’t have them, by definition you will only buy the property no one else wants. That’s OK…until you try to sell it.
Ardell, you are absolutely correct — multiple offers are not ‘bad’ for buyers, they well may be the smartest home a buyer can buy.
The absolute top properties have the most competition to obtain them, and in my 20+ years experience, that means that property is a smart one to buy, for tomorrow it is very likely to still be a hot commodity!
What a buyer needs in order to ‘win’ in a multiple bidding situation is a smart agent, their own advocate, someone who is on the buyers side. Cautious Buyer, your very name choice indicates you probably won’t be a buyer who chooses to go after and win a home in a multiple bidding situation (ie, ‘bidding war’). We don’t call it a war for no reason :-)!
What does a smart agent do for their buyer client, in multiple offers or otherwise?
** advise you on what price NOT to go over. Help you pick a line, draw it in the sand, and don’t cross it. You didn’t ‘win’ if you pay far too much for a property, keep that in mind.
** advise you on how to structure your offer in ways that will be strongly appealing to the seller and the sellers agent. Price, terms, fast closing date, short inspection timeframe, things like that.
** writes a clean, crisp offer. NO LOOSE ENDS, NO SLOPPINESS.
** Personable – if the seller hates your agent because they are too pushy or whatever, your offer isn’t likely to be the winner. Your messenger counts for a lot.
** Consider too, is your agent well known to other agents, and well respected? That also can be the reason your office gets accepted. If the sellers agent can say to their seller “gee, I’ve worked with this agent before, and they do a really great job”, that’s going to help your offer. A lot.
And there are other things, but Cautious Buyer, don’t be too cautious with choosing to work with an agent. Find one who comes highly recommended, allow them to help and guide, and teach you, and educate you. Once you feel educated, you’re not going to feel like your agent is working against you, you’re going to feel like you have a real advocate to learn from, and to lead the way towards owning your first home.
What you qualify for is going to be up to you and your lender – not your agent. And, your agent certainly will have some excellent lender contacts. Talk to those people too.
The right buyers agents priorities are definitely aligned with yours. Once you pick your agent, hopefully, you will have a great experience, and want to work with that agent every time you buy or sell in later years.
That’s one reason to ask friends and relatives for referrals – and if they used the same agent for more than one transaction, I’d sure recommend meeting that agent.
The Washington Post gives home buyers the “heads up” on how a real estate transaction works in the real world.
“Some people just don’t like working with agents. Other buyers go without them thinking they can negotiate a better deal on their own by working directly through the listing agent. Often they think that by working on their own, they are entitled to a discount on the sales price equal to what the buyer’s agent would have received as commission. But the payment structure doesn’t work that way. In that situation, the seller’s agent just keeps the whole commission.”
Craig, I appreciate your insight and the ability to speak out to assit others. I was approached by an agent in 1999 when trying to sell my house on my own, without much success. He stopped me in the yard and said if I agreed to let him list the home he would charge only half the broker fee if he could sell my home within 30 days. I agreed and moved out so they could have open house. Sure enough during the open house a couple happened to see the sign out front, stopped look, liked the house and told his assitant who was showing the house on that particular day to write up the agreement. The assistant gave them a card of an agent in neighboring community and said call this person and he will write it up.This is what is confusing for me. The new agent, drafted the agreement as being the sellers agent and the man showing our house became the buyers agent. Since he was not the seller, he said we were not entitled to half the broker fee. We were living 1200 miles away by then and did not know what to do but agree. His assistant let the cat out of the bag when I called to inquire as to how they happened to find a buyer. The assistant told me that a couple happened to stop in, liked the place and said write up the agreement. Thanks for you advise.
I actually used this route back before I was a real estate agent, when I sold my second home and purchased a new one. Obviously not your traditional method and something most people probably wouldn’t be comfortable with… But the advice here is good and if followed correctly could save you thousands of dollars
$6000 over 50 hours is $120/hour. Perhaps you meant to say $6000 over 30 hours is $200/hour? Either way, I agree the listing agent should do a little extra work to earn the massive paycheck. It’s more than most salaried employees earn and we work overtime for FREE when requested by our bosses!
How ironic that an attorney who’s profession is to represent people would advocate that a buyer conducting the largest purchase of their lifetime would do so without proper representation. Yes, an attorney will draw up the paperwork for the buyer, but the attorney is not going to spend 30-40 hours conducting the numerous tasks that have to be accomplished or supervised to successfully close a transaction.
There’s an old saying, “Let the buyer beware”. What good would it do a buyer to save 3% if a good buyer’s agent can negotiate 5% off the seller’s asking price. Also, a good buyer’s agent starts working in the buyer’s best interest the first day they meet. This includes helping them get a loan with the best terms and the best type of loan, ex. VA, FHA, Conv. etc. A good buyer’s agent doesn’t end their duties until the transaction is closed. This includes dealing with the numerous complications that can come up during the closing process. This is where your attorney lets you down. Your deal dies and your back out looking for homes again. All because you thought you might save 3%.
Any buyer that buys a home without their own licensed, experienced real estate professional is doing themselves a disservice and deserves whatever they get.
We’ll have to agree to disagree on whether a buyer is sufficiently represented in a transaction when using a lawyer instead of a real estate agent.
Why are you assuming that an agent will be a better negotiator than a lawyer? That seems dubious to me, I think the best we can assume is they are both competent. So there goes your “5%” savings.
Yes, a broker provides value that an attorney does not, no dispute there. But at a substantial cost. Rational consumers can – and will – weigh their own circumstances to make that determination on their own. To call that a “disservice” to themselves is neither accurate nor fair.
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