Suppose you contacted me to discuss my helping you sell your home or any piece of Real Estate. What would you think if I told you that I could greatly increase your proceeds by reducing what you expected to pay me by my not using a portion of my fee to pay the agent representing the buyer? Would you be thrilled or skeptical?
There are different business models for compensating Real Estate agents. Our rules and regulations require that we disclose how we are paid and that the fee is negotiable. Having the seller pay a negotiated commission or fee to their listing broker/ agent at settlement or the closing of a sale remains the most common. In turn, the listing broker would offer compensation to the buyer broker/ agent who got the property sold and settled. That offer is an incentive to show and sell Real Estate.
While that business model makes sense and has worked for years, as I will explain, over the years many have questioned having a seller provide the compensation that would ultimately end up paying the buyer’s agent. That “question” finally caused enough of a stir that a major change has occurred with respect to compensation.
My local MLS, and I suspect many others, adopted a change to how properties are listed in the MLS. As stated in a recent release to agents, the MLS now will “allow users to enter any amount in a listing’s cooperative compensation fields. Prior to this update, the cooperative compensation fields required entry of at least one cent….. the fields will allow any amount, from zero and up.” The release went on to explain the change as allowing “subscribers to engage in transparent negotiations with their clients.” That seems logical, doesn’t it?
Real Estate agents have two commodities to trade for the opportunity to earn a fee or commission. One is our time, meaning that any time we devote to developing leads and working with prospects, customers and clients has to be invested wisely as the amount of time we have is finite. Time management is one of many topics we have to master. How much is our time worth? Can we differentiate between important tasks and urgent ones? How is our time best spent? Some agents have a better handle on this than others.
One of our challenges is to evaluate which clients to accept based on the likely outcome of our working for them. It boils down to probability: am I likely to sell a client’s house or is a buyer likely to buy a house? Of course, this is a “people business”. Nothing is guaranteed and we will all spend some time for which we know we will not be compensated. The goal is to manage our time as best we can or at least recognize when “time” spent is becoming a concern such as when it distracts us from more efficient and effective pursuits. It can be a balancing act. Of course, discrimination is NEVER acceptable.
The other commodity we have to trade is the combination of our experience, training, education, knowledge, ability and resources. Our actual experience is only one part of the equation as some of us spend a lot of time, money and effort to continue learning so that we are better prepared to protect and promote the best interests of our clients. While some clients may be more self-sufficient than others, perhaps minimizing what we need to do for them, others are less so and will need more of our time as we advise and counsel them.
One of the basic requirements of Real Estate is that commissions are negotiable. In fact, when a group of agents get together we are NOT allowed to discuss commission as doing so may be perceived as collusion. Offices and companies set their rates or fees and may or may not allow their agents the flexibility to charge what they can or need to in order to acquire clients. There is more to our fees than simply comparing one company to another. Are we a valued and unique resource or just a commodity?
Since my first day in Real Estate I have heard that our fees were under assault. Different business models have come and gone, each trying to capture market share. Many which focused on low or “discounted fees” compared to their competition have not survived. This often involved eliminating or limiting certain services such as “representation” to offset the lower fee, perhaps even going below our minimum standards established by states and, if the agents are REALTORS, the Code of Ethics, for representing clients. This is not retail; it is a service business. Some consumers do not value our services as highly as others, reducing our role to preparing documents and unlocking doors, while others demand a lot of our time, seemingly expecting to learn everything we know regardless of whether or not their situation requires it or how serious they are about selling or buying.
The word “commission” is an interesting one as is the concept of only getting paid when a house is sold and settled regardless of how much time and effort we have invested or whether or not the seller and buyer were really motivated to get it done. Many sales fall through when a buyer cannot get a loan or when the two parties cannot agree as to how to address an issue such as a home inspection list. Sometimes people just “change their mind”. Even if a sale falls through during or just prior to settlement, there is typically no compensation paid. That is part of what we have to accept when we enter Real Estate. Some companies collect part of their fee upfront to offset the impact of sales falling through. That is an option that a client has to evaluate when considering whom to “hire”.
The commission or “fee” is a marketing expense, a cost of doing business. The real question is can we achieve an outcome for the seller that offsets and justifies our fee or could they have achieved the same result without our services? I understand that buyers and sellers would prefer to pay less rather than more. Everyone likes a bargain.
From the buyer’s perspective, many sellers indirectly pay the buyer’s broker/ agent through their listing broker although the fee comes from the funds offered by the buyer. From the seller’s perspective, the less they pay, the more they walk away with. If we are just a commodity, meaning “all the same”, the goal should be to pay as little as possible. However, we are not all the same: some are better; others worse!
What is the reality? Some sellers will select an agent based solely on their fee. I subscribe to the philosophy that you get what you pay for. If an agent is willing to accept less than their competition or if they need to charge less to attract business, perhaps they are not as capable of earning the trust and respect of prospective clients let alone achieving the same results as their more expensive competition. Sellers might want to question the negotiating skills of an agent who accepts a lower fee to acquire a new client: how hard will they negotiate your selling price? Of course, in some markets houses sell fast regardless of marketing while, in others, selling seems impossible. Everyone needs to know their local market!
Respectfully, sellers need to know their competition and how the market works. Part of the fee negotiated and earned by the listing broker will be offered as an incentive for buyer agents to want to show and sell the listing agent’s property listing. The amount offered is determined by the agent and the seller but, if it is not competitive with other listings that a buyer’s agent might show their clients, the seller’s house might sit on the market longer than it should. Houses with a high “days on the market” can become stigmatized, meaning that buyers and their agents wonder why someone has not bought it. Even worse, houses that go under contract and then come back on the market may be thought to have repair issues. Houses that do not sell often require a price reduction to generate interest. How does a price reduction compare to the fee the seller thought they saved?
Assuming that a buyer has “hired” an exclusive agent to represent their best interests, the buyer and their agent should have agreed to a fee owed to the agent at settlement. “Hiring” a buyer’s agent, as with “hiring” a listing agent, technically requires a contract spelling out the agreement and how the fee is earned. A handshake or verbal agreement may not be enforceable.
If the contract allows the buyer’s agent to accept compensation from the listing agent, it may well include a provision that requires the buyer to personally make up any difference between what they agreed to pay their agent and what the listing broker is offering in the MLS. The question then becomes why would a buyer pay “fair market value” for a house and still be willing to pay a portion of their own agent’s fee? While there are ways to address this, a buyer may simply avoid the situation by requesting NOT to see houses that may require their own “contribution”. As a listing agent, I want buyer agents to want to show and help me sell my inventory! Money is a great incentive! Few sales involve “dual agency” meaning having the listing broker or agent produce the buyer for their own listings but that is beyond my focus here although I have Blogged and Podcasted about it.
One idea I hear from time to time is that the seller and buyer should each compensate their own agent. I recently posted a Blog and a Podcast covering that topic. It sounds simple and fair, doesn’t it? Does the typical buyer have the funds to do this? In my experience, buyers are really financing their own agent’s compensation as part of their mortgage. The fee paid to the listing agent comes from the sale unless the seller owes more than their proceeds.
In addition, historically, meaning prior to the change mentioned at the beginning of this post, our regional MLS required listing brokers using the MLS to advertise, expose and promote their property listings to offer some amount of compensation to the buyer’s agents who successfully “procures” a buyer for their listing. The answer for some brokers is to keep their listings off the MLS rather than having to compensate the buyer’s agent. These are called “office exclusives”. Can the listing agent offer the same exposure as the regional MLS? That is doubtful especially since no “public advertising” is allowed for off-MLS listings. Exposure creates competition! If they cannot generate the same exposure, will the seller achieve a lower selling price? If so, how does that loss compare to the perceived commission savings? Either way, listing agents should respond to all inquiries even though they are not offering compensation. I doubt that any seller, even those not willing to compensate a buyer’s agent, would expect their listing agent to prevent buyer agents from other companies from showing their property to their buyer-clients. That would make no sense.
When I talk to prospective seller-clients I need to gather information. Prior to our actually meeting, I need to learn what I can so that I can prepare a market analysis for their house so that I have some idea about the possible range of asking and selling prices. I also check the compensation offered to buyer agents and share that information with my prospective clients. At our meeting, I need to walk through the house to see how it compares to others on the market, “under contract” and recently sold so that I can better assess its marketability and pricing. In addition, I need to discuss the seller’s motivation: are they more focused on the price achieved or the length of time it takes to sell, their expectations as far as asking and selling prices and whether we can work together. There is a lot more to taking a property listing than just signing paperwork. I need to make sure that my clients understand the market, the process, the paperwork and how and why I do what I do. A significant part of this is explaining the commission and how it works: it is more than just an expense. Do they understand the need to compete with other available listings, do they value what we do and do they value my time? If not, I need to make a decision as do they.
I have read a number of studies and articles over the years and reviewed thousands of MLS printouts for properties that did not sell and believe that the amount of compensation offered to buyers’ agents has an impact on showing activity, how long it takes to go “under contract” and the eventual selling price. This does not mean that there is no room for negotiation. I have at times been willing to accept less for my role but will not risk harming a seller-client by not having what I offer a buyer agent compete with comparable available listings.
While I respect different business models, I have two concerns about a seller and listing agent being able to market a property without offering any compensation to a buyer agent. Generally speaking, I am not sure that all agents adequately explain what we do, especially when it comes to the matter of compensation. I have spoken to many sellers whose prior listing agents did not offer a competitive fee to the market. Many of these sellers claimed that they only saw the chance to save money without understanding the ramifications. How many agents will suggest offering no compensation to buyers’ agent under the new rules? How many sellers will only see added proceeds? That remains to be seen.
In addition, I see a problem on the buyer side. I have previously taught the required core course for the ABR, or Accredited Buyer Representative, course. Every time I taught the two-day course, we had discussions about using the approved representation contract and I always had one or more students say they did not use them. That led to further discussion. Of course, our rules and regulations require using a formal contract to represent a client. Absent a contract, you are working with a “customer” and the list of what you can do is greatly diminished. The most significant part of the relationship affected was the compensation: if an agent did not have a written contract specifying their fee and how it was earned and paid, the agent technically had to accept whatever was shown in the MLS at the time a purchase offer was presented to the listing agent. While there was a general range of such compensation that I have seen over the years, it was NEVER ZERO.
I have heard and understand that some buyer agents are intimidated with the process of getting a contract signed and that some buyers refuse to sign one. I suspect that will continue as long as some agents are willing to work without a contract. However, I do not suspect that listing agents have the same mindset.
Imagine being a buyer agent working without a contract who has one or more “customers” who want to see properties with no offer of compensation. Will they show them? Will those properties sit on the market unsold and accumulating “days on the market”, perhaps needlessly reducing their asking prices?
Call me a dreamer but perhaps buyer agents will ultimately stop working without a formal contract and being willing to accept whatever a listing agent thinks their time and effort are worth. The problem is what happens “in between”?
As I hope I have explained, there is much more to selling Real Estate than deciding how much commission you want to spend. The fee is a marketing expense and a cost of doing business. Owners may try selling on their own but without professional representation they may lack the expertise needed to navigate the selling process. Without the MLS they may lack the exposure to the public that creates competition.
In the most common business model, sellers only pay us if and when we succeed. Studies over the years have shown that houses offering lower commissions to buyer agents tend to take longer to sell. While we all want to save money, there is nothing wrong with that, but signing a listing contract based on a low commission may not work. I have seen the same result time and again: a low commission is offered to buyer agents, those houses may get shown but not sold and the listing agent asks for a price reduction which more than likely offsets any perceived commission savings. While the new price may appear attractive, the commission has not changed so the house may continue to sit unsold. Be careful what you wish for!
Remember, when it comes to selling or buying what is typically your biggest asset and largest overall investment of money, time and effort,
There is no time for inexperience, empty promises or false expectations!
HIRE WISELY: We are not “all the same”!
Andrew Wetzel's Musings 