April 26, 2007
Stuck in the last century: Real Estate Transactions
The Internet has done wonders in getting information to people. In terms of commerce, it’s really done an amazing job of reducing the “matching” problem - connecting buyers and sellers. It’s done a great job and reducing the need for a middleman, enabling buyers and seller to have better results. Plane tickets, hotel reservations, clothing, computers, insurance, contact lenses…
And then, there’s real estate.
A former colleague of mine tried to buy a house recently without an agent - here are some relevant quotes from his most excellent and informative tale:
Mike’s Lookout » Blog Archive » Adventures in Real Estate - Buying without an Agent
In January, I embarked on a quest to buy a home without using a real-estate agent. The reason for doing so is not because I thought that agents have no value, but just because I didn’t value their services at their asking price of $35,000-$45,000. (3% of $1.5M is $45K) There are very few things that I ever spend that much money for; and a few weeks of part time service from an agent does not seem worthy of that price. $4K to $5K seems like a more appropriate price.[snip]
The offer is the hardest part of the process for several reasons. First, you may be dealing with an Agent that is fundamentally opposed to buyers working without agents. While Agents are legally required to present your offer to the seller, they are not required to put a positive spin on it. So, when you run into these agents, your offer is may be rejected just because you don’t have an agent. I had this happen to me at least once. The Agent first claimed that what I was doing was illegal. When ultimately convinced that my offer was legitimate, she took it begrudgingly. Nonetheless, the offer was rejected.
[snip]
In my case, I was ultimately not able to buy without an agent. We put in four offers on our own, none of which were ‘low-ball’ offers. Three of the four offers were for over-asking, and one offer was for more than $100K over the asking price. However, all four offers were rejected.
Unfortunately, each offer we made was accompanied by at least 4 offers from other parties. When the seller has multiple offers to select from, unless your offer is considerably higher than the others, the seller is likely to take a ‘traditional’ offer in favor of yours. From the seller’s point of view - and this is fair - your offer is riskier. You don’t know the process as well as an agent does, and maybe the reason you don’t have an agent is because you are less serious than other bidders. The seller doesn’t want the transaction to fall through, and taking someone else’s offer may be the safest bet, even if they are leaving a small amount of money on the table.
So, in conclusion, I don’t think you’re likely to buy a house without an agent if there are competing offers. If yours is the only offer, I do believe this process can work, but it is a lot of work to you.
Sadly this tale isn’t uncommon. In fact, instead of looking for ways to enable the Internet to provide more information to people - well… look at what’s going on: Arizona is trying to ban Zillow. Real Estate brokers refuse to show properties to people using discount brokers. There was even a story (can’t find it right now) about Realtors hiding properties that were listed by For Sale By Owner folks. All to, presumably, protect their old way of doing business and serving as a middle-man.
I’m not sure that we can count on our government to fix this situation anytime soon - look at #11 on this list:
LobbyWatch - The Center for Public Integrity
# Companies and Organizations Reported Lobbying 1 Chamber of Commerce for the U.S.A. $204,614,680 2 Altria Group Inc $101,220,000 3 General Electric Co. $94,130,000 4 American Medical Association $92,560,000 5 Northrop Grumman Corp. $83,405,691 6 Edison Electric Institute $82,866,628 7 Verizon Communications Inc. $81,870,000 8 Business Roundtable $80,380,000 9 American Hospital Association & State Affiliates $79,205,772 10 Pharmaceutical Research & Manufacturers of America $72,720,000 11 National Association of Realtors $68,810,000 12 ExxonMobil Corp. $59,672,742
(And before someone calls me a hypocrite, yes I do realize that the company I work for shows up 12 spots below on the list.)
Now I’m sure there are honest and ethical real estate agents - that it’s a few bad apples that are spoiling the cart with their bad behavior above… but in this day and age, should real estate agents be like travel agents - moving up the market by serving those who have very specialized needs?
If you can trade stocks for free now, why do you still have to pay 6% to sell a home?
Finally, as a buyer, this should definitely concern you - after all, as Mike notes - you’re paying for this 6% for the life of your home in the form of taxes:
The saddest part of real-estate commissions is that you pay them every year after you purchase. In addition to paying $90,000 up-front for real-estate agents on a $1.5M home, you’ll also pay $1080 each year in increased taxes as long as you own your home, since the agent’s fees are rolled into the assessed value of your home!
(Note: for non-Californians, a $1.5M home isn’t unreasonable. Click here to see some.)
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5 Comments to “Stuck in the last century: Real Estate Transactions”
April 27th, 2007 at 6:45 am
Hi, I am a real estate agent in CT. And unless you’re buying a home which is for sale by owner, and the seller refuses to pay a commission, most of us don’t charge buyers for our time. And, although the commissions may seem steep. We as agents don’t get the whole 6%. Our broker, and the sellers broker split the 6% (usually 50/50), then we get our share of our brokers 50%. (On average an agent gets 1.5%). Also, from an agents end, once you start working with a buyer, most have a tendency to think that they own your time. And do you know how many deals would fall apart without a hard working agent. So many times, I’ve been at a picnic, or a family event, and I have to spend hours of what should be my free time, calling this one and that one, trying to work things out so that everybody is happy. (This is not time spent with you, so you are unlikely to realize exactly how much time your agent spends on you). Most real estate agents work way more than 40 hours per week and there is no salary involved. If you don’t sell a house, you don’t make any money, all you do is spend both your money and your time. So, the commission is not unreasonable. It’s not like you sell a house every week, and especially not a 1.5 million dollar house. A house that expensive usually stays on the market longer. You spend more on marketing, more Sunday’s doing open houses, and more time between all of the work and the paycheck.
And although this is a bit off the topic. Don’t forget about all of those buyers that we work with for months, and then they decide not to buy. Or the buyers that have a hard time making decisions. I spent a year showing a client house after house driving all over creation. They made 7 offers and changed their mind after the offer was made over and over again. Finally the 8th offer stuck, but it was a nightmare of negotiations to make that one work. All of this for a $3000 commission.
So, without those occasional big commissions, this job would definitely not be worth the headaches involved. And if Realtors start quitting, and become a rare commodity, then the consumer will have a much harder time with real estate transactions.
April 27th, 2007 at 8:44 am
We got our house without an agent, but only because the sellers wanted to sell on their own to save the 6%. In then end they used a friend of the family and paid something like 1% for him to do the final paper work (still a great deal for the agent), and we were able to actually buy a place in CA because the pricetag was 5% lower that it would have been with an agent (the sellers had a dollar amount they wanted to pocket when it was all over).
April 27th, 2007 at 10:51 am
>We as agents don’t get the whole 6%. Our broker, and the sellers broker split the 6% (usually 50/50), then we get our share of our brokers 50%. (On average an agent gets 1.5%).
No offense, but that’s a problem with your compensation scheme. It’s not my problem. Should I feel bad for the used car salesman because he only makes $300 while the owner makes $2000 on a sale? Should the McDonald’s employee be outraged that he makes less than his employer?
>And do you know how many deals would fall apart without a hard working agent.
How’s that different than for used car salesmen? That’s an inherent risk of the occupation - because the reward is pretty high.
>A house that expensive usually stays on the market longer.
That’s not true here in California. Did you not read the post I cited? These $1.5 million dollar houses had multiple offers. Sounds like they practically sell themselves to me.
>And if Realtors start quitting, and become a rare commodity, then the consumer will have a much harder time with real estate transactions.
No it wouldn’t. There’d always be Real Estate Attorneys who work on a per hour fee. Even if the Attorney’s bill came out to be $5k, that’d still be less than the commision on a typical Californian house.
Finally, let’s assume that I agree with your arguments and that big commisions are required. In Q1 of 2001, the median home was here in San Jose was $480,000. That means if you sold a median home, your employer could make $28,800 (6%) while you made $7,200 (assuming 1.5%).
Fast forward to Q1 of 2006 - the median home here in San Jose is now $642,000 - which means that your employer would make $38,520 (6%) while you would make $9,630 (assuming 1.5%).
Inflation calculators indicate that the growth should’ve only been 17%. How do you justify the value add of your services to explain the 34% increase in expenses?
June 15th, 2007 at 10:18 am
Dennis, I bet Microsoft pays you a pretty good salary, plus benefits, sick time & vacation to do what you do. How hard can “Program Manager” be? Even though it looks pretty simple, I don’t want to do it and I don’t begrudge you the money you negotiated for your services. Why do you feel that way about Realtors? If you believe that Realtors make “easy” money, give it a try. Actually, you did give it a try & it wasn’t as easy as you thought, right? As for agent compensation, you’re not getting it! the entire 5% (6% is Looong gone as a “standard” compensation) does NOT go to one broker. The seller’s broker splits 5% with the buyer’s broker. Brokers do not “employ” agents. Agents are independent contractors with no salary or benefits. The agent who works for either brokerage negotiates a compensation split with their respective broker. So an AGENT generally makes around 1.5% of the sale price. Believe me, without brokers, VERY few homes would be sold. Neither buyers nor sellers have access to the local MLS, which, despite Realtor.com, is responsible for the vast majority of home sales to local buyers. Hell, Realtor.com wouldn’t exist without the MLS - which is paid for BY AGENTS. Agents pay for ALL of the professional marketing that sellers need to sell their homes. That money comes directly out of an agent’s compensation. Did you know that more nearly 80% of all FSBO sellers eventually hire an agent? That’s because, without broad exposure that brokers & agents PAY FOR, buyers won’t find the FSBO house. Buyers don’t have time each & every day to drive neighborhoods, knock on doors or send letters & e-mails to potential sellers to find the house they want. (Most of them use a Realtor - for free - to do that) In addition, both parties need representation during a transaction. There are literally hundreds of points within each contract that can be problematic should one party or the other be either dishonest or uninformed - especially in California, the most litigious state in the nation. Paying the agents up front saves each party potentially multiple times more money down the road in a possible lawsuit. Attorneys do not find it worth their time, or obviously they would be in the real estate transaction business! Some transactions are easy, some are hard but they tend to balance out over the long haul. You bought ONE home - obviously an easy transaction. Your realtor hopefully has done 10-12 transactions in the past year at least. Most Realtors earn their money - but there are those bad apples who re-enforce the “not woth the money” stereotype. I do, however, agree that the buyer should not have to pay property taxes on the amount of agent’s compensation that is included in the sale price. That’s just not fair.
June 16th, 2007 at 12:30 am
The point you make about Agents vs Brokers is a good distinction, and I should have been more clear about that. This piece should have been about why the idea of having Real Estate Brokers should go the way of having Stock Brokers.
>Hell, Realtor.com wouldn’t exist without the MLS - which is paid for BY AGENTS.
To be clear, Realtor.com is owned by Move.com and is the official site of the National Association of Realtors, so I’m not sure what your point about Realtors paying for MLS is. Regardless, it’s certainly true. But let’s face it, even the Department of Justice has some thoughts about how MLS is run:
http://www.usdoj.gov/atr/public/press_releases/2005/211008.htm
JUSTICE DEPARTMENT SUES NATIONAL ASSOCIATION OF REALTORS FOR
LIMITING COMPETITION AMONG REAL ESTATE BROKERS
It’s mostly about the MLS.
>Attorneys do not find it worth their time, or obviously they would be in the real estate transaction business!
I’m a bit perplexed by this statement. How would you explain Real Estate attorneys. There’s plenty of them too - though I must say that in New York, there were far more. How about this: what if instead of using brokers/agents, people simply bought and sold real estate online, and then completed the transactions with lawyers who charge only about $1000. Seems to me like a savings of $40,000 or so by all parties involved might just be worth it.
FWIW, when I do buy a place, I will definitely be using an attorney - regardless of whether or not I use a broker/agent. You’re right California is notoriously litigious, and real estate is complicated, and that’s why I want an attorney that has passed the bar exam to represent me.
It may sound harsh that I’m saying that we should do away with your job - but if there were less government interference, the market and the internet would do away with your job. (Like travel agents.) But to be fair, globalization is pretty close to doing away with my dad’s job, and will one day do away with mine. That’s how we move forwards.
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