Big Bucks to Buyers: Part I
In the last few years, coincident with the growth of the Internet as a real estate search tool, a number of real estate firms have begun to offer rebates their buyer clients. The firms offering rebates range from venture capital-backed national startups like zip realty, to small local firms like ours, Realty Advocates.
In the pre-Internet days, the information about homes for sale was very tightly controlled by local boards of Realtors with their wholly owned Multiple Listing Service. With the exception of newspaper advertising, buyers needed to work closely with an agent to learn about the inventory and closed sales. Agents are where buyers would also find out about local schools, crime statistics, neighborhood demographics, and where the best coffee shops were. Agents used this monopoly of information to justify their value in the real estate transaction. That value was reflected in the the buyer’s agents share of the total sales commission, usually between 2.5-3% of the sales price.
The Internet has changed all this. Nowadays, all the formerly proprietary or hard-to-find data is freely and easily available on the net. Homebuyers can search virtually all the available listings of all the real estate companies on a nationwide basis. This means that agents spend much, much less time with buyers prior to making a purchase offer and ultimately closing a sale. But has this reduction in the workload translated into any transactional savings for either buyer or seller? For the most part, no.
Traditional buyers agents now earn the same commissions while doing about half the work! Luckily, for buyers at least, companies like Realty Advocates accept the new realities of the Internet and offer buyers commission rebates of up to 1.0% of the sales price, depending on the price of the home and what commission is offered by the seller’s agent. For our Piedmont buyers, for instance, where the median price home is $1,500,000, they would receive a check from us at closing of somewhere between $7,500 to $15,000. No other local real estate company, with the same level of experience and expertise, offers such generous rebates as Realty Advocates.
Despite the fact that more and more buyers are using the Internet to find a home, they still need an agent to represent them. One choice is to go directly to the listing agent. Usually this decision is linked to the expectation that this gives the buyer an “inside track” because the agent now has double the incentive to have this buyer succeed (i.e. not having to share the commission with another agent). However, usually the opposite occurs: an agent is only as successful as their reputation with other agents. If other agents believe that any favoritism was given, the listing agent’s reputation would immediately suffer. A listing agent also representing a buyer for the same house (known as dual agency) will therefore go to some length to insulate the two from each other, usually utilizing the managing broker in the office to act as a go-between
Another reason some buyers go directly to the listing agent is they figure they can represent themselves and receive the entire buyer-side commission (typically between 2-3%). The listing agent will quickly shatter that dream. The only buyer legally qualified to receive part of the commission is a buyer with a real estate license. Even an attorney would not qualify.
This leads us back to the buyer looking for an agent to represent them. Since there are agents offering commission rebates to buyers, should you simply hire the one that gives the largest rebate? The obvious answer is no. Finding the right house for a buyer is by far the least important part of a good buyer’s agent job description. A good agent needs to intimately know the neighborhood market conditions and this is knowledge that does not come from a distance. To labor the point: real estate is LOCAL, and a buyer whose agent relies largely on MLS statistics is a buyer who is not getting very good advice.
Aside from knowing about a market up-close, a good buyer’s agent is someone who can advise about the actual condition of the house, both of its defects and its attributes. A good agent knows what current remodeling construction costs are, about the difference between a repair and an improvement, and what the neighborhood “upside” may be.
A good agent also knows what the local customs are regarding disclosures. For instance, in the Berkeley/Oakland market, the listing agent will almost always provide a disclosure packet for the buyer to read before submitting an offer. I can’t tell you how many times I receive offers where the buyer’s agent hasn’t even bothered to ask for the disclosures. Lots of times, the agent hasn’t even visited the house. How credible will this buyer’s offer be? Not very.
While were on the subject of disclosures, a good buyer’s agent knows not only to request them in advance of an offer, but how to read them. Nowadays, it is not uncommon for these packets to be over 100 pages long. Some of the material provided is pro-forma and boilerplate, while other material can be extremely consequential and specific to the house. These important pages are often buried within the not-so-important. A good buyer’s agent will know what to look for and how to interpret it.
How about negotiating skill? This isn’t something one learns in a book, but rather comes from many years of experience. Again, lots of agents offering buyer rebates are relatively new in the business. This skill is not easily obtained and can takes years, and literally dozens of transactions, to fully grasp.
The moral of the story is that if a buyer has found a house to make an offer on and is shopping for an agent, yes, look for someone who will offer a commission rebate. But among the agents doing so, pick the one that has the most experience, neighborhood market knowledge, and the time to visit the house with you prior to writing your offer.
In the Albany/Berkeley/Oakland/Piedmont market, Realty Advocates, with over 20 years of experience, would be a good choice. Recent buyer Kristine Starr had this to say of her experience with Realty Advocates: “Right from the beginning, I was impressed with Brett’s market acumen. We were in a competitive offer situation, and Brett’s experience and calm counsel directly resulted in us not only getting the house but at a price below what we were willing to pay. He also rebated a good part of his commission, all of which made us realize how lucky we were to have him as our agent.”
It’s a fact: a growing number of agents rebate some part of their commission to the buyer. Combine this with another fact: many agents pay a hefty referral fee for new business, whether to other agents or through a relo company, of usually between 20-35% of any commission eventually earned from the referral. Now with all this money being given away, it begs the question: where is this money coming from, and why is it being away?
The money, of course, comes from the seller, who signs a listing agreement, agreeing to pay a commission and authorizing/instructing the listing agent to offer, usually half, of the total fee to buyer’s agents as an incentive for them to bring buyers to the house.
But at some point, sellers are going to realize that this is a pretty crazy system. Take a million dollar listing, with a total commission of 5%, or $50,000. The buyer’s agent share would be $25,000. Now, if the buyer’s agent has to pay a 30% referral fee, that equals $7,500. So the seller is paying $7,500 to someone who has nothing really to do with the sale of his house. That’s a lot of “fat” in the system, so it shouldn’t come as a surprise that new business models are emerging to make the process more “lean.”
But its not all so new. Agents like to complain when a listing offers them “only” 2% , from a total commission of 4%. But these are crocodile tears-they routinely accept this much when a referral or relo is involved. The bottom line: few agents can make a living from just a couple of transactions a year. Sometimes you take a listing at 6% and also represent the buyer, keeping the whole 6%. Sometimes you do both ends and gross 5%. Sometimes, you do one side and get 3%. Or 2.5%. And sometimes its 2%, or even less. It all evens out in the end.
And I, as a 25+ year realty veteran, won’t exactly be sad if the some of these complaining agents drop out of the business. It another place where there is way too much fat in the system..