by Osman Parvez"Realtors have a massive conflict of interest," my friend chipped in over a camp fire last weekend. "The higher the purchase price, the more money they make - great for the seller but not so much for the buyer."
Funny. Before I got into this business, I thought the same. Whether a buyer is negotiating directly with the listing agent (i.e. seller's representative) or she has a buyer's agent, compensation appears to be in direct conflict with the buyer's economic interests.
The way the math works, yes the incentives are misaligned. Here's a reality check. My business and those of other successful Realtors are largely built from referrals. I do very little advertising. Clients, inspectors, lenders, other agents, and even the contractors we recommend form an ecosystem on which my business relies. In short, we're talking about trust.
A high degree of trust matters a lot more than a small or even large difference in commission. Trust is what gets my clients larger negotiated discounts, inspection items resolved, and sometimes even wins bidding wars without increasing the purchase price.
My clients are the ones who write my reviews. Take a look. They're also the ones that recommend me to their family, colleagues, and friends. My reputation is entirely built on my performance. The short term gain from pushing a client into paying too much is not worth the collateral damage to my business.
Double Ending the Deal
Here in Boulder (and in much of Colorado), listing agents typically market homes for sale at 6.0%. From this, they will pay the buyer's agent 2.8%, netting 3.2%. This is established in the agreement between the seller and their listing agent. It's not set in stone, but that's the most common arrangement. And when I say "common," I mean nearly always.
Commissions are usually paid from the seller's side of the proceeds (always double check). If the listing agent handles the transaction without a buyer's agent, the listing agent will "double end" the deal, collecting all or part of the 6.0% commission.
Double ending the deal is a much heralded Realtor myth. It rarely happens because the incentive to use a buyer's agent is pretty clear. As a buyer, you get representation, expert advice, and negotiation skills. You have someone working for you. I've talked about this before, so I'll keep it short. With a good buyer's agent, you're getting a professional who is there to help you make a smarter decision. That's how I look at it. And the best part? The payment for this service is already set aside by the seller. Choosing a buyer's agent means the listing agent makes less money and you make a smarter decision.
Rather than shopping homes online, you really should be shopping for a buyer's agent. But let's say you chose a lousy buyer's agent. You didn't review the comps, didn't negotiate well, got nothing fixed on inspection, and you found out later that you paid 10% more than you should have. Did your buyer's agent screw you over?
Let's talk about numbers. The median sale price in Boulder last month was $585,000. In this scenario, paying 10% too much means forking over an extra $58,500. If you financed it with 20% down, you paid an extra $11,600 out of pocket but will pay an extra $80,435 over the life of a 30 year mortgage loan (at 4%). Ouch!
How much more did your buyer's agent make? $58,500 x 2.8% = $1,638.
Do you really think that I'm going to flush my business down the drain for a measly $1,638? Have you seen the damage that bad online reviews can do to a business? No way! If you're unhappy as my client, I'd much rather write you a check for $1,638.
Questions?
Q: What about the listing agent? Can't I just use them?
A: The listing agent has certain legal obligations to you as the buyer, but they're severely limited by common sense if nothing else. Don't be fooled by the nice talk and hand waiving, they don't represent you. They represent the seller. Even if their status changes to "transaction broker," you're getting lousy service and very little representation for your interests. The seller is their client, specifically by contract and of nothing else, because their relationship has precedence.
Q: Isn't 6% a lot of money?
A: Yes, it's a lot of money. That's why you should hire the very best agent you can find, period. As with other things in life, beware the discount agents. As my momma used to say, you get what you pay for in life. The average agent makes less than $50,000 a year because (a) they're average and (b) take home is net of splits which occur down the line. Splits can include fees to the managing broker, franchise, donations, and so forth. For instance, we donate 5% to local non-profits.
By the way, when you're spending hundreds of thousands (or millions) of dollars - you don't want the typical agent. You want an exceptionally good agent. You want a rock star. But hey, it's your money.
Q: If I don't have a buyer's agent, can't I take 2.8% right off the top of the asking price?
A: Good luck. In my years of Boulder real estate, I've never seen it done. Not a single time. The opposite? That I've seen, several times. Buyers who go in without representation risk being taken to the cleaners.
Q: I've negotiated on tons of stuff before. I've bought houses before. What's the big deal?
A: At Silver Fern, we typically close 1-2 deals a month (we're a small shop) and as of this writing, we're 7 years into this business. We know the contract and we know negotiation on real estate assets. It's our value-added skill set. In prior lives, I've also been heavily involved in negotiations for many different type of assets in complicated deal structures. Guess what? Only some of my prior experience is relevant to real estate negotiation. To negotiate real estate transactions with mastery you need a deep familiarity with the Colorado contract, direct experience (and a reputation) negotiating with Realtors, and knowledge of the local housing market. It's not that it can't be done, but you're probably better off hiring a great agent and focusing on your own profession than attempting to moonlight as a Realtor.
Q: How long is the typical process?
A: There is no typical process or typical client. Most of our buyers find the house they want and we're able to negotiate an acceptable price within a few months. Our record holder took over 3 years. Together, we obsessed over valuation and finding the right house. He's now a trusted adviser to Silver Fern. If you happen to find *the one* on our first visit, I'll still insist that we see a half dozen other options just to backstop the decision with some due-diligence.
Q: I still don't like the inherent conflict of interest. How do we work around it?
A: I've had a handful of clients express an interest in non variable commissions. In response, I've offered up price brackets with flat rates. Once we have a discussion about trust, none of them have taken me up on it. If you've seen how hard we negotiate on behalf of our clients, you'd understand why.
Additional Reading
Want an edge in business? Study up on the ‘Trust Edge' - Harvey Mackay (Aspen Times)
---Note: Our goal is to provide exceptional service to our clients. The ideas and strategies in this blog post are the opinion of the writer at the time of publication. Silver Fern Homes recommends careful and complete due diligence before buying or selling real estate or other investments. Consult with your professional advisers before making financial decisions. This article is not intended as legal, tax, or investment advice. Silver Fern Homes will not be held liable for investment choices derived from this article.
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