Securing the home-buyer’s place at the table: How two simple reforms can finally result in a full, uncompromised form of buyer representation . . .

Executive summary: This is long, and it’s written (I hope!) for ordinary people, not real estate professionals. But I want for real estate professionals to be aware of this argument, because I think it solves several of the knottier problems affecting our industry. Here’s a quick summary of the essay:

1. Buyers should negotiate the buyer’s agent’s compensation in detail and prior to looking at any homes
2. Sellers and listing agents should concede funds directly to the buyer to be disbursed at the buyer’s discretion to compensate the buyer’s agent

Either of these two reforms, or ideally both, will finally, fully empower buyers as supervisory employers of real estate agents in the way that sellers always have been.

If you discuss this in your weblog — and I think you should, in order to hear what your clients think — I would appreciate it if you would either link back to this essay or use the Technorati tag “compensation for buyer representation” (that exact keyword, without the quotes), so that I can track the conversation.

–GSS

Securing the home-buyer’s place at the table: How two simple reforms can finally result in a full, uncompromised form of buyer representation…

I was at a real estate seminar a few years back and the instructor happened to ask what kind of commissions Phoenix-area Realtors were getting on their listings. “Six percent,” someone said. “Five percent,” said someone else. “Five percent.” “Five-and-a-half.” And then a very beautiful young man, not quite overdue for his second shave, stood up and said, “Seven percent.”

“Just keep thinking that way,” the instructor replied. “Someday you’ll make yourself believe it.”

This is a true fact of real estate, widely if not universally known: Sellers negotiate commissions. Routinely. As a matter of course. “How much do you charge?” is often the first question blurted out at a listing appointment. You undoubtedly already know this, as well, if you’ve ever sold a home in your life — or talked to anyone who has. Yet for some reason, people persist in pretending that the six percent commission is still ubiquitous — if it ever was.

As a matter of disclosure, we routinely list for 5%. We’re not discounting, we’re taking away the seller’s price objection and removing the one differentiating factor that might make a competitor seem appealing. We list harder than anyone we compete against, bringing with us marketing strategies they simply cannot match. By pounding them on price, as well, we make sure we get every listing we want. There may come a day when we have more opportunities than we can fulfill. That’s when we’ll charge a higher fee.

But the question at hand is this one: If sellers routinely negotiate commissions, why don’t buyers?

Because they don’t know they can, for a very simple first thing. For the entire history of the National Association of Realtors, the real estate industry has infantilized buyers. Not from any evil intent, I am sure, but simply out of long-standing habit. Until very recently, buyers were not represented at all in a real estate transaction — and no one told them. They blithely went along with everything “their” agent told them, never knowing that “their” agent — and every agent — represented only the seller. Now we have true buyer representation — except that buyers are still often treated like children at the grown-up’s table.

As an example, the buyer’s agent’s commission — the co-broke — is a “secret” field on an MLS listing. If you’ve had listings emailed to you from a Realtor, you’ve probably been surprised at how much more detailed they are than listings you find on Realtor web sites or on Realtor.com. But the amount of compensation “your” agent is to be paid — money that you alone as the buyer will pay — is kept concealed from you. As your agent, I am required by law to disclose an infinite number of material facts to you, but I am not required to disclose — and, in fact, I am supposed to keep secret from you — how much I am being compensated for representing you — with every cent of that compensation being paid by you.

Does that make you feel like a grown-up in the home-buying process?

But wait. There’s more.

You are going to pay me that co-broke — usually 3% — whether I am a genius or a dunce. Whether I roll out the red carpet for you — or insist that you roll it out for me. Whether I provide knock-your-socks-off ’round-the-clock service — or you have to wake me up every time you want to see a house. Whether I work 200 hours in your behalf — or two hours. You’re going to pay me — never knowing what you’ve paid me until the very last minute — whether I have performed well, badly or barely at all.

Does that make you feel like a grown-up in the home-buying process?

Before I do any work to list a home, the seller and I are going to have a long, detailed meeting to discuss rights, privileges, responsibilities — and compensation. Every detail is going to be ironed out and reduced to legally-enforceable contract language before I lift a finger to market that home.

On the other hand, when you come to me as a buyer, we might just hop in my car and go look at houses right away. If you’re very clear on what you want, we might go ahead buy one on the first day, pounding out the purchase contract on the kitchen countertop. You better know we’re going to sign a Buyer Broker Employment Agreement — which actually will detail my compensation in mind-muddling legalese — but you’re going to be so enthralled by the house that you won’t give any of this a second thought.

Better yet, let’s go to a new home subdivision. They’re going to pay me 6% or more right now, without ever telling you, but you’re going to be so in love with your brand-new home-to-be that you wouldn’t notice it even if they did disclose the commission.

Here’s a bitter pill to swallow: One of the reasons the real estate industry treats buyers like babies is because they often act like babies. Sellers are normally coldly logical. They’re done with the house, and now their sole objective is to extract as much money as possible from it. Buyers — not just owner occupants, even some investors — can be charmingly, swimmingly, over-the-top in love with a house — to their own financial peril.

I have a solution for all of these problems, plus many more that I could name:

Don’t pay a co-broke to a buyer’s agent, concede the funds directly to the buyer and let the buyer negotiate the buyer’s agent’s compensation.

That addresses the issue from the seller’s and the listing agent’s point of view, but we can also do this from the buyer’s and the buyer’s agent’s perspective. I’ll come back to both in due course.

First we need to understand why the seller is conceding the commissions in the first place. As we said above, except in extraordinary circumstances (e.g., the seller owes more on the house than it is selling for), the buyer pays for absolutely everything in the purchase of a home. The seller brings a house to the closing table. The buyer brings money, either his own, his lender’s or some admixture of the two. Everyone walks away with some of that money except the buyer, who gets the house in trade.

By offering his home for sale, the seller originates the sequence of events leading to the sale, and Realtors traditionally regarded the commissions as having come out of the seller’s proceeds, rather than out of the buyer’s funds. This is why, historically, only sellers were represented. The real estate industry did not understand that the buyer’s money was as much a valuable consideration as the seller’s house.

There’s more to this, though. Many buyers do not have cash on hand to compensate a buyer’s agent. Even those who do would rather apply those funds to the down payment or closing costs. Lenders are not apt to look favorably on a request for a separate line item, apart from the purchase price, to pay for buyer representation. For these reasons and others, the buyer’s agent’s commission is set by the listing agent as some portion — usually but not necessarily half or more — of the total listing commission.

This is also necessary for an offer of cooperation in an MLS system. An agent can take an “exclusive” listing, which means that, even if a buyer’s agent is allowed to participate, he will not be compensated by the listing agent. But in order to put a listing “in the MLS,” the listing agent must make a unilateral offer of compensation to a cooperating agent. In other words, the listing agent brings the seller, the buyer’s agent brings the buyer, and they split the listing commission in some proportion as a consequence of their cooperation.

This doesn’t mean the buyer’s agent must take this and this only in compensation. If the co-broke is less than 3% — or if the price of the home is especially low — a buyer’s agent may well come to the buyer to negotiate a higher fee, to be paid out-of-pocket by the buyer. This may be the first time anyone has ever suggested to the buyer that commissions are negotiable!

The other end of this is, except in very strong seller’s markets, listing agents will almost always offer 3% of the purchase price as the buyer’s agent’s commission, regardless of how much the listing agent will make. The reason for this is the widespread belief that buyer’s agents will not show homes offering less than 3% commission — even though this would be a clear-cut violation of that agent’s fiduciary obligations to the buyer.

What fiduciary means is that your agent is obliged to put your interests ahead of all others, including his own. If your buyer’s agent is cherry-picking listings based on his own compensation, and not on your needs and desires, he is actively betraying your interests.

And this is another good reason to put the power of compensation in your hands and not the listing agent’s. It is long past time that we effected a true buyer’s agency, with buyers assuming the full responsibilities for employing their own agents. As long as the buyer’s agent’s compensation comes — or seems to come — from the listing agent, the buyer’s agent will tend to act in the seller’s interest, the listing agent’s interest, his own interest — everyone’s interest but yours.

What this means is that before you run off to look at houses, you and your prospective buyer’s agent are going to have to have a long, detailed meeting to discuss rights, privileges, responsibilities — and compensation. Every detail is going to have to be ironed out and reduced to legally-enforceable contract language in advance. If you wait until you’re in the house you want to buy, you’re probably too late. Even if you can keep your eye on the ball, you’ve already missed the perfect time to take your swing at it.

When is that? When the agent is still competing for your business. When the notion of buyer representation was first proposed, the idea was the the Buyer Broker Employment Agreement would protect the agent. In fact, deployed properly, that contract is your best protection in the purchase of a home.

Even allowing that sellers and listing agents will continue to do as they have always done, if you negotiate the Buyer Broker Employment Agreement to protect your interests, you’ll do fine.

What are you negotiating for? Compensation, first, and you might structure things in such a way that your agent will be paid more for achieving critical benchmarks — timeliness, location, price — whatever is most important to you. The contract language might look something like this: “Buyer’s broker is to be compensated as follows [….] with any additional funds conceded by the seller or the listing broker as a cooperative broker’s commission, bonus or other form of compensation to buyer’s broker to be conceded to buyer by buyer’s broker at close of escrow to defray buyer’s down-payment, non-recurring closing costs, loan costs, pre-paid interest or other costs.”

Second, you want to include a simple “firing” clause, so that you are not stuck with an agent who is just not working out. This language will suffice: “This agreement will be terminated upon written notice by either party.”

That much can be done now, with no change to the way things are done. Buyers simply need to assert the right they already have to negotiate fees appropriate to the level of service they want to obtain. Do you want to conduct an unfocused search for months, looking at ten houses every Saturday? Pay the full 3% and be grateful. Do you already know which house you want to buy and need an agent to negotiate the best price and take care of all the knotty transaction details? For work like that, you might consider a flat fee or an hourly rate. Do you plan to buy the builder’s home you have already put together on-line? Do take you agent with you to the builder’s sales office — after you have agreed to how much of the builder’s commission he will be throwing at your down payment.

You should expect to pay for everything you get. That’s only fair. But you shouldn’t pay for more than you got, more than you wanted, more than you needed.

There is an even better way to do this, but it requires a radical change in The Way Things Have Always Been Done — which means it could take time and will almost certainly occasion much moaning and griping among Realtors.

But picture this: Instead of conceding a huge buyer’s agent’s commission, what if listing agents were to specify a nominal co-broke fee, say $10, to satisfy MLS rules, with this language included in the publicly-visible remarks in the listing: “Seller to concede 3% of purchase price to buyer at COE to be used at buyer’s discretion to pay for buyer’s representation, closing costs, etc.”

Now you are no longer wrangling with “your” agent over “his” money, he is negotiating, very politely, for what he believes should be his share of your money. It’s has always been your money, but structuring the listing this way assures that everyone involved in the transaction is aware of that fact.

The instant objection to this would be that agents won’t show homes with less than a 3% co-broke. But the agent is no longer the only party to know how much money is available and how the funds are to be disbursed. Listings are everywhere. If a bigger broker adopted this policy, it could advertise that fact: “Buyers, we don’t pay your agent, you do!”

A built-in advantage of doing things this way is that the buyer’s agent will want to have that long, detailed meeting before doing any work, even if the buyer just wants to rush out and buy a house. The original ideal of buyer representation was the idea of “listing the buyer” in the same way that we list sellers. By openly acknowledging that the funds belong to the buyer — not to the buyer’s agent, not to the listing agent — we confer upon buyers exactly the same kind of supervisory power as employers that sellers have enjoyed all along.

In other words, this one simple change in the way we list houses for sale would transform the buyer into a fully equal principal in the transfer of ownership of real property. No more babying, but also no more acting like a baby — at least not without having addressed the grown-up responsibilities first.

But: Don’t expect this change to happen fast. We’re going to try it when we can find a risk-loving seller. If the house sells fast — which it easily could — we’ll try it again. If it works as a marketing idea, it will be an irresistible force. But if the houses don’t get shown… That’s a problem.

But your part of the problem, as a buyer, is already solved. All you have to do is remember those words sellers have been blurting out for decades: “How much do you charge?” That one simple question will tell you whether or not your prospective buyer’s agent sees you as an grown-up — or a baby. When you get to the one who knows that you are the boss, with the power to take your business elsewhere, make the deal and then go shopping — in that order.

If listing agents help by conceding the funds directly to the buyer and not to the buyer’s agent, so much the better. But even if they don’t — or even if that particular battle takes years — all you need to do as a buyer is assert your right to compensate your buyer’s agent by mutual agreement, not by default, and your battle is already won…

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