Butterflies might be free, but home-buyers pay for real estate advice — whether they know it or not . . .

by Greg Swann

Suburban Phoenix Real Estate Broker

Author website

Ardell raises some questions at Rain City Guide about my column in this morning’s paper on negotiating the buyer’s agent’s commission. I’m going to address some of her remarks here, but my fullest statement on the topic is quite a bit more comprehensive. In the newspaper, I get 350 words a week, with the result that I am splitting this one topic over 5 (or possibly more) weeks. I’m thinking, too, that we should create a category for these weblog posts, because both Cathy and I are writing quite a bit on the subject.

And thus to Ardell’s points:

“I find that most consumers would like we in the industry, to lead the revolution and win that battle for them, rather than being involved in the process of that change in the industry.”

I’m sure that would be nice, but I don’t expect it to happen that way. One of the reasons agents are so close with the co-broke information is that they’re giving up so much on the listing side. Buyers are the last sheep to be shorn — even though buyer representation is getting easier, not harder, and even though the prices of homes have risen dramatically over the years.

I don’t see any way for this to change across the board without buyers becoming educated and putting their education to work. One market segment who could help a lot are the For Sale By Owner sellers. They could implement my idea of conceding funds directly to the buyer, to be used at the buyer’s discretion for representation or other costs, with none of the risks a listing agent might face.

“Has anyone seen the Buyer Agent fee show on the Buyer’s Closing Statement when the transaction closes?”

This is the only way a HUD-1 is produced in Arizona. If it’s not being done that way in Washington — one HUD-1 for everyone — I can’t imagine why. In any case, the buyer can negotiate for full disclosure of all funds.

“Seller pays his agent and buyer pays his agent, is the only rational answer…”

But it’s not actually true. For a represented home, the seller sets the amount of the commissions, the listing agent sets the distribution, and the buyer pays every penny. The rational argument is that the buyer discovered the home because the seller paid a marketing expense, much as you discover any other product. But the marketing expense is nevertheless paid by the buyer, with no input from the buyer as to the amount to be paid to the listing agent. The buyer can affect the amount paid to the buyer’s agent — but only by a process of negotiation. You and I are initiating that negotiation now. Few other agents are. All buyer’s agents would initiate that negotiation if the funds available to be used to pay the buyer’s agent were controlled by the buyer, rather than by the MLS co-broke policy. Until that happens, most buyers will have to initiate this negotiation for it to take place, since most buyer’s agents would rather represent their services as being “free”.

“Truth is, buyers really do like these lies up to a point. They really do like to believe that is is free and the seller is paying it. Buyers like to “receive money from the agent” like the Redfin cashback. It’s a whole lot more fun to believe that they are “getting back” $20,000 than to understand that they are paying $10,000. They are not really getting back anything, they are financing their cash credit, if they take it in cash or cash credits. To truly save something, they have to negotiate a sale price with the seller and AFTER the fact, reduce the purchase price by the negotiated buyer agent fee difference. Otherwise they are including the full fee and they are paying it with interest for 30 years! They are borrowing it from the lender, not “saving” it.”

And all of this is a huge problem. Buyers need to grow up — and fast.

“But Greg does not give any advice regarding what to respond when the agent replies: “What do I charge?”

I only get to do this in 350 word snippets. But that’s a good one, so I’ll do something explicit with it. (I have to say, Q&A is an easy way to punch out a lot of text fast. Somebody should have a blogging contest…)

“What do you say to a buyer agent who tells you his services are FREE?”

A smart answer would be, “That’s interesting. How do you make your car payments?”

Buyers are not dumb, they just want something for nothing. Shopping should be “free.” Well, it is, if you do it alone or do it with an agent who has nothing better to do. Sellers understand why they must negotiate — because they understand that no agent is going to work to sell their home for “free.” If buyers wake up to the fact that they do pay for representation, then they can embrace the idea that negotiating a more favorable fee is to their advantage no matter how the excess funds are deployed.

Further down, from the comments:

“If a buyer needs to sign a contract to talk about commissions, the purpose becomes for the agent to get a contract, and not for the buyer to…anything.”

The purpose of every contract is the mutual benefit of the contracting parties. Right now, anything we do with buyer commissions is essentially unilateral, because the buyers don’t know to ask for it, and don’t question the numbers we offer. Cathy is playing right now with a flat fee for buyers, and we may go to that — possibly also with an added discount in exchange for a non-refundable retainer. Half of this is about giving the buyer a much better deal. The other half is about eliminating our front-loaded risks. The corresponding and countervailing sets of costs and benefits are what make it a good deal — for both parties.

I think we’ll end up doing the same thing with listings, and for the same reasons. We bring exceptional value to the transaction, and we’re willing to share in the cost savings we can effect, but the quid pro quo is that we want to eliminate non-productive client relationships from our practice. If I know going in that every client I work with is going to cover his or her costs, I can afford to charge less. That’s business, and buyers will do better by doing business than by shopping.

There’s more: There are at least three components that have made this industry amazingly stupid, as compared with any other business in the capitalist system. The first two are commissions and licensing, but the third, and by far the most consequential, is the safe-harbor income tax exclusion. Because brokers can “hire” everyone as an independent contractor, they have no reason to cultivate human capital — the only kind that really matters. This was a foolish mistake, and it may well be the death knell for traditional personal-service real estate. One of the things we want to do, in the long run, is effect a totally different kind of business model for real estate representation. This again could result in huge costs savings for buyers and sellers while increasing our own profitability.

Want to get the bums out of this business? Make real estate brokerage so efficient that only smart, honest, ethical people can make a living. Profit is the purpose of capitalism, but a gradual movement toward moral perfection is a necessary secondary consequence. There is nothing wrong with asking buyers to make a commitment in order to get one in return. What is wrong, in my opinion, is deceiving them — one way or another — into thinking that extremely valuable professional advice is “free”…

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