Nominate me Ikonoklastes, for I am come to raze this temple of half-baked ideas. I want to come back to the MLS later in the week, and I have a deep need to expose the motivations of brokers, as these are distinguished from the motivations of lesser licensees. But for now I want to take on the idea of market value.
Jeff Brown, whom I admire without limit, asks of me:
I’m still wondering though about the apparent premise underlying your argument that says the buyer pays everything.
That premise is this: That somehow the market value of the home is controlled by something other than supply/demand, and the other factors of which we’re all aware. Would you please clear this up for me?
There are actually two different issues on the surface there, and there is still a third issue buried in the underlying premises.
First things first: In every economic transaction, unless the seller is taking a loss — or unless the seller pays for something outside of the transaction — the buyer pays for everything. This is true of anything that can be bought, and it is why — in every business except real estate — the buyer is given the red-carpet treatment. The seller (of anything) brings the value to be sold, but the buyer brings every dollar of the money, and every dollar that is disbursed to the seller and to any other involved parties is disbursed from the buyer’s pile of dollars.
In real estate, we make believe that the money is first transferred to the seller and then instantaneously distributed to the other parties, but this is a sleight of hand we effect in order to get the sales commissions past the lender. It might once, historically, have described a sequence of events, but even then the activity was a pantomime.
The seller does not cause the sale by claiming to pay for it. The buyer causes the sale, and no uncoerced sale ever happened until the buyer caused it.
Moreover, nothing in the laws of god or man ever prevented a seller from paying sales commissions out-of-pocket, in advance, instead of their being extracted from the proceeds of the sale. For obvious reasons, this does not happen.
The buyer pays all the sales commissions, all the title fees, all the lender costs, all the miscellaneous charges and everything else that gets paid for in the transfer of title of a home. The seller brings the house. Unless the seller is upside down, the buyer brings all the money. The buyer pays for everything.
I will consider this much to be settled art unless someone can offer a cogent argument to the contrary. Not, mind you, a feel-good warm and fuzzy sentiment. Not a harrumphing “but-we-like-to-look-at-things-backwards!” harangue. If you have a case, prove it. If not, take a seat while I kick away the other stilt you’ve been leaning on.
(And, for god’s sake, if you do effect to make an argument, make it in public, either in a comment here or by linking back to this post. I’m sure it’s fun beating up on straw men in what you presume to be your secret lair, but it’s simply childish. If you don’t know who I am talking about, it ain’t you.)
Here is a specious argument that has been floating around: That even if the buyer were to come into the transaction unrepresented, the price of the home and the sales commissions disbursed would be the same. But this describes an irrational artifact of the listing contract, not an economic necessity. In a rational negotiation, the seller might agree to do things differently if he were not presumptively contractually bound to pay some percentage of the list price as a buyer’s agent’s commission whether or not the buyer comes represented by a buyer’s agent.
This is Jeff’s argument of market value, I think: The idea that the sales price is going to be the same whether or not a buyer’s agent gets paid. This might be true — but it is true only in the present context.
The solution, obviously, is to divorce the buyer’s agent’s compensation from the listing agent’s compensation. I have suggested a way of doing this, and, ten days ago, while reading Jim Duncan’s Real Central VA, I found a better answer, as presented in Mark Nadel’s white paper on real estate commissions:
Buyers Should Know that Mortgages Can Include Fees Paid Directly to Buyer Brokers
In most cases, the fees charged by even non-traditional buyer brokers are paid out of the co-op fee offered by the listing broker or the seller. In some cases, however, listing brokers may want to see particular buyer brokers fail, particularly those the broker has targeted with adverse split arrangements. These listing brokers may refuse to adjust the purchase price to cover the buyer’s broker’s fee. This makes it more difficult to amortize that fee as part of the mortgage. That does not appear to be due to any formal rules deterring banks from granting buyers mortgages based on a total sale price that includes the fee paid directly to the buyer’s broker rather than by the listing agent from the latter’s commission received from the seller. Nevertheless, many lenders appear resistant to regarding a fee paid directly to the buyer’s broker as part of the sale price, even if only out of ignorance. This may occur because some written lending standards may not have been officially revised to recognize that agents working with buyers are no longer usually subagents of the seller. Buyers and banks should be informed that these mortgages are available and accepted in the secondary markets.
This may or may not be lawful at present, and, even if it is, it may not be practicable without a lot of tap-dancing. But this one little paragraph offers the solution to a vast horde of real estate problems.
I am not kidding. I want to smash every idiotic idol in our insane practice. We have been wrong, badly wrong, and it is well past time to put things right.
So start with the idea that the buyer contracts for his own representation, with the lender agreeing to roll the buyer’s agent’s compensation into the home loan.
This is exactly what is happening now, except that buyers don’t negotiate commissions and we insist, contrary to easily discerned fact, that the seller is paying the real estate commissions.
There is a difference, however: There would be nothing to prevent the listing agent from demanding all or part of his compensation in advance, out of the seller’s own pocket. Then the seller actually would be paying a real estate commission!
In fact, commissions could be paid outside of escrow on both sides of the transaction, although I’m sure the Feds would frown on this, at least if there are Fannie/Freddie loans involved.
But consider: The whole idea of procuring cause just evaporated. The procuring cause of the sale is whomever the buyer has designated by contract. If a listing agent elects to invest a lot of effort in a buyer — which might be necessary if a property is challenged or over-priced — this earns that listing agent nothing from the buyer. If the listing agent wishes to negotiate additional compensation from the seller, that’s between them. But the buyer’s agent is being openly compensated by the buyer, not by a sleight of hand effected through the seller or the listing agent.
So what just happened to the “market value” of Realtors?
This is not the market value Jeff is talking about, but we now have a lens for understanding market value in context.
Where before the market value of Realtors was firm and fixed — a fiat of tradition and obstinance — with the simple reform of moving the buyer’s agent’s compensation to the buyer’s side of the HUD-1, we have completely changed the context in which Realtors are to be evaluated.
Is my trusty buyer’s agent worth 3% of the purchase price? That depends on the purchase price, doesn’t it? If I’m buying a $60,000 house, he might be worth more than 3%. If I’m buying a $6,000,000 house, I’m pretty sure he’s worth something less than 3%. How do we decide where to draw the line? By negotiation.
So suddenly the buyer — revered in every other business, historically disdained in real estate — inherits his rightful place at the head of the table.
Sellers have understood for quite a while how to negotiate commissions, which is why very few listing agents are getting 3% for their side of a multi-million dollar property.
But if buyers are able to take control of the buyer’s agent’s commission, the Djinn is out of the bottle for good.
So what does this do to the market value of the home? Maybe nothing, although my inclination is to reserve judgement on that. But by unbundling the sales commissions from the purchase price of the house, the true market value of the house will be the value of that home in the buyer’s estimation, not a value inflated by an arbitrary percentage — essentially hidden from the buyer.
At the same time, it is entirely reasonable to suppose that real estate brokerage costs will tend to decline as they become obvious to both sellers and buyers, so, in principle, sellers should net more money for their houses, and buyers should get more house for their money.
In both circumstances, ante- and post-diluvian, the home will have sold for its market value. But those values will be different, because the context will be different.
We have made a grand tour of Mare Nostrum — Greece, Arabia, Rome and Jerusalem: Merely divorcing the buyer’s agent’s compensation from the listing agreement is not sufficient to rip asunder this temple of craven idols and money-changers.
But it’s a start…
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Technorati Tags: blogging, compensation for buyer representation, disintermediation, real estate marketing
Jeff Brown says:
Greg, if what you’ve now put to print is true, than my original question remains, at least in part, unanswered.
Are all the appraisals up to this point not been based on the principle of supply and demand? And, however the various brokerage fees are doled out, or what side of the HUD-1 they’re placed, do they in fact change what the home is worth?
It becomes painfully clear every time I visit your blog that relatively speaking I attended school via the little bus, a fact of life I easily accept. 🙂 I yearn for the intellectual horse power you dispay daily. However, I still sport three digits in my IQ before I bang into the decimal point. And the value of anything, regardless of who pays for what, is still a singular result of the free market’s brutal workings.
Who causes the sale, what does or doesn’t go into the mortgage, whether the buyer and seller are truly separately represented, or any other variable exists, the appraiser will ignore it. He will look exclusively to what has recently sold, that is in fact comparable to the subject property. In other words he checks what the market has most recently produced.
I maintain that no changes to the current system of organized real estate fees and/or their mode of payment will have any measurable impact on a property’s value in an ‘uncoerced’ sale.
‘The buyer pays everything’as a viewpoint is like saying grass is green, or baseball is superior to baskeball. It’s obvious on its face. But in reality, as Adam Smith said so much better than I, whether you bring cash, and I bring the house or vice versa, it’s still a trade. The transactin doesn’t happen because the buyer triggers it, it happens because they both have something the other wants.
The two of them just have to agree on the details. This becomes easier if we look at my side of the business, which often involves exchanges.
I’ve actually been party to two direct exchanges of real estate without the luxury of a third party buyer. In those cases the parties had to agree on the values of the properties being brought to the table for trade. They both looked at all the normal market history, and mutally agreed upon both values.
All transactions are trades.
And for the record, I think in the blogging world you should work with a handicap. Even Secretariat had to carry more weight than the rest of the horses. Of course, we saw how much that mattered. You command my respect by your ability to think, act, and most important put your thoughts in the public arena. Brains and courage has always been a winning team.
October 17, 2006 — 9:31 pm
Greg Swann says:
> All transactions are trades.
Absolutely true, and we’re never very far apart. But this is interesting:
> Are all the appraisals up to this point not been based on the principle of supply and demand?
Appraisals are based on double-think — what should a hypothetical buyer pay within a stipulated context?
So let’s play the game with an appraiser:
Scenario 1: The house is to be sold with 6% brokerage commission rolled into the price.
Scenario 2: The same house is to be sold with each party paying their brokers outside of closing.
What should a hypothetical buyer pay?
If Scenario 2 is not (Scenario 1 * .94), I want to know why.
Do you disagree with this?
Any appraisers looking in? How would y’all treat this circumstance?
My take: The idea of a market value is a cipher of convenience. It presumes a certain context, and I’m deliberately changing that context to make a point. But it also presumes an imaginary “market” which is ultimately rational in the aggregate, when, in fact, all that really exists are individual people, who are often largely irrational in their buying decisions.
> And the value of anything, regardless of who pays for what, is still a singular result of the free market’s brutal workings.
But that’s actually false with respect to any particular event, which is the only way events can occur. The whole “I buy houses” movement is based on buying houses for less than their Fair Market Value — which in turn holds down the appraised value of other nearby homes. You could double-back and say, “But that’s the free market, too,” and that would be true: It’s an uncoerced transaction involving the trade-offs of multiple values, only some of which are accorded importance by economists — even though they are obvious, measurable and clearly dispositive. Tip the undertaker and you can make a nice living selling homes belonging to heirs you will never meet and who just want fast cash, not top-dollar.
But the other end of that is that the argument of “the free market’s brutal workings” would put some homes at prices higher than they sell for, and others lower — as when the kids get together to buy mom and dad out with enough money to buy for cash in Sun City.
These are examples of bright-line irrational behavior, but most real estate transactions are irrational to some degree. There are 11 houses for sale for every buyer in Surprise right now. Why the hell won’t those buyers use my whipsaw strategy to get an incredible bargain? Because they want some one particular house more than they want an an incredible bargain.
All of Classical Economics and even much of Austrian and Chicago School Economics presumes the existence of a hypothetical rational Economic Man. There is no such creature. There seems to be, when you examine masses of economic events in the aggregate. But when you get down to particulars — and you’ve seen a whole lot more particulars than I have — rational behavior can be thin on the ground.
All that aside, you should say so when you’re coming to Phoenix. I would love to have you over to the house or take you out to dinner. Nothing in it for me but Splendor, but that’s all the true wealth there is in human life…
October 17, 2006 — 10:57 pm
Jeff Brown says:
>All of Classical Economics and even much of Austrian and Chicago School Economics presumes the existence of a hypothetical rational Economic Man. There is no such creature.
Now I get it. You’re establishing the new BloodHound Economics Theory. I should have known. You’ll have to excuse me – I’m old, but I’m slow. 🙂
I’d love to see what’d happen in our world if appraisers applied ‘irrational buyer/seller theory’ to home valuations. At least it would be entertaining.
As far as Surprise goes, I stayed out of there, since as Joe Kennedy would’ve said, it wasn’t a surprise any longer.
In the end irrational behavior at any level will affect the final reslult in the home buying/selling experience. Quantifying that behavior is a task I’ll gladly leave to those who rode to school on buses that carried more than twelve kids.
I’d love to have dinner my next time out. And true wealth? That’s a topic I hold dear. It’s the understanding that as you think, so you are….
October 17, 2006 — 11:49 pm
ardell dellaloggia says:
Yesterday, when I said “We (Greg and I)do in many ways lead the cause of buyers controlling their side of the fence, though sometimes Greg goes a little over the net on that one.” I was referring to your contention that buyers pay the ENTIRE fee, when you should stop at the point where buyer’s pay for their own separate and good representation.
I’m not suggesting that you are incorrect in that regard. Just that you go too far. I have watched the strongest proponents of buyer agency go the way you are going in this argument, for many years. I warn you that it does more harm than good to swing the pendulum all the way to the opposite extreme. In fact it is one of the reasons buyer agency has not progressed over the last 15 years, so please try not to go there.
“Sellers pay the entire fee” leaves buyers out in the cold with regard to respect for their side of the equation, as in free riders and “beggars can’t be choosers”. Swinging the pendulum to buyer pays the entire fee, including paying for the seller’s representation, simply provokes an argument and does not invoke the changes needed in our industry.
It really is a which came first the chicken or the egg question, so don’t allow it to end up in a total tug of war. It’s not a competition. We do need a win-win result here. Seller pays his; buyer pays his.
Clearly many of us have proven that all things are possible without changing the system one iota. All we need is to promote a mindset that the seller pays his agent from the proceeds of the sale and the buyer pays his agent from the money he brings to the table. The end goal is for agents to respect their clients. The seller’s agent already accepts that the seller pays him. We don’t need the seller’s agent to accept that the buyer pays him, now do we? So stop going there. You don’t have to jump the net and bash the other guy to a pulp. Just get to the net, that point where the buyer pays ONLY his agent. Stand at the net and wait for the other side to come to the net and shake hands. Your guy pays you and his guy pays him.
We need the buyer’s agent to accept that the buyer is paying him, and no one else. We need the buyer’s agent to understand that his client is paying him for representation.
We do not need the seller or the seller’s agent to believe that the buyer is paying for the seller’s side of the fence. All that would do is swing the pendulum too far to the opposite extreme. And trust me…it won’t get us where we need to go. Many have gone the way you are going and it gets nowhere…come with me. We do not need the seller to think the buyer is paying the buyer’s agent. We do not even need the seller’s agent to think the buyer is paying the buyer’s agent. We only need the buyer’s agent to accept that the buyer is paying him…that’s all. No need to go too far.
It’s a shell game with two fees and three shells. The seller side only sees his two shells. One says “listing fee” the other says “mls offering”. The Buyer Agent takes his empty shell and the “mls offering” shell and pulls that same “mls offering” and puts it under his “buyer agent fee” shell.
That one fee has two separate and distinct purposes. From the seller’s side it brings buyers to his house at the time of offering it in the mls. From the buyer’s side it pays for his representation at time of closing. It has to remain BOTH simultaneously. It’s one of those “mysteries of faith”. One of those is the half glass full or half empty. It is a perceptual change that is needed, and nothing else.
October 18, 2006 — 9:02 am
Greg Swann says:
> I’d love to see what’d happen in our world if appraisers applied ‘irrational buyer/seller theory’ to home valuations. At least it would be entertaining.
But they do, of course. When we list historic homes, we use an historic homes appraiser who understands all the things historic home buyers want — extremely energy-inefficient windows, for example — that they rationally “shouldn’t” want. There is nothing wrong with any sort of desired feature in a home — people want what they want — but if you mistake one for the other, you will come up with a useless evaluation of the home.
October 18, 2006 — 9:48 am
Jeff Brown says:
Whether you or I judge a particular desire as irrational or not, the market will always make it clear if they represent a measurable subset or not. I imagine folks wanting those type windows aren’t in a small group, historic designation or not.
If they are a subset of one, (much like a former girlfriend) then the behavior might truly be tagged as irrational. The fact that there are many who want historical homes with that type window indicates to me it has added value to them. For an appraiser not to take this into account would be irrational itself.
I want to be the first to ask for an autographed copy of your new book debuting BloodHound Economics 101.
October 18, 2006 — 9:59 am
Greg Swann says:
> It is a perceptual change that is needed, and nothing else.
I knew you would say all this, and it is at once literally untrue and at the same time unimportant. If we make the change Nadel is proposing, then your way of envisioning things will be the simplest way of looking at them: Buyer pays buyer’s agent and seller pays seller’s agent.
This is powerful stuff:
This one change addresses a host of problems: True buyer representation at negotiated fees, the end of the procuring-case debate, an end to the need for MLS-exclusivity, etc.
We built our entire industry around the listing brokerage’s desire to hoard both sides of the sales commission. If we get rid of that one defect, a host of other ugly habits and practices goes with it.
Not everything, alas, but that one reform may be enough to permit market forces to clean up the rest of the mess.
October 18, 2006 — 10:06 am
Jeff Brown says:
>This one change addresses a host of problems: True buyer representation at negotiated fees, the end of the procuring-case debate, an end to the need for MLS-exclusivity, etc.
Of course, I’ve been shouting from the top of the mountain since day one that separate contracts for buyers and sellers paid separately by each is the way to go. This stuff isn’t rocket science, and it’s embarrassing to the industry that such a simple problem with such an equally simple solution requires such time, effort, and angst to fix.
However, even ignoring the old growth tree sacrificed to make Nadel’s report possible, the separation of buyer’s and sellers through the use of their own representation, solves any argument put forward on the subject. The rest is what’s used to keep the balloons in the clouds over Del Mar every weekend.
If by perceptual change Ardell means the public would understand that the property value doesn’t change at all, but that they’re now truly represented, I agree. And its affect would be positive. It is true, and it would be important because of the huge change it would force.
I think Greg, and Ardell if I read her right, are both going to reap the benefits of this approach. Greg’s new model, just hitting the road as we speak, will probably bring him more business than he ever imagined, and the enmity of those he couldn’t care less about. 🙂
I’m sorry, but never having been on M.I.T.’s short list, all this thought is giving me a headache.
October 18, 2006 — 10:40 am
Greg Swann says:
> For an appraiser not to take this into account would be irrational itself.
Agreed. The problem is to find appriasers who understand why things they would consider negatives in other homes add value in true historics. I’ve seen home inspectors who had no idea what to do about a foundation. They had never seen anything but slab.
October 18, 2006 — 10:43 am
Mark Nadel says:
I’d like to take a crack a responding to Jeff Brown’s initial question about supply, demand, and the market value of a home. I’m sorry that this effort is a bit long, but it is nothing like the 75 pages of the full article!
When a seller sells her home, if she sets the price at the true fair market value X (based on supply and demand), then, by definition, within a reasonable period of time, a buyer will emerge willing to pay $X. Assuming that most buyers and sellers in the market are using traditional brokers, X will be based on the assumption that it will be used to pay both brokers’ commissions.
This is the price that appraisers will call the “market value” of the home, although it arbitrarily includes 3 major elements, and excludes others. It includes
1. The amount the seller receives for the home before paying off any mortgage
2. The amount the seller pays to the listing broker (as indicated on the HUD-1 form)
3. The amount the seller or listing broker pays to the buyer’s broker
It generally does not include
4. “Closing costs,” like recording fees, title insurance, etc.,.
I do not like this approach and would define market value as solely #1 in the list above. I would argue that for the same reasons that appraisers and mortgage lenders do not include closing costs as part of the “sale price” of the home (I believe it is because those fees go to third parties and are thereby “lost” to the buyer) they should not include either of the brokers’ fees. For those who say that the “market value” or sale price should include “the entire amount that the buyer is willing to pay to obtain the home,” well then it should also include all closing costs paid by the buyer, because those must be paid if the buyer wants to own the home.
I think it is more useful, however, to define that “market value” of a home as the net amount one could expect to recover if one sold the home. I would think that this is the figure that a mortgage lender should care about, and I would think that appraisers could adjust sale prices (after reviewing HUD-1 forms) to reflect this. After all, if mortgage lenders foreclose on a home, they will not be able to recover the “sale price” that they now define as the “market value” of the home, because they will generally need to pay listing and buyer brokers. I fear, then, that there is a substantial risk that taxpayers will end up bailing out mortgage lenders or the secondary market makers – Fannie Mae, Freddie Mac, etc.
I would have no problem with banks deciding to lend buyers the amounts required to pay the brokers and other closing costs, so that those often large fees could be amortized over the life of the mortgage, rather than representing an insurmountable obstacle to many eager to buy a new home, but I would require buyers to take out appropriate mortgage insurance if their total mortgage exceeded 90% (or some less risky percentage) of the “market value” of the home as I define it.
So, who pays the buyer’s broker’s fees?: As I explain in my article, if the buyer is willing to handle all of the tasks normally handled by the buyer’s broker & agent, then the seller and listing broker should be willing to pay the buyer the 3% co-op fee built into the price of X or reduce the price of the home by 3%. That is, while a listing broker might initially demand at least 4% (and arguably deserve some additional amount if s/he is expected to handle tasks normally handled by the buyer’s broker), if the buyer sticks to his guns and is willing to walk, the listing broker should realize that earning a 3% commission today is better than passing and hoping for a 3% fee later, and very possibly settling for 3% of a lower sale price. Thus, the buyer’s broker’s fee should be recognized as paid by or retained by the buyer.
Who pays the seller’s broker’s fee?: Greg, I agree with Ardell on this. The market price X, which the buyer has agreed to pay will include an amount that could be paid to a listing broker, because that is the assumption that most buyers and sellers are now operating under (as noted above). But the choice of whether to actually pay a standard commission to a traditional listing broker or a flat fee to a flat fee broker, or to go FSBO is up to the seller. This decision by the seller will determine how much, if any is paid to a seller’s broker. Since the seller determines the amount of the fee, I would say that it is most accurate to say that the seller pays (or doesn’t pay) the listing broker’s fee.
October 18, 2006 — 2:59 pm
Jeff Brown says:
Let it be known up front that I feel like Jim Bowie in a gun fight.
So let me go all Socratic on you.
In the last four weeks three homes have sold and closed for $300K. They’re as close to clones of my home as you can find. I plant a FSBO sign in my front yard and three buyers show up who are all interested. There are no agents involved in any way.
I maintain that my price will be the same $300K. Don’t you?
October 18, 2006 — 3:13 pm
Mark Nadel says:
No.
I maintain that the buyers without agents will point out that all of the other sellers were willing to pay $9K of the $300K to buyer brokers and these buyers want to receive the same treatment, i.e., be paid $9K for handling buyer broker tasks. They would say that they would have paid $300K if they had not had to handle broker tasks themselves, but they did not get the $9K value of a buyer broker and so they do not want to pay for it.
October 18, 2006 — 3:41 pm
Mark Nadel says:
Part II
If the other $300K home sellers had included a $9K set of new furniture and so do you, but I say that I don’t want or need it, then I think you would sell me the $300K home for $291K and return the furniture to get your extra $9K.
October 18, 2006 — 4:15 pm
Greg Swann says:
> If the other $300K home sellers had included a $9K set of new furniture and so do you, but I say that I don’t want or need it, then I think you would sell me the $300K home for $291K and return the furniture to get your extra $9K.
Ah, but then Jeff whips out his better knowledge of the real estate world and says, “Yes, but the lender insists that chattels transfer at no value either way!”
My expectation in the present economic context is that FSBO sellers would expect to receive the same amount as represented sellers. The argument would be that the price should be the same, regardless of representation, for any essentially-fungible properties. The buyer would want to bargain, and, assuming no other bidders, they might ultimately settle somewhere between $0 and $9,000.
But: In the post-Nadel context, a FSBO seller no longer has any need to worry about broker participation, and a BUBBA buyer can easily buy a FSBO home with representation. These are net improvements over the present situation.
On the other hand, new home builders — and any other sellers who continue to regard the buyer’s agent’s commission as a bribe in exchange for the introduction — are left in the lurch.
Nota Bene: Get me to the situation described in the quote from page 70 shown twice on this page and I promise never again to care who pays the listing agent!
October 18, 2006 — 5:02 pm
travis says:
Mandating your marketing gimmick as an industry standard is not a free market.
October 18, 2006 — 5:30 pm
Jeff Brown says:
Amen Travis – amen.
Using physics as a metaphor I’d conclude my thoughts this way: No matter the quality of your argument, nor the skill in its execution, if I fall off the roof of your home, I’m going to fall down…..not up.
October 18, 2006 — 5:44 pm
Jonathan Dalton says:
How odd … I wonder if I hit preview rather than post as all I had written has disappeared into the ether. So we try again, albeit shorter as now I have to be out the door in a few minutes.
> Here is a specious argument that has been floating around: That even if the buyer were to come into the transaction unrepresented, the price of the home and the sales commissions disbursed would be the same.
To defend the specious argument, as I’m one of its more ardent supporters, I’m failing to see any evidence of sellers happily dropping their price by the amount of the co-broke or passing along that co-broke to these buyers. And of course, they either would have to be unrepresented sellers or would have had to have signed an amended listing agreement allowing for a reduction in the commission paid to the listing broker.
> But this describes an irrational artifact of the listing contract, not an economic necessity.
Economic ecessity, no. But an actual, contractual fact? Absolutely. Re-read section 6a of the Exclusive Right to Sell, which details how much the seller will pay the listing broker in commission and show me where this amount depends on the presence of a second agent. Such language would have to be added on page three. Given your stance, I’d assume all of your listings state that if the buyer is unrepresented, the co-broke is given as a credit to the buyer. Only seems logical and I commend you on the concept.
> But the choice of whether to actually pay a standard commission to a traditional listing broker or a flat fee to a flat fee broker, or to go FSBO is up to the seller. This decision by the seller will determine how much, if any is paid to a seller’s broker. Since the seller determines the amount of the fee, I would say that it is most accurate to say that the seller pays (or doesn’t pay) the listing broker’s fee.
I couldn’t put it any better myself. True, the buyers is the one bringing the money to the table. Techincally, the buyer is paying on that basis alone. But it’s an irrelevant argument unless you’re going to unbundle absolutely everyting – closing costs, escrow fees and, of course, the commission. Without the ability to do so, it’s akin to arguing you only should have to pay $1.69 a gallon for gas and that you’ll pay all of the taxes and other fees out of pocket. An excellent idea? Perhaps. Doable in any way shape or form? Nope.
> I maintain that my price will be the same $300K. Don’t you?
Sorry, Jeff, but I don’t. I’d fully expect to see a lower number written on the contract, assuming the drool pouring from the salivating lips of the buyers doesn’t render the paper unusable. The buyers will assume you’ll accept less a) because you’re not paying a commission and b) because you’re unrepresented, which places a bullseye squarely on your back.
My last point … appraisers are not interested in the intrinsic value or full market value of a property. All they want to see is that the property has sufficient value to justify the risk the lender is taking in issuing the loan. All the rest is little more than theory.
So that concludes attempt number two. Perhaps I ought to keep the ruler on stand-by, just in case.
Let’s see … post is here on the right …
October 18, 2006 — 6:15 pm
Jeff Brown says:
Fees don’t affect market value unless the seller says it does, or unless the market speaks a new language. The only time fees impact prices, and even then they don’t really, is when I represent my buyer. He pays me out of his pocket in escrow. It’s 3% of the price. We offer only 97% of what we think it’s worth BECAUSE in fact my buyer perceives he’s then paying 100%.
If the theories put forth in these myriad comments actually come to fruition in a world far far away, then I’ll be right with you.
An argument isn’t specious because someone decides it is. It’s specious on its own merits. My argument is provable historically since I’ve been in the business, and that’s been a little bit. Until someone actually answers the core questions here with something other than ‘new math’ or ‘here’s what’s going to happen when….’, or shows me empirical evidence proving your point, I’ll remain in the world where gravity makes me fall down, not up.
And regardless of all this, I still maintain Greg’s new business model will rock Phoenix.
I’m done.
October 18, 2006 — 6:37 pm
ardell dellaloggia says:
Greg,
My way works right now, with no fanfare needed. You know someone’s going to lobby against Nadel’s way…you think he’s the first one to have brought it up? I say everyone get on Board and start DOING it now. Nadel’s way just gives everyone an excuse to WAIT for some other shoe to drop…I wouldn’t hold my breath on that one.
Jeff,
I have a headache too. I just wrote one on blue tape 🙂
October 18, 2006 — 7:35 pm
ardell dellaloggia says:
Greg,
Look up the history of NAEBA (National Association of Exclusive Buyer Agents) or email Tom Early in Ohio or Tom Hathaway in Tennessee. They’ve been busting their butts since 1989 to get “Nadel’s Idea” through. Don’t hold your breath on that one.
October 18, 2006 — 7:39 pm
Greg Swann says:
> Look up the history of NAEBA (National Association of Exclusive Buyer Agents) or email Tom Early in Ohio or Tom Hathaway in Tennessee. They’ve been busting their butts since 1989 to get “Nadel’s Idea” through.
I just went and looked. I may have missed something, but I’m not seeing it. In their FTC testimony, they speak of buyers paying for representation, but it’s still in the context of the co-broke.
Moreover: We do have DOJ/FTC oversight right now. You and I can do what we do. For my own part, if I am successful, in three years the co-broke in Phoenix is going to be $5,000 flat for everything. But the buyer’s role will still be subordinate so long as there is a co-broke. Nadel’s proposal looks brand new to me, but whatever it is, it’s a way out now…
October 18, 2006 — 11:08 pm
Oct. 18, 2006 - Nordstrom, Service and Flat-Rate Real Estate says:
Yesterday there was a fairly spirited debate about the future of real estate commissions, particulary on the side of the buyers’ agents …
October 19, 2006 — 9:00 am
Todd Tarson says:
I’m going to wade in quickly and be very general in this sea of particulars.
Two identical homes in each and every way (save for one exception) sell for the same price. One home seller agreed to pay a professional agent 6% of the sales price for services rendered, doesn’t matter if there is buyer representation or not. The other home sale was totally unrepresented.
I see the home value still being the same, save for the fact that one seller agreed to part with a chunk of money from proceeds of the sale for representation. As a cost of conducting the transacation.
The houses are the same as same can be. The properties are the same as same can be. What each seller put in his pocket in the form of money from their transactions is different. Each buyer bought a home for the same amount.
What am I missing and where am I wrong??
October 19, 2006 — 4:19 pm
Jonathan Dalton says:
I don’t believe you’re missing anything or are wrong anywhere. The buyer with representation didn’t pay extra for the house on that basis, which is where I believe the argument that the buyer pays the commission breaks down (i.e. – if the commission is paid outside of the transaction, does that mean the price of the home would be that much less?)
Call it a specious argument if you like, but I don’t believe it’s any more specious than any other argument being made right now regarding the price of buyer representation.
October 19, 2006 — 4:27 pm
Jeff Brown says:
Let’s make everyone here a major real estate lender. By definition this means you are the most at risk on any home you lend money. If you lend $240K on a home in Chandler, AZ that you appraise for $300K, you have $4 invested for every $1 the buyer does. The appraisal upon which you’re relying deems commissions irrelevant to the process of objective valuation.
Is your appraisal in error? Have you lent $240K on a property actually worth much less than $300K? Are the economists for the various secondary market giants who buy all these loans living in a fool’s paradise?
Can pigs fly?
October 21, 2006 — 9:30 am