Will Home Buyers Go After The Buyers Side Real Estate Commissions Like Home Sellers and Discount Real Estate Models Did?
In the previously hot sellers market, discount real estate services picked up market share from the traditional real estate model because home sellers did not want to pay a 6% which included both the listing agents and buyers agents commission (traditionally split 50/50 and one of the main reasons for the development of the MLS which discloses this compensation to agents).
Unfortunately, the NAR does not provide the exact figure of alternative / discount real estate company market share but it must be significant considering the 25 million advertising campaign against FSBO’s.
Many real estate agents state that these models will fail and their market share was only temporary due to the hot market. Many believe that the typical real estate commission will increase from an average of 5% back up to 6% - 7% once the real estate market cools down like it has now. Will they go back up or has the internet finally changed real estate forever?
Recent homebuyer studies from the National Association of REALTORS (NAR) and the California Association of REALTORS (CAR) indicate the buyer is doing more of the work of finding a home. Here are some important facts from these reports:
· 77% of home buyers used the internet to search for homes (which leaves us to assume that 23% of home buyers are “traditional” who do not use the internet) – 2005 NAR Home Buyers Report
· 24% of the homes purchased were found directly by the buyer on the internet vs. 36% found by the agent – NAR
· The average internet home buyer purchased a home within 1.9 weeks of first contacting a real estate agent vs. 7.1 weeks with a traditional home buyer – CAR
· Internet buyers looked at an average of 6.1 homes with an agent vs. traditional buyers (currently 23% of the market) who looked at 15.4 homes with agents before buying – 2005 NAR
· 71% of the time the home buyer selected their agent based on first agent who returned their phone call - NAR
“Let me Find You a Home… My Real Estate Services are Free”
Buyer’s agents have used this “Free Service” pitch forever; in fact, it’s even endorsed in the National Association of REALTORS Code of Ethics:
Are Buyers Agent Real Estate Services Really Free?
Here is where most homebuyers’ get confused and mislead. Their real estate agent tells them it’s “free” to use their services. The NAR say’s its o.k. to advertise “free services” even though agents expect compensation. At closing time, the homebuyer does not see their agent compensation, as a “charge” on their HUD 1 closing statement… so it must be free? Wrong.
It’s all about “Net”
Home sellers price their home based on “netting” a certain amount from the sale of their property. The buyers’ agent real estate commission is paid out directly from the home sellers equity. If there is a 3% real estate commission being paid to the buyers agent from the sellers equity but the seller did not have to pay a buyers agent, you can discount the sales price by 3% and the seller would still net the same amount from the sale even if the sales price is 3% less.
Here is a basic example of the home sellers net proceeds*:
· $400,000 Sales Price - 3% buyers agent commission ($12,000) = $388,000 Net to Seller
· $388,000 Sales Price - 0% buyers agent commission ($0) = $388,000 Net to Seller
Will a home seller care if the homebuyer uses a real estate agent if he / she still gets the same $388,000 either way? Probably not.
So the reality is when a buyer uses an agent to assist them in purchasing a home, they are in fact financing the buyers’ agent real estate commission into the purchase price of the home.
If homebuyers negotiated with home sellers or their real estate agents directly, they can possibly eliminate the buyers’ side real estate commission from the price as noted above in example.
Now Home Buyers are in Control… of Real Estate Commissions?
Yesterday, CNN had a front-page article A fresh attack on the 6% commission. This highlighted alternative real estate models, which rewarded with part of the buyers agent real estate commission when home buyers do some of the legwork when buying a home.
These companies offer a rebate of the buyers’ side real estate commission to homebuyers who do a portion of the work themselves. Typically models typically require the homebuyer to search the MLS listings directly, driving to and previewing homes themselves. Many homebuyers are ALREADY doing much of these tasks as indicated in the facts noted above.
Some of these rebates can amount to a lot of money dependant on the sale price of the home. We have created a calculator to help you calculate your buyers’ agent real estate commissions and view a real estate commission rebate chart.
· View Buyers Agent Real Estate Commission Calculator
Although these real estate commission rebates are nothing new, they were never really publicized but now that the real estate market has cooled and buyers are more in control, I have a feeling that this will be discussed heavily in the media.
Once the press and press highlight these available options... the traditional real estate agent community will try in vain to discredit these alternative real estate models (usually with some kind of “legal” ramification scare tactic) as they have with other alternative / discount or FSBO real estate models.
Here are some arguments I suspect traditional real estate agents will use:
“You may have to sue the seller / agent because they did not disclose everything properly”
“You are not represented because the listing agent represents the home seller not you”
“You are not protected in your negotiations”
“You may not receive all of the proper property disclosures from the seller”
“You may not get the lowest price because the listing agent represents the seller”
“You may over-pay for a property”
Maybe real estate agents reading this would like to comment on reasons why buyers should not negotiate directly with the home sellers real estate agent?
Cooling Real Estate Market Will Create More Alternative Home Buyers Models
One thing that is guaranteed, is that the normalized real estate market will be a breeding ground for alternative real estate models geared towards homebuyers. Once successful real estate agents and companies will seek out ways to get more market share of buyers to make up lost income from sellers.
The same thing that happened when home sellers where the hot ticket, many new models came out to compete against traditional agents and now the same will happen towards home buyers.
Homebuyers themselves may seek out other options where they can get a win / win for themselves, especially as the secret veil of the buyers side real estate commissions come off.
What do you think will happen? Are real estate commissions going to go up or down and will home buyers start demanding part of the real estate commission for the work they are doing?
*Net proceed example does not include other real estate costs associated in a real estate transaction. It is only an example of how the real estate commission affects their proceeds.
Unfortunately, the NAR does not provide the exact figure of alternative / discount real estate company market share but it must be significant considering the 25 million advertising campaign against FSBO’s.
Many real estate agents state that these models will fail and their market share was only temporary due to the hot market. Many believe that the typical real estate commission will increase from an average of 5% back up to 6% - 7% once the real estate market cools down like it has now. Will they go back up or has the internet finally changed real estate forever?
Recent homebuyer studies from the National Association of REALTORS (NAR) and the California Association of REALTORS (CAR) indicate the buyer is doing more of the work of finding a home. Here are some important facts from these reports:
· 77% of home buyers used the internet to search for homes (which leaves us to assume that 23% of home buyers are “traditional” who do not use the internet) – 2005 NAR Home Buyers Report
· 24% of the homes purchased were found directly by the buyer on the internet vs. 36% found by the agent – NAR
· The average internet home buyer purchased a home within 1.9 weeks of first contacting a real estate agent vs. 7.1 weeks with a traditional home buyer – CAR
· Internet buyers looked at an average of 6.1 homes with an agent vs. traditional buyers (currently 23% of the market) who looked at 15.4 homes with agents before buying – 2005 NAR
· 71% of the time the home buyer selected their agent based on first agent who returned their phone call - NAR
“Let me Find You a Home… My Real Estate Services are Free”
Buyer’s agents have used this “Free Service” pitch forever; in fact, it’s even endorsed in the National Association of REALTORS Code of Ethics:
Standard of Practice 12-2
REALTORS® may represent their services as “free” or without cost even if they expect to receive compensation from a source other than their client provided that the potential for the REALTOR® to obtain a benefit from a third party is clearly disclosed at the same time. (Amended 1/97)
Are Buyers Agent Real Estate Services Really Free?
Here is where most homebuyers’ get confused and mislead. Their real estate agent tells them it’s “free” to use their services. The NAR say’s its o.k. to advertise “free services” even though agents expect compensation. At closing time, the homebuyer does not see their agent compensation, as a “charge” on their HUD 1 closing statement… so it must be free? Wrong.
It’s all about “Net”
Home sellers price their home based on “netting” a certain amount from the sale of their property. The buyers’ agent real estate commission is paid out directly from the home sellers equity. If there is a 3% real estate commission being paid to the buyers agent from the sellers equity but the seller did not have to pay a buyers agent, you can discount the sales price by 3% and the seller would still net the same amount from the sale even if the sales price is 3% less.
Here is a basic example of the home sellers net proceeds*:
· $400,000 Sales Price - 3% buyers agent commission ($12,000) = $388,000 Net to Seller
· $388,000 Sales Price - 0% buyers agent commission ($0) = $388,000 Net to Seller
Will a home seller care if the homebuyer uses a real estate agent if he / she still gets the same $388,000 either way? Probably not.
So the reality is when a buyer uses an agent to assist them in purchasing a home, they are in fact financing the buyers’ agent real estate commission into the purchase price of the home.
If homebuyers negotiated with home sellers or their real estate agents directly, they can possibly eliminate the buyers’ side real estate commission from the price as noted above in example.
Now Home Buyers are in Control… of Real Estate Commissions?
Yesterday, CNN had a front-page article A fresh attack on the 6% commission. This highlighted alternative real estate models, which rewarded with part of the buyers agent real estate commission when home buyers do some of the legwork when buying a home.
These companies offer a rebate of the buyers’ side real estate commission to homebuyers who do a portion of the work themselves. Typically models typically require the homebuyer to search the MLS listings directly, driving to and previewing homes themselves. Many homebuyers are ALREADY doing much of these tasks as indicated in the facts noted above.
Some of these rebates can amount to a lot of money dependant on the sale price of the home. We have created a calculator to help you calculate your buyers’ agent real estate commissions and view a real estate commission rebate chart.
· View Buyers Agent Real Estate Commission Calculator
Although these real estate commission rebates are nothing new, they were never really publicized but now that the real estate market has cooled and buyers are more in control, I have a feeling that this will be discussed heavily in the media.
Once the press and press highlight these available options... the traditional real estate agent community will try in vain to discredit these alternative real estate models (usually with some kind of “legal” ramification scare tactic) as they have with other alternative / discount or FSBO real estate models.
Here are some arguments I suspect traditional real estate agents will use:
“You may have to sue the seller / agent because they did not disclose everything properly”
“You are not represented because the listing agent represents the home seller not you”
“You are not protected in your negotiations”
“You may not receive all of the proper property disclosures from the seller”
“You may not get the lowest price because the listing agent represents the seller”
“You may over-pay for a property”
Maybe real estate agents reading this would like to comment on reasons why buyers should not negotiate directly with the home sellers real estate agent?
Cooling Real Estate Market Will Create More Alternative Home Buyers Models
One thing that is guaranteed, is that the normalized real estate market will be a breeding ground for alternative real estate models geared towards homebuyers. Once successful real estate agents and companies will seek out ways to get more market share of buyers to make up lost income from sellers.
The same thing that happened when home sellers where the hot ticket, many new models came out to compete against traditional agents and now the same will happen towards home buyers.
Homebuyers themselves may seek out other options where they can get a win / win for themselves, especially as the secret veil of the buyers side real estate commissions come off.
What do you think will happen? Are real estate commissions going to go up or down and will home buyers start demanding part of the real estate commission for the work they are doing?
*Net proceed example does not include other real estate costs associated in a real estate transaction. It is only an example of how the real estate commission affects their proceeds.
posted by Jessie B at 2:31 PM
7 Comments:
Excellent post. Nice job explaining the hidden cost of "free" agent services. Rather than using an agent, a buyer can pay an attorney to provide legal and negotiation services, and then offer 3% less than the asking price. As for commissions, they are definitely on the way down -- perhaps not at the rate of a falling anvil, but the trend is clear. Pushback from agents (and who can blame them -- change is difficult if it causes a drop in your income) will simply delay the inevitable.
-Craig
Law Office of Craig Blackmon
What are your typical attorney fees for a buyer Craig?
Excellent, informative article. I enjoyed reading it. -- Jess
One thing I just don't understand from all this talk about reducing realtors fees either on the sell side or buy side is why would people want to do this? Here's a situation where people are making the biggest financial decision of there life and there's talk of reducing fees and services. It's like people who get in to serious legal problems and they want to use a reduced service attorney. Why?? If I get in to legal problems I want the best representation I can possibly buy! Or it's like people who are going to get heart bypass surgery. I think I'll shop around and try to find a cheap heart surgeon! Are you kidding me!?
This argument falls apart quite easily. Regardless of whether the buyer uses a buyer rep, the seller pays the same percentage of the net sale amount at closing for his brokerage's fee. What happens to that fee after it is paid is an issue only for the brokerage(s), not the buyer and seller!
Only if the marketing practices changed (and cooperation among real estate agencies was discarded forever) would this case hold water. In this new world, the seller would pay one commission if a buyer used a buyer rep, and half that commission when the buyer relied on the listing agent.
Of course that world would quickly destroy the entire concept of buyer representation, because sellers would prohibit buyer agents from showing their homes! Buyer agents would vanish overnight, and all Realtors would represent the sellers, regardless of whether they were "assisting" a buyer or not . . . .
Wait a minute, that's not a new world, that's where the industry was 20 years ago, only now everyone would be earning half the commission per transaction . . . .
By only offering 3% less, the buyer may not be removing the buyer agent’s fee at all. Furthermore, by attempting to do this, most buyers only spite their overall transaction by trying to be “penny wise, pond foolish“.
Washington Post - "Some people just don't like working with agents. Other buyers go without them thinking they can negotiate a better deal on their own by working directly through the listing agent. Often they think that by working on their own, they are entitled to a discount on the sales price equal to what the buyer's agent would have received as commission. But the payment structure doesn't work that way. In that situation, the seller's agent just keeps the whole commission."
I am a Realtor in NC, and knowing every state has different rules and regulations, may help explain your post to me, but as far as NC goes-the Seller is always responsible for Commission, Preperation of Deed and Revenue Stamps, and the price of the home is deteremined by what it is worth and nothing else, now I also understand their are agents out there that practice differently than I do, but I do not believe in overlisting a house or under listing it, what it is worth is what it is worth. I don't up the price to include my commission or another agents commission that is unethical. The only time a Buyer would be responsible for paying his agents commmission is if we find a FSBO and the owner is not willing to pay the Buyers agents for bringing the buyer. And that needs to be paid at closing from the buyer than not added into the mortgage. And all monies involved in a Real Estate transaction need to be shown on the settlement statement. As I tell my clients that are buyers, I work for free for you because the seller is paying me, but remember this, if in the future you decide to sell.
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