Do Homebuyers Really Need Real Estate Agents… if 64% find the Home they Purchase without the Help of an Agent in the First Place?

On April 5, the NY Times real estate blog, The Walk-Through, did an article regarding a company doing new online tatics in the real estate space. The article quoted that 2/3 of homebuyers found their own home without the help of an agent.

In reading the comments to the blog post, many agents appeared surprised by this 2/3 statistic, asking to see the statistic, so I pulled the press release again (I had previously discussed this NAR report which was spun to show 86% of buyers using agents, more than ever before) from the NAR at: Realtor.org/publicaffairsweb.nsf/pages/hmbuyersellersurvey06 and reviewed the statement which is as follows:

"When asked where they first learned about the home purchased, 24 percent of buyers identified the Internet, up strongly from 15 percent in 2004 and only 2 percent in 1997. Although most buyers use an agent to complete the transaction, 36 first learn about the home they buy from a real estate agent and 15 percent from yard signs; five other categories were 7 percent or less."

So my initial math was as follows:

24% internet (Note: up a whopping 63% from just the year before) + 15% yard signs + 7% other = 46%… that’s a lot of homebuyers finding homes on their own… but…

If you interpret it the other way…. “36 first learn about the home they buy from a real estate agent” which leaves us to assume that really 64% of home buyers found the home they purchased without the help of a real estate agent. (100% - 36% = 64%). Like you, I’m not sure where the other 18% is but this is a NAR statistic and that’s another post.

A long time argument from real estate agents to justify their fee is the time and money they spend showing clients homes and their ability to find homes… these NAR statistics obviously put a big hole in that argument.

What is the Buyers Real Estate Agent Really Doing?

So, if 64% of homebuyers are finding the home they buy on their own, (which is supposedly where all the work is), what are the real estate agents really doing to earn the 2-4% buyers side commission? Here are some thoughts.

a) Letting them into the house – the obvious increase in agent use, is because the buyer has to be able to get into the property they found and since they can’t call the owner directly they MUST call a real estate agent. Are homebuyers willing to pay a fee to be let in to view a home? Can this service performed by someone else… like the home owner?

b) Writing the Offer – if a buyer found the house, calls an agent who let’s them into the home and the buyer likes the house, then the next step is the buyer to ask the agent, how to make an offer. The buyer does not view this innocent question as possibly costing them 2-4% of the sales price in fees for the real estate agents service, as buyers agent services appear “free” (See my previous post regarding this “Free Service” fake-out).

Statistics from the CAR indicate that 71% of homebuyers select their agent based on who calls them back first (and I assume the reason they call the agent in the first place is to show them the inside of a home they found… see reason A).

Can just writing the offer / negotiation be performed by some else for cheaper? I.e. actual listing agent (who is already receiving the other portion of the commission), escrow, title, closing attorney? Do homebuyers really depend on the buyers agent for their negotiation skills or is the agent just “supporting” the decision as indicated in the Century 21 commercials? (See interesting post regarding this commercial on Slate)

c) Refer Homebuyers to required Services – This appears to be a big one, since it represents reason # 1 according this the REALTOR.com marketing piece on “Why Use a REALTOR” after this beautiful PR piece… “REALTORS® subscribe to a strict code of ethics and are expected to maintain a higher level of knowledge of the process of buying and selling real estate.”

Higher level of knowledge than whom? The home buyer? The home seller?

Also, this “Referring of Services” is the broker / owners favorite reason as it allows the agent to guide the buyers into using “broker owned” services, like title, escrow, mortgage because it increases the profit potential of the transaction.

Can someone else perform this “referral” service for cheaper and with less strings attached? You bet, see social networking sites.

d) Guide the buyer through the real estate transaction – Yes, the agent helps manage the transaction but so does the $2,300 a month “real estate transaction coordinator”, who typically performs this for most agents. Also, keep in mind that the mortgage lender, escrow, title, home seller and buyer also want the transaction closed because they all get what they want (income / house) and this can only happen when the deal is done. Can someone else other than the agent do this for cheaper and better?

There may be more items completed by buyers real estate agents used to support their value-proposition... maybe some agents would like to comment or add to this list to get these points across.

Do homebuyers really need agents to perform these services?

When broken down into separate components it’s easy to see that the real estate model can be done more efficiently when it pertains to time and cost. Will there be full service agents... of course, will they still make 5-7%, of course but the standard of service will be much, much higher than currenty. Is there change coming...

I personally think any homebuyer in California who saw that it cost them $15,000 (3% of $500,000 average sales price) to use their “free” buyers agent, would seriously think twice. Personally, I don’t think that most real estate agents could provide a strong enough value proposition to justify the cost.

Imagine this…

What if the buyers agents real estate commission appeared as a “cost” on the homebuyers final closing statement…

Think homebuyers would also look for other home buying options… much like home sellers have with discount brokers, flat-fee services and For Sale by Owner services?

What are your thoughts?

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:

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.