Real Estate Commission Secret... Out, Again

Those of you who read our blog know that we have covered the topic regarding the buyers agent real estate commission a few times and how many people don't realize there is a cost of using an buyers agent even if they tell you it's free. Since this is a FSBO / pro-consumer blog not many real estate agents wanted to give their point of view but that may have finally changed.

An Arizona real estate agent and great blogger name Greg Swann posted an article regarding the little lie that most real estate agents tell their buyers on his blog and it was also published in the local news paper, Arizona Republic. Of course the reaction was immediate as he describes here but not really surprising.

Additionally, Ardell a Seattle real estate agent and avid blogger also posted a counter-point to the post regarding buyers real estate commissions.

You will see that Greg tells consumers to ask this simple question: Mr. Realtor, what do you charge? and Ardell questions this by stating what if they provide an answer "nothing". The immediate comebacks are "scripted" responses to help protect the real estate commission. This is very popular in the real estate business... have a "script" to help with negotiations.

Knowning that many agents have these "scripts" we thought it would be nice to provide consumers with a script of their own to help negotiate real estate commissions. A while back ago, we created this downloadable real estate agent interview form and a real estate agent hourly rate calculator. As a consumer, if you use both you will be provided a customized "script" to help you negotiate the real estate commission down... saving yourself thousands of dollars.

It will be interesting to watch both of these and see what kind of comments come out of it. Especially considering that companies like, Zip Realty, Redfin and Buy Side Realty are offering buyers commission rebates and they have lot's of money to advertise this option. It also helps that it's now a buyers market.

If you are a consumer who was thinking of buying a home, were you aware that it was costing you thousands to use your real estate agent?

New Home Sales Up... Due to a 10% Secret?

Cnn reports that new home sales are actually up for the first time in 5 months while actual median price is down 1.3% over last year. I suspect part of that reason may be due to the builder aggressively courting real estate agents again... and I mean aggressively.

There are some projects where builders are offering up to 10% real estate commission to agents for their home buyers. I don't have to tell you that agents will "highly suggest" these properties to their buyers do I?

Let's see... sell three houses at 3% commission or sell one at 10%?

Do you think it's fair for a home buyer to pay a 10% premium on a new home to subsidize the cost using of their real estate agent?

Why are builders offering so much? Simple, to keep home prices up for as long as possible. It's easier for builders to offer 10% commission to agents and a $20,000 credit towards flooring than allowing prices to come back down.

Also, in many projects the builders are competing directly against investors who purchased a previous phase and now want out. These investors may have the properties listed with an agent and offering 3% commission, so to insure that the builder gets the buyers they are keeping the price the same and just pumping up the commission.

This is also the same reason why many real estate agents are saying real estate commissions are actually increasing.

If home buyers were aware of this, would they still purchase? Do you think there should be proper disclosure as to buyers agent commission back to the buyer?

For prospective home buyers reading this... I will be posting a "how to" guide on how you can save yourself thousands of dollars when purchasing a new home, so stay tuned.

Existing Home Sales Down 1.7% Nationally

Not surprising the NAR release it's existing home sales data which reported a 1.7% decrease in the median home price.

This is the first drop since 1995 and is the largest drop since 1993. This is pretty significant news especially for those currently in the market, buying or selling.

I have a feeling that in two months you will see an even more dramatic slowing as this will psychologically take it's toll on buyers. They will begin to submit lower offers based on this information and the media will jump all over it further decreasing buyer moral.

Combine this will 9 trillion in adjustable rate mortgages that will adjust in 06-07 and you can see additional downward price pressure as foreclosures may become a bigger issue. This may bode well for "for sale by owner" home sellers as they can price more aggressively offering a win/win with buyers.

There was a blog post on Trulia about what real estate professionals thought was going to happen. Looks like Jonathan Miller ( a real estate appraiser and great blogger) was the only one even close regarding the existing median price.

Will this downward trend continue?

More Homes For Sale by Owner Listed in Michigan than California Due to Emotional or Financial Reasons?

Homethinking, a great realtor rating site, posted an interesting article on why some states have higher concentration of FSBO's than others. According to the informal study, there were 3,031 people per FSBO in Michigan while California was 32,177.

The article continues on to ask why some states have such a high concentration while others are significantly lower?

Our thoughts are that it has to do with the fact that clients perception of amount of equity sacrificed for the convenience and comfort of using a REALTOR is much greater if you have had little price appreciation and little equity vs. alot of appreciation and equity. Also it may be due to need vs. desire and if the market softens up dramatically, there may be a much large percentage in "need" of selling FSBO.

We used our cost of home sale comparison calculator and ran a few scenario's to support this theory.

We will start off with someone who purchased the median priced home in Los Angeles and Detroit for 2004 and resold it currently. Assuming all things equal that both buyers put 10% down payment at 5.5%, fully amortized for 30 years. We will take 24-month amortization to show new loan balances. Will also assume that both properties where sold with a 6% total real estate commission and 1.5% for all other fee's including title, escrow, termite, etc. Here are the results of the test sample.

Detroit Median Price in 2004: $161,000
10% Down, Final Loan Amount: $144,900

Current Median Price, Q2: $155,700
24-month amortization, loan balance: $140,885

Total Gross Equity: $14,815

Minus 6% Real Estate Commissions: $9,342
Other Costs of Sale estimated at: $2,336

Selling with an Agent: 78.82% of the owners gross equity is spent in total cost of sale and owner nets: $3,137

Selling FSBO: 15.76% of the owners gross equity is spent and owner nets: $12,479

Now compare this to California, same assumptions:

Los Angeles Median Price in 2004: $446,400
10% Down, Final Loan Amount: $401,760

Current Median Price, Q2: $576,300
24-month amortization, loan balance: $390,630

Total Gross Equity: $174,540

Minus 6% Real Estate Commissions: $34,578
Other Costs of Sale estimated at: $8,645

Selling with an Agent: 24.76% of the owners gross equity is spent in total cost of sale and owner nets: $131,317.

Selling FSBO: 4.953% of the owners gross equity is spent and owner nets: $165,895

Again, we just selected random numbers to create a side by side comparison but it makes that financial and psychological /emotional aspects of the transaction come to light.

In Detroit, the seller probably “feels” that the real estate agents are making too much money because they are making more than the owner “netted” for his two year sacrifice of owning the home, making the payments and repairs. While the agent came in, worked for 60 days and “made” more money than they did.

While in Los Angeles, California, the seller probably “feels” great because he looks at the $131,317 net which is a significant amount. The fact agent made $34,578 does not seem that much compared to his substantial gains.

Does difference of $3,137 vs. $12,479 seems much more than difference between $131,317 vs. $165,895? Maybe it's the same emotion of .99 cents vs. $1.00 that advertisers use everywhere?

If you were selling your home, how would you “feel” if the agents make more money selling your home in 60-90 than you are netting from the sale of your home with 2-3 year sacrifice as indicated above?

Am I way off base on this?


Source of Median Prices, NAR Existing Home Sales Q2, Homethinking.com and Costs of Real Estate Sale Comparison Calculator

Even Bavarian-Style Castle Owner's Want to Sell For Sale by Owner

Just couldn't resist posting this castle for sale by owner... don't see to many of these and did not have a field for property type: Castle.

Will Spike in Foreclosures Lead to More People Selling Homes For Sale by Owner?

Cnn, reported that foreclosures are spiking dramatically with increases nationally of 53% and hot spots like California increasing 160% over last year. The article quotes a RealtyTrac executive saying that a large portion of these maybe due to adjustable rate mortgages reaching their first adjustments.

With the build up in inventory and dramatic flattening of home prices, remember the NAR's July Existing Home Sales report which indicated that nationally property values only increased 0.9% from July 2005 to July 2006, will more people attempt to sell their homes for sale by owner?

A home seller who is in trouble can create a win/win situation by decreasing their price by 4% in a flooded market, making their property more attractive due to the lower price.

California example: Traditional real estate listings in area are $500,000, a FSBO with powerful marketing can price property at $480,000, possibly causing a faster sale and reducing carrying costs.

Would home buyers rather pay less in a slow market or will the convenience and mental comfort of using a real estate agent prevail?

Huge Increase in People Selling FSBO in Cincinnati

Slowing real estate market causing more people to sell FSBO. According to this report from WKRC.com there has been a 90% growth in FSBO's.

Watch the video

People are trying to retain some equity and save the real estate commission, not really surprising. We feel that there will be an even bigger increase in the amount of homeowners selling FSBO.

What do you feel is the biggest draw-back to selling FSBO?

More Talk of Web Based Real Estate Companies

Today, Red Herring is putting up an article regarding alternate real estate models. Funny as the opening starts with "death treats have already started".

Which of the models have the best chance of success in a market like this?