Wil the real estate model change?
By Charles TurnerShannon’s comment on my previous post, Who Does Your Agent Work For?, brings up an interesting point. She thinks that buyer’s shouldn’t be represented by commissioned sales people. The more the buyer spends, the more the agent makes. That is therefore bad for the buyer.
She say:
I’m thinking a flat fee plus a bonus based on how far below whatever price I’m qualified for I actually spend. But that’s just one idea. On a commission basis, the closer I can be worked up to the most I can spend, the more money “my” agent makes. Does this really reflect my best interests?
I’m not sure that will work because what you are qualified to spend and what you want to spend are totally different things. It would have to be tied to the actual property that you decide to buy. But it does raise the question about how buyer’s agents get paid.
In today’s co-op transaction in most cases, the buyer’s agent commission is set by the seller and the listing agent. It is not negotiable. The buyer isn’t paying their agent directly. The agent has a responsibility to show all properties of what the offered commission is unless the buyer and agent have a Buyer/Broker Agreement where the buyer will make up the difference between the offered commission and the agent’s minimum “fee.”
Under the current co-op model, the buyer “pays” their agent but indirectly, it is built into the listing price. A potential new model has the buyer and agent entering into a contract before they see a single home together. The buyer knows exactly what the agent is making. The sales price theoretically drops by the buyer’s agent’s commission because the seller is not paying it.
How does an entrenched model change? Should it?
I’m not sure the model is broken for agents who really work for their clients. For some, I wonder why they even get paid… But the same is true for Loan Officers : )
But if you look at the amount that is actually earned on the “negotiated” savings in sales price, it really isn’t a lot of money. i.e on a $10,000 reduction in sales price an agent would risk losing $300 at 3%, and that might need to be split with the broker. This isn’t a lot of incentive to run the price up or negotiate it down.
I suppose on high end homes $500,000 and up it might make some sense to have a structured pre-arranged fee that caps out at a set amount. But on a normal home, most realtors earn their income working late hours showing many homes until just the right one comes along.
My industry is similar. I feel guilty charging 1.5% on a Million dollar loan when it usually doesn’t take as much work as a $200,000 loan. Also, I usually can’t get away with it as the loan industry doesn’t allow for exclusive representation. Technically, I can lose a loan on the day of closing.
I would rather have an agent work hard for their money finding the best property for me and then negotiate a fair price. Spred out over the term of the loan, I would rather pay a slightly higher price than have a realtor possibly lose the deal due to trying to get a larger bonus by negotiating the sales price down to much.
As a buyer, I have the ability to tell the realtor how much I’m willing to pay, both for the sales price and for the realtor’s services. If either think that it is unprofitable, a deal doesn’t have to be made…
Larry can correct me if I am wrong, but another thing that will have to change is the way lenders look at buyers paying for real estate services. They don’t like things being added to the sales price.