I haven’t seen an article yet where the reporter gets the other side of the story, so I’ll address these fallacies below at green paragraphs. Hat tip to all who have sent in this story!
Why should a home seller have to pay for the buyer’s side of the transaction, especially when the buyer’s expenses include negotiating against the seller?
That apparent conflict of interest is at the heart of an escalating legal battle that pits the National Association of Realtors (NAR) against a group of law firms that filed a class-action lawsuit on behalf of home sellers against the NAR and four large national real estate brokers: Realogy, HomeServices of America, RE/MAX and Keller Williams Realty. As of May 22, the Department of Justice joined the fray when it demanded information about residential estate commissions from CoreLogic, a California-based data analysis firm.
JtR – Why? Because it is in the seller’s best interest to offer a bounty/bribe to the buyer agents.
The fight is forcing into the open many of the hidden factors that dictate how realty agents are paid and common practices that make it difficult for home sellers to effectively negotiate the commissions they pay.
It is standard for multiple listing services — data bases owned by realty agents — to require that the entire commission be paid by the home seller. Typically, the commission is 5% to 6% of the sale price of the property. Then, the commission usually is evenly split between the broker representing the seller and the broker representing the buyer.
That means that the seller directly pays for the transaction costs for the other side — even when, as is common, the other side negotiates for a better deal. The net result is that the seller is forced to pay for those working against him or her. The core of the lawsuit is that “the rules are, in effect, anti-competitive,” said Brown. “It’s a very strange way to run a market.”
JtR – The MLS does not require that the entire commission be paid by the home seller. They require that the listing broker offers compensation to the buyer’s agent, and it can be any amount.
The NAR filed to dismiss the lawsuit, partly based on the fact that it supports many types of business models for its members, said Rene Galicia, director of MLS engagement for the NAR. “The MLS doesn’t set commission rates. That’s left up to individual brokers and consumers, depending on the transaction,” he said. “Consumers should look at their level of comfort with real estate and what they want to accomplish. It’s highly competitive right now. Lay out your goals and find which broker will meet your needs.”
The actual commission structure has not been tackled head-on until now, say real estate experts.
JtR – The commission structure gets tackled every day on the street – without pads and helmets! We should do a better job of disclosing how much commission, and why, to all parties.
The split-commission structure causes confusion when sellers try to negotiate how much they will pay, because any reduction must be negotiated with everybody involved, explained Gary Lucido, president of Lucid Realty Inc., a Chicago broker that offers rebates on commissions. For instance, if the seller’s agent agrees to take less money, the buyer’s agent might not agree to a discount.
JtR – The commission isn’t negotiated with everyone involved. The listing agents decide how much they are willing to pay buyer-agents, and then present the commission package to the seller for approval or negotiation. The buyer-side cut comes out of the total commission negotiated between listing agent and seller – the only choice the buyer-agent has is whether they will show the house.
Also, the baseline costs of selling are not always obvious to consumers, said Lucido, which means that home sellers often don’t have the information they need to effectively negotiate. The cost of listing a house in the MLS, which feeds national listing sites such as Trulia and Zillow, is the same regardless of the asking price. A higher-end property might require additional marketing services and associated costs, such as a drone video or a fancy broker’s open house.
But usually, said Lucido, the additional cost of marketing does not justify the richer commission on a higher-end property. That is why, he said, agents are more willing to reduce their commissions on more expensive properties than on those under $200,000: Once the fixed costs are covered, it doesn’t take that much more work to sell an expensive property than a moderately priced property.
JtR – This is the common ploy by discount agents – that it doesn’t cost that much more to sell the higher-end properties. It suggests that all agents offer the same skill set, which is the true issue that needs to be examined – and maybe in court. Because the supply-and-demand of higher-priced homes is in the buyers’ favor, the sellers should hire agents with advanced sales skills and resources.
The class-action lawsuit and DOJ involvement might be enough to bring Americans in line with the rest of the world in terms of how real estate fees are calculated and paid for, said Timothy S. Becker, director of the Kelley A. Bergstrom Real Estate Center at the University of Florida in Gainesville. “The 6% model is ridiculous compared to how real estate is bought and sold in the rest of the world,” said Becker. “The agencies are set up to work for the transaction and for the agents’ own interests, not for consumers.” Real estate commissions around the world vary, but often are as low as 1.5%.
JtR – The media insists on quoting outsiders incessantly on this topic, but never explores further. You pay peanuts, you get monkeys.
It is significant that the class-action lawsuit is brought on behalf of property sellers, because they are the ones who pay the entire cost of the transaction. “The buyers currently don’t pay anything,” said Becker, “There should be a correlation between what you get and what you pay for.”
JtR – If buyers don’t pay anything and, as a result, can choose any agent to represent them, you’d think they would search out the very best. Why don’t they? The internet has made the homes for sale more available to consumers, but has it educated them on the nuances? No, and the industry is to blame. This lawsuit won’t change it, either.
The camera was rolling today – here are a couple of short home tours with commentary along the way:
We lost a pillar of our industry this week when Mike Evans, broker/owner of Sea Coast Exclusive Properties passed away. He began his brokerage in 1985, and it grew into three offices with 150 agents before he sold it to First Team in January. RIP
Realtors are fighting the idea of open bids? Agents prefer no rules:
Ontario real estate agents are lobbying the province against the mandatory disclosure of offers among competing home buyers in transactions involving multiple bids.
The Ontario Real Estate Association (OREA) sent a bulletin to its 78,000 members this week urging them to contact their MPPs to oppose the compulsory sharing of offer prices and conditions among competing buyers. That’s something the province has said it is considering as part of its planned update to the 2002 Real Estate Business Brokers Act (REBBA).
“Buyers and sellers should have the choice of using an open, transparent process,” said the OREA email.
It says that sharing information about competing bids could lead to the disclosure of personal financial information to any interested parties.
“The government should not force consumers to gamble their life savings in an experimental, mandated open offer process,” said the OREA email signed by association president Karen Cox.
“Hard working realtors like you would face increased red tape,” it warned.
Under the current rules, a real estate agent can only share the details of offers with the property seller.
But consumers should have a choice if all the buyers and the seller agree, said OREA CEO Tim Hudak.
Making the disclosure of offers mandatory “would be a radical change in the real estate market that does not exist anywhere else in North America,” he said.
“This would invoke a brand new process for every real estate transaction where brokers would have to distribute offers to all the other buyers,” said Hudak and that means sharing prices, deposit and closing information, right down to who gets the fridge.
The buyers’ addresses would be included in each of the offer documents, as well as conditions around the need to sell another home or the amount of cash that buyer has on hand for a deposit.
Some sellers would agree to share offer information based on their ideas of fairness for buyers, said Hudak. But all sellers should seek the advice of their realtor, he added.
At least one Toronto agent says his advice would depend on whether he was representing a buyer or seller.
“If I were representing my seller I’d say, ‘no.’ Unless I was mandated to do it, I wouldn’t do it. It’s our job to protect our clients,” said Royal LePage’s Desmond Brown. “If I had a buyer I would want to know as much information as possible.”
Among its 28 recommendations for modernizing the real estate act, OREA is proposing that the government eliminate bully bids — offers that pre-empt the time the seller has set to look at bids on their home. It is also recommends the elimination of escalation clauses, offers that specify the buyer will exceed the best bid by a certain amount.
The Toronto Real Estate Board (TREB) said it understands, “the fairness angle,” of disclosing competing offer details. “But this will also be a tricky area for the government to attempt to legislate,” said a statement attributed to board CEO John DiMichele.
“Disclosing bids puts realtors in conflict with their seller clients,” he said.
In regard to bully bids, the government would need to either require sellers to look at all offers as they come in or not accept any until a certain date.
“We prefer less government intervention in the marketplace,” said the statement.
The percentages are quite a bit higher this year. The title of the graph could be ‘Sellers Who Are Having No Showings’ because most are (overly) optimistic this early in the selling season and hold tight on price until later. Something must be rattling them – like no showings.
An excerpt from the UT article:
Home price reductions are still common when the market is red hot. It is sometimes a selling tactic — although not usually considered a good one — to price a home higher and then come down so the buyer feels like they are getting a deal. But, the number of reductions recently shows a big change.
For instance, 8.5 percent of homes had price reductions in November 2016. In November 2018, there were 29.4 percent.
Jason Cassity, a real estate agent based downtown, said the industry has a problem shifting when there has been a big change — such as a downturn in sales at the end of last year. He said some agents are operating like there will still be a bidding war.
“If you continue pricing like it is 2016, it is going to sit on the market a long time,” he said. “Or you are going to be one of those 20 percent (in February) that have to price reduce.”
He said a lot of the reductions he has seen were listings marked up too high out of the gate, something a lot of agents could get away with for years. He said sometimes homes are priced overly high just to meet sellers’ expectation of a huge payday, not the actual value.
Cassity said he presents news articles about the real estate market to clients before they decide on what price they are going to market with.
Here’s a good example of what makes us old-school agents good at our job – we know the inventory. Seeing the new listings every week enables us to recognize the features/nuances of each home and how they compare to other active, pending, and sold listings. It also gives us a chance to network with the other agents, get tips, and build alliances – and find good matches for our buyers.
You never see discount or disrupter agents on tour – ever:
The DRE has finally issued ‘guidance’ on the Coming Soons. Ignored are these facts about agents making off-market deals with no MLS exposure:
We see top agents doing it regularly,
There is no enforcement whatsoever, and
You give us the forms to CYA (last paragraph).
Burying this advice in the back of the bulletin isn’t enough. Until we see realtors being prosecuted and found guilty, nothing will change.
DRE Weighs In on “Coming Soon” Advertising: “Be Sure to Maintain Fiduciary Responsibility for Your Client or Face Civil and Regulatory Liability”
The Department of Real Estate has included in its 2018 Winter Real Estate Bulletin an article which discusses the risks of “Coming Soon” marketing. It includes a statement of the DRE’s view of “best practices” for listing agents:
“Coming Soon” advertising CAN benefit the seller if handled properly. Such advertising can increase exposure time of the property and generate interest in the public about a soon-to-be marketed property, helping potential purchasers prepare to tour the property or make an offer when the property is put up for sale. A practice of “Coming Soon” advertising coupled with initially not showing the property is sometimes known as a “Coming Soon—No Showing” strategy (or similar) and can well serve a client. In such a strategy, the property may show as “Coming Soon” on a multiple listing service, but also as not yet being shown to potential buyers. After a time, the property is broadly marketed as for sale. There are likely multiple listing service requirements that must be met to advertise a property as “Coming Soon—No Showing” or similar.
The potential conflict a “Coming Soon” strategy can have with a licensee’s fiduciary duty comes when the listing agent begins accepting offers before the property is exposed to a larger audience via a multiple listing service or by other means. When a property is not exposed to the full market, a client’s best interests might not be served, even when a full price offer is received (because the property may well have sold above the marketed price if better advertised). Imagine the dilemma for a listing agent if a seller accepts an offer on a poorly marketed property and then receives much higher backup offers as the property receives greater exposure.
At a minimum, an agent should disclose that a better sales price could be obtained if the property were to be marketed on a multiple listing service and obtain the seller’s prior written permission that she or he agrees to not fully market the property.
A listing agent who encourages the use of a “Coming Soon” program, without broadly advertising a property via a multiple listing service or other means, especially exposes himself/herself to the potential for an increased chance of civil liability and regulatory action when the agent also then represents the buyer in a dual agent capacity. Such a dual agent would need to be able to demonstrate that the agent acted in the best interests of the seller to obtain a purchase price that was as high as could be expected for a fully marketed property. This agent, who receives commissions on both ends of the transaction, could face scrutiny questioning whether they worked to obtain the best offer possible for the seller or was acting in such a capacity for personal financial gain.
The following are some best practices for agents when representing a seller:
• Market the property via multiple listing service or other broad advertising means.
• Make sure the seller agrees to and understands how the property will be marketed.
• If using a “Coming Soon” strategy, do not accept and act on offers until a property has been broadly marketed.
• If the property will not be fully marketed, obtain prior written permission from the seller that demonstrates they understand that such a “Coming Soon” strategy may not result in receiving the best sales price.
• Avoid double-ending a property that is not fully marketed—it is best to refer potential buyers to another agent.
The C.A.R. Residential Listing Agreement explains the benefits to the seller of using the MLS and the impact of opting out.
For the seller to instruct the agent to opt out of the MLS, the seller and broker must initial paragraph 5 of the RLA. Additionally, the seller must sign form SELM (Seller Instruction to Exclude Listing from Multiple Listing Service) or the comparable form provided by the MLS.
Our CEO, Robert Reffkin, shrugged it off, which is fine and what he should do:
“What you talk about is a representation of what you are focused on,” Reffkin said. “We don’t tear down competitors, we don’t pay attention to the noise, what we focus on is empowering agents.”
But as a Compass guy, I’m going to address some of Ryan’s specific concerns for those consumers and agents who might be curious and want to know the truth:
1. Robert Reffkin told us that because we’re in the Top 20 markets, the company was going to concentrate on supporting and growing those already in play – which sounds great to us agents. I don’t know how you rate the Top 20, but here’s where we are: Atlanta, Boston, Chicago, Dallas, Denver, Houston, Los Angeles, Miami, New York City, Orange County, Philadelphia, San Francisco, San Diego, Seattle, and Washington D.C., plus nine other smaller cities – which makes 24 markets. Close enough.
2. Compass agents grow their business quickly after joining Compass? I don’t remember that claim specifically, but every agent knows your business usually takes a hit when you change companies. Ryan said York at MoxiWorks contradicted the claim, but that’s not true. York said that the Compass market share was lower than claimed, but he checked the Compass production only, when Compass said it was the agents’ cumulative total for the year. Agents count their annual sales volume, regardless of their brokerage, so the Compass and MoxiWorks measurements were apples and oranges – for Ryan to misconstrue what happened is disingenuous.
3. Ryan says Cigna isn’t our insurance company, but looks like they are to me:
We saved $4,000+ per year and have a lower deductible.
4. Ryan claims Compass is losing money and wants to know about the turn-around plan? There’s $1 billion in the bank, and Compass will likely do an IPO in the next 24 months. But agents are focused on selling homes – if we make any money on stocks or stock options, it will be icing on the cake.
5. Ryan said that Compass ‘strongly encourages’ agents to use the in-house tools. Nobody has ever asked or told me to use the Compass tools. Furthermore, the Compass agents I know are all seasoned professionals who used their own tools long before working at Compass.
After his release went public, Ryan said this:
“I believe competition raises the level of play, and I welcome it,” Gorman said. “But when a competitor fails to uphold the basic ethics and integrity that this industry has together worked so hard to build, and puts the people I care about in jeopardy, I cannot sit on my hands.”
“The ‘talk’ coming from Compass behind closed doors is disturbing, and yet even in public forums, such as this publication, the inconsistencies, exaggerations and flip-flops by Compass executives are deeply concerning.”
The NRT sales volume is around 5x what we sell at Compass, and this guy goes ballistic over half-truths and innuendo, most of which is wrong or inconsequential? Why?
According to the Realtors Confidence Index national survey, 89% of home sellers were at least 35 years old, and two-thirds were selling their primary residence:
Of those who bought a home, 72% were at least 35 years old, and 40% came from a home they owned. Mix of those buying up or down? Maybe 50/50?
The REALTORS® Confidence Index is a key indicator of housing market strength based on a monthly survey sent to over 50,000 real estate practitioners. Practitioners are asked about their expectations for home sales, prices and market conditions.
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