Zillow says that the average price reduction is 2.9%, which isn’t going to impress buyers much. When prices were rising 5% to 10% annually, the market would catch up with a wrong price before too long. But now that pricing is flat, we don’t have that luxury – and we need to be smarter about price strategy.
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.
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.
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?
Yesterday we heard from Gov Hutchinson, the assistant general counsel for the California Association of Realtors. He travels around the state to inform realtors of the basic changes to forms, and helps define other aspects of the business – here’s a summary of what we heard:
Transfer Disclosure Statement – The buyer has a five-day rescission period after receiving the completed TDS from the seller (the form where the sellers disclose pertinent facts about the property). If the form is delivered to the buyer’s agent late, incomplete, or unsigned, the buyer can still cancel the transaction even if they have already released their other contingencies.
The CA Department of Real Estate is unhappy with compliance to the rule that realtors need to have their license number on every flyer, business card, sign, social-media account, etc. They have hired additional personnel to chase us around.
It’s acceptable for landlords to say ‘no pets’, but they must accept tenants with service animal (seeing-eye dog) or emotional-support animal with a note from a licensed caregiver – as long as it is reasonable. If the animal affects the landlord’s insurance, or is a threat, the landlord can say no. The law supersedes HOA, C,C,&Rs, and city codes, and the landlord cannot require a pet deposit or higher rent for these animals.
A landlord cannot require tenant insurance.
A landlord cannot be compelled to take a Section 8 tenant.
Low-flow plumbing is required in all homes throughout the state. Sellers don’t have to fix/update if the buyers will accept as-is.
If a house for sale has hidden cameras, there should be a sign near the front door to alert buyers and agents who are showing the property that the house is under surveillance.
No laws, rules, or guidance on Coming Soons – it is a local MLS issue.
I think we can say that the Coming Soon dilemma has been decided – nobody wants to address it globally, so it will be left up to the agents.
Realtors love the Coming Soons, and are now pitching them as a vital part of the marketing program. But with no rules or guidelines, what happens when a buyer wants to see the home? Do you show it during the Coming Soon period? Do you field offers? If you do get an offer, do you throw the listing on the MLS to give everyone a chance too? Or do you just make the deal and hurry off to the next one? How do you know if you got full value? (you don’t know)
Virtually every listing will go this route in 2019, and then most will be uploaded to the MLS with diminished urgency because the motivated buyers already saw the sign two weeks ago, and forgot about it.
Instead of relying on instant market data from the internet, we’ll need drivers to patrol for new Coming-Soon signs, and rely on word-of-mouth between agents to make these off-market deals we now crave for some reason.
Things that blow out deals are usually avoidable, and are easy to identify in hindsight. In this case, the agent let the buyers pick a roofer out of the book, which is a terrible way to do business. He gets paid the same whether he blows the deal or not, so of course he tells the buyers the house will fall down some day. No wonder he has great reviews – think of all the homebuyers he saved from buying a regular house, and are still renting!
But the most important lesson is how the agent handled the situation once a concern has been identified. Buyers are counting on their agent for expert guidance, which should include pointing out that there are no perfect homes out there, and let’s find a way to deal with the imperfections – because in this case, the house had far more positives than negatives.
But instead, the agent – who had been telling me that everything was fine – just sends over the cancellation form in the dead of night. She didn’t give me any more opportunity to address the concern (even though I has already provided ample evidence), or try to fix it herself. Instead, once her buyers objected, she just cancelled.
This is where we will see the last nine years of a bull market come back to haunt us. There are plenty of agents who got into the business since 2009 that not only consider themselves one-percenters, but have built teams and are riding a high horse. But they have never had to handle buyer objections.
Expect a long, stagnant, bumpy market ahead.
Get Good Help!
What did I do? I went back to the second-place finisher and sold it to them.
The State of California doesn’t have a Code of Ethics…..
This article is Part Two of a series arguing for the reinstatement of the Department of Real Estate (DRE)’s code of ethics. If you haven’t already, take a look at Part One, which provides context for the current vacuum in California ethical standards.
Why a code of ethics?
Every public-facing industry, especially one as complex as the real estate industry, is in need of common standards of practice. Presently, the code providing those standards for California real estate agents is far from an ideal set of rules governing an agent’s conduct in service of the public.
The code in question is a generic product of the National Association of Realtors® (NAR), which NAR’s state-level manifestation, the California Association of Realtors® (CAR), has commandeered as its own.
Real estate practice is rooted in state codes, cases and regulations aimed at protecting residents of that state, and as a result, this national code of ethics is frequently ill-fit to the unique marketplace of California. NAR has next to nothing to do with California, where principals might have little to no personal knowledge of the agent representing them (especially in urban population centers), and have no choice but to operate under a general set of expectations for licensee conduct.
Further, the Department of Real Estate (DRE) has continuously pushed the NAR code as an acceptable standard for those California licensees who also happen to be Realtors®. As we discussed recently, the state nixed the DRE’s code of ethics in 1996, and California has consequently been left without a California code of ethics for the real estate industry — a situation the DRE could rectify.
But before we can argue for the reinstatement of the DRE code of ethics, we need to understand what’s in it. What are we arguing for? And maybe more critically, what are we arguing against?
For an industry that has been stagnant and mostly unaffected by disintermediation/disruption over the last couple of decades, you get the feeling that change might be afoot now.
It’s asking a lot, but what we really need is transparency.
We are at the fork-in-the-road where agents and consumers alike want and need to choose between the traditional model of selling homes, or one of the newfangled disrupter ways.
But the services being offered are blurry. The disrupters call themselves realtors, and say they provide the same full service. Big teams say because they’ve sold so many homes that their way is the best. Individual agents get caught in the middle somewhere.
If every agent described exactly what they do to earn their fee, then at least the consumers might be able to compare apples-to-apples.
Every agent has their 100-point marketing plan, a fabulous support team, and is in the Top 1%. Let’s go beyond those basics.
To make it easier for consumers, let’s boil it down to the most important part of the equation – what is the one critical question to ask an agent?
‘Who and where are you at the point of sale?’
The frenzy has simmered down, and we’re back to the regular hand-to-hand real estate combat in the streets. This is when buyers and sellers need real and effective guidance on when to make the deal.
If you choose a discounter, inexperienced agent, or get stuck with an assistant, you will get a tepid response. Their lack of experience at guiding you to make the right decision when everything is on the line will cause them to be conservative, and not commit. You will be left to your own devices.
When you choose a great agent, he delivers facts and opinions for you to use to make the right decision on the spot – that is real guidance.
This is where consumers need the real help, but the industry fails miserably because when you need us most, we’re not there. We don’t insist on having top-quality help in place at crunchtime.
It hasn’t mattered in the full-blown frenzy – buyers just pay the price or higher, and everyone is happy. You don’t need much help then.
But now that sales are receeding, and more homes are lying around not selling, real help is needed to figure out what to do.
Sellers are always prone to add a little mustard to their price, and without proper guidance on when to accept a lower offer or when to reduce their price, they can miss the selling window and chase the market down. Buyers can pay too much and regret it later, or not enough and miss out on a good match.
The standard knee-jerk response about pocket listings is to insist that some sellers don’t want to be on the open market for personal reasons, and that’s fine. In reality, those should be limited to major Hollywood icons who are unsure of how much their star-power adds to the price of a home, AND those who are flat-out bamboozling the buyer – like these sellers, who just sold this property off-market for $11,000,000. The buyer’s agent has been in the business for two years and this is his only sale ever on his Zillow profile!
Eight months ago, the sellers paid $7,195,000 for it after 1+ years on market:
If the sellers are fully aware that they are engaging in an off-market deal, then fine. But most are being duped into thinking they are on the open market, but then all of a sudden – whiz, bang, boom, whoosh – and there is an offer on the table that is good enough to get them on their way.
It moves so fast that they never realize they weren’t on the open market.
What never gets mentioned is that every realtor has signed an agreement to share their listings with one another. This is how realtors are destroying the industry from within – because we foster the illusion of having a cooperative MLS but are happy to deprive our own sellers of open-market exposure in hopes of making two commissions.
The practice is so common that I don’t think realtors give a second thought to upholding their fiduciary duty to their own client, the seller:
Pacific Union International, California’s second-largest residential real estate broker by volume, is launching a new service this week that will give the public a peek at its “off-MLS listings,” meaning homes for sale that aren’t on a Multiple Listing Service.
It’s the latest in a growing number of ways home sellers can test the market — and maybe get an offer — before embarking on a full-on marketing campaign.
Putting a home on the MLS is usually the best way to get top dollar because it provides the greatest possible exposure. But in a red-hot market, some sellers figure they can bypass the MLS — and the real estate websites that repost their listings for the whole world to see.
Currently, agents circulate these “off-MLS” or “pocket” listings inside their firm and with other agents through Facebook groups or email lists. Some share them with groups such as Top Agent Network or Marin Platinum, which restrict their membership to high-volume agents.
Instead of holding a public open house — with strangers and neighbors traipsing through — agents arrange private showings.
Pacific Union estimates that 20 percent of its home sales in the Bay Area and 30 percent in Los Angeles last year closed without appearing on the MLS.
Mark McLaughlin, Pacific Union CEO, says Private View will help buyers and sellers by giving greater access to his firm’s off-MLS listings: “We are taking secrets in our filing cabinet and exposing them to the public.” He agreed that the MLS provides “maximum exposure,” but for clients who don’t want that, this is “an incredible” alternative.
“Once we get critical mass, I think more sellers will be part of this,” Segal said.
In a market starved for inventory, that may not be welcome news.
Pocket listings have always been used, mainly by celebrities and people selling extravagant homes that only a few could afford. But their use in California has grown since 2013, as the housing market rebounded and bidding wars broke out.
“As inventory goes down, off-MLS practices go up,” said Jim Harrison, president and CEO of MLSListings, the listing service for Santa Clara, San Mateo, Santa Cruz, Monterey and San Benito counties.
He estimates that 21.6 percent of all homes sold in those counties in the first quarter did not hit the MLS before they closed. That compares with 12.6 percent in the first quarter of 2012. (Many agents enter a sale into the MLS after it has closed to help establish comparable prices for an area).
The California Association of Realtors discourages pocket listings. In a 2013 press release, it said most sellers want the highest possible price from a well-qualified buyer, and the best way to get that, the association said, is to put the home into the MLS.
Most Multiple Listing Services are owned by local Realtors associations. Agents who join an MLS generally must post homes on the MLS within a few days of signing a listing agreement, unless the seller signs a waiver.
Every member of an MLS has access to those listings. They also go out to real estate websites such as Zillow and Redfin.
Pocket listings can lead to ethical, antitrust and fair-housing issues, the state Realtors association said in 2013.
Sellers typically pay a commission to their agent, who shares the commission with the buyer’s agent. In pocket listings, it’s easier for agents to keep the entire commission to themselves, or within their brokerage firm or a small network of outside agents.
Agents say there are many reasons to keep a home off the MLS, at least temporarily.
“My preferred way is to market heavily off-market for a week or two, and then go onto the MLS,” said Cathy Youngling, an agent with Paragon Real Estate Group of San Francisco. That way “I have built a level of excitement and enthusiasm” before the “time on market” clock starts ticking.
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