There is undoubtedly a time and a place for a buyer’s agent when purchasing real estate in the US. Maybe you don’t know the market, exactly where you want to look, or even what to look for. Getting an agent to help you out can certainly ease your search.
But don’t for a minute buy the baloney that your agent is free. In Chicago, the buyer’s agent picks up 2.5% of the sales price. And that’s how the myth of free lives on, since it’s the seller that actually pays for your services (don’t even get me started on how lopsided that is). The thinking goes that if you’re not using an agent to buy, the seller’s guy gets the full 5%.
Right. Just like everyone actually starts their bidding at the asking price. Of course that fee is negotiable. And by “negotiable”, I mean saying “I’m not represented by an agent, but I want the commission due none the less” and the seller saying “Sure!” (as based on anecdotal, personal experience dealing with 4 sellers in Chicago).
To fellow Danes — and I assume many other countries in the world with no defacto price-fixing on real-estate commissions either — this comes as no surprise. We never had a wide-spread concept of buyer’s agents.
For US buyers who know where and what they want and are willing to do a little work yourself, I suggest you ignore the myth and pick up that $10,000 commission check on a $400K house yourself. That’s probably the best hourly rate on work most people will ever see.
DHH
on 23 Aug 07BTW, I know that some counties have actually outlawed the practice of letting buyer’s without representation pick up the commission due. Yes, insane.
osmif
on 23 Aug 07I would argue that under the traditional arrangement, as described above, that the buyer’s agent is not only not free, but is not a buyer’s agent.
Anyone paid a commission as a percentage of the sale price is a sales agent. They only get paid if the sale happens, even if it’s not in the buyer’s best interests.
As they sang in Free to be you and me: “Some kind of help is the kind of help we all can do without”.
Much better would be an arrangement in which the buyer’s agent is paid: $ ([a percentage] * (the average recent sale price of comparable homes in the area – the sale price)).
That way their compensation goes up as you pay less. That’s my kind of help.
My $0.02
MikeInAZ
on 23 Aug 07David,
Are you buying a house now? Unless the house is special or unique, I’d wait a bit. Lots of problems surfacing in the US housing market. With tightening mortgage standards (fewer qualified buyers), prices are sure to drop. Not to mention, lots of houses on the market (high supply).
http://www.thehousingbubbleblog.com
Adam T.
on 23 Aug 07What’s worse than buying and selling agents is loan agents (myself being one) who can often times gouge you in many unfortunate ways.
Always make sure to get a “Good Faith Estimate” before you start the loan process, and question every fee if you have to. A good loan agent will explain everything and won’t shy away, but start looking for a second opinion if he gets fuzzy on details.
Most notably, look out for duplicate fees: an “underwriting fee” and a “lender fee” together is usually bogus (especially if both are around $600), as are most “loan origination fees” or “points.” If your loan agent can’t give you options on how to not charge you an arbitrary amount (usually 1% or more) for your loan (sometimes this could mean bumping up your loan’s interest rate a tiny bit, maybe 0.25% or 0.375% at most, depending on the loan amount), he’s probably trying to screw you.
I’ve seen loan agents charge buyers and refinancers $15,000 without batting an eye. Your Good Faith Estimate is your first chance to get out of the loan early, without any repercussions, and at the close of your loan, if your loan agent tries to slip in any charges not detailed to you at the end of the loan when you get your “HUD-1” or “Settlement Statement,” you might be able to take legal action.
Mike Champion
on 23 Aug 07When we bought a place for the 1st time last year, the buyer’s agent we had hardly did a thing except drive us to the places we told her we wanted to look at. She was very friendly and helped walk us through the negotiation and close, and was very well compensated for that. The rise of internet sites that let you browse homes and compare prices in the neighborhood make them less valuable. When we go to sell the place, I’ll be very tempted to use a service like RedFin (www.redfin.com) that is available in the Boston area…
AndyC
on 23 Aug 07We’re selling our house and simply added the calculated buyer’s agent’s cut onto our asking price.
I agree with the previous point that the buyer’s agent will be acting largely in their own (greedy) self interest – which will happily align with our own (slightly less greedy) interests!
However coming from the UK where agents compete on commission and service – I take issue with monopoly and fixed rates here in Canada. Although that has to balanced against the trauma of selling/buying a house in the UK where anyone can walk away at the last minute causing a whole chain to collapse.
Galen
on 23 Aug 07Good call – it always infuriates me when people say “it’s free.” If the commission was smaller, you would pay less, right? So buyers agents need to justify their rate.
There can be a couple of problems with just picking up the buyers agent’s 2.5% – 3%:
Sometimes the sellers agent won’t give it to you and they can confuse the seller into thinking you low-balled them when they would receive the same amount of money in the end.
And
You’re unrepresented. Working with a bad agent is worse than being unrepresented, but it really helps to have someone who knows the intricacies of closing dates, interpreting inspectors remarks, etc so you don’t get stuck buying a home with a looming $20,000 bill or a home for $15,000 over what you could have picked it up for.
There is a third way: if you actually know the place you want to buy, many agents agents will work for either a flat fee or a discounted commission – it’s much less work for them than schlepping you all over creation.
Damon
on 23 Aug 07Nice theory, but it just doesn’t work that way in real life. Brokers have twisted the laws in their favor, and often act in a manner at conflict with their clients. The broker already has a signed agreement with the seller – your only recourse if you object to the fees is to walk and buy a different house. Except you’ll find the same problem again and again.
I pray that redfin makes it!
jharr
on 23 Aug 07A keen eye, a little reading up and a solid real estate attorney can make for a great buying experience. I’ve found much better deals and much less hassle in by-owner transactions, as long as you protect yourself and have n attorney review every step of the way.
Drew Pickard
on 23 Aug 07But if you’re in Seattle – you almost might as well throw all of this advice out the window . . .
This place is crazy.
Phil McThomas
on 23 Aug 07Ah…but the conflict of the buyer’s agent whose only interest is to clinch a sale is offset by the seller’s agent whose only interest is to get a sale at any price.
Take that $400K house. If the seller’s agent spends a lot of time and energy promoting the house, getting lots of buyers in, advertises all over, etc, etc….maybe they’ll get $425K for it.
If they do a phoned-it-in performance, maybe the house still sells at $375K.
To the sellers, the difference is $47K.
To the seller’s agent, the differece is $1500 – hardly worth it if the extra time invested could have been used to sell another $400K house.
Or to give another scenario: If an early offer for $375K comes in, should the seller’s agent recommend they go with it (sellers agent gets paid for little work) or hold our for something better?
The ‘something better’ is a marginal improvement for the SA, and means investing more time and even the possibility that the sellers decide to never move!
Mike
on 23 Aug 07My biggest complaint about real estate is the appraiser. A place is put on the market at a certain price and then you negotiate and come up with an agreed upon price. But before the bank will pony up the loan, you need to pay $400 for an appraissal which is likely going to say exactly what the bank and you want to hear: that the place is worth $X amount. Appraisers will say exactly what you and the bank want to hear, otherwise they won’t get recommended for future work.
Andrew
on 23 Aug 07A Buyers Agent is your friend up until the point you find a place you want to bid on. At that point the buyer’s agent only has one goal and that is to get you into that house at any price. So just remember that all the help and friendly advice you got from your agent, and any good will earned, is basically out the window as you are essentially on your own. Rarely will an agent tell you to underbid or walk away, when in fact, that might just be the best advice. Most buyers don’t realize this and assume that the agent is looking out for your best interests. No way! Your buyer’s agent only has ONE goal and that is to get paid. Period.
Vikram Rajan
on 23 Aug 07Well, that’s a very cynical perspective. As a for-profit personal brand marketing advisor for real estate professionals, I can appreciate somebody being honest, competent, delivering results, and expecting appropriate compensation (in relation to one’s brand).
Have an agent represent you as a buyer is a growing trend. It is only now growing in NY. It helps us interface with traditional seller’s agents.
Personally, I advise agents and brokers to move away from the traditional commission-sales model (where margins are growing slim with technology, competition, and market trends). While it feels uncomfortable, real estate professionals should leverage their expertise as a consultant. Its better for us:
We can d-i-y many aspects with technology help and expert guidance. And if we want to hire a real estate professional as our “administrative assistant” they should give us an hourly, and use globalization to their favor.
You get what you pay for: Be it a house, a broker, or a consultant.
~ Vikram
PersonalBrandMarketing.com
Darrel
on 23 Aug 07I ‘m patiently waiting for realestate.google.com
Any MLS site worth anything is using Google as the back end anyways. Google is now trying to grab details on every business in the country. The next step seems to allow any homeowner to upload all of the pertininent information to google maps to sell their house.
Google take a 1% commissions or something and everyone wins.
Well, except the Realtors.
Glenn Kelman
on 23 Aug 07Google real estate site is getting better and better but it will never broker deals; too messy. Redfin is the option that seems to appeal to most tech-savvy buyers, but it’s only in a few markets (I work for Redfin). It’s a venture-backed company trying to be the E-Trade for real estate, refunding 2/3rds of the commission it gets to to the buyer, usually around $10,000. Tragically, we do not use Ruby on Rails, sorry David. We often wish we had.
Brian
on 23 Aug 07Betting a buyer’s agent was the best thing I ever did when purchasing our house (in Ohio). She was extremely nice, very informative in educating us, and did all the heavy lifting for us – scheduling, calling, dealing…all we had to do was say yes/no and be at a certain place at a certain time.
I know she got 3% of the sale price, that’s fine because she did all the work and it didn’t come out of my pocket. I didn’t have to sign over a check or hand her cash. It was automatic and that’s how it should be. And that money was already gone anyway.
I didn’t want to think about buying a house, I wanted it to be like going to the store and picking what I want off the shelf. As long as I am paying what I am comfortable paying, and get what I want in the final product, it doesn’t matter who else does what or who gets what % of what dollar amount. Ease for the buyer is most important (when you’re the buyer anyway).
And at least with my agent, she was never pushy about closing the deal. We never felt pressured or rushed during any point. I guess I should be happy we found a good agent and not ones as described by others here.
I was worried that buying a house would be a hassle, but the agent negated all that and made it a very pleasant experience.
Killian
on 23 Aug 07For the do it your selfers:
I suggest using the MLS tools provided by ziprealty.com. I have tried just about every MLS tool available in the area and Zip Realty really nails it for ease of use, customization, and transparency.
There is no obligation to go thru them as a broker while you take advantage of their customizable searches.
Re the post:
Agreed- the buyers agent might be necessary if you are not located in the place you want to buy, but if you are willing to do the contacts yourself you can often get that 2.5% commission taken right off the asking price… or possibly better yet wait until you reach a negotiated price and then go for the extra 2.5% discount.
Re: The property value boogie-men
I think this is a huge buyers market and there are lots of nervous owners with investment property that are not appreciating or turning a positive cash flow. This to me equals opportunity for someone looking to buy.
IMHO the Chicago home prices have already burst and folks who bought during the bubble are trying to unload. Just don’t overpay.
Martin Ringlein
on 23 Aug 07Do your research and there is such a thing as a free lunch (and a agent). Hell if he is good, there is a free bottle of Champaign in it as well.
I’ve bought two properties in Washington, D.C. and have both times used the same strategy. Do all the hunting and research on your own, find the place you love and then use the sellers agent to act as your agent.
You ensure you will always be top-of-mind during all negotiations and your best interests are now the selling agents best interest. Many agents live under many different rules/regulations from different companies. Some are employees, some are contractors and some are employees of contractors—rarely is an agent a W-2 of large company like ReMax.
Most times, the selling agent can get up to 3% of the sales price down for you due to the fact that the agent is representing both parties. Not only is the agent free, the guy comes with a discount!
Mike Rundle
on 23 Aug 07Try getting access to detailed MLS listing information or setting up appointments with other real estate agents if you don’t have your agent do it for you. Good advice financially but in the US at least, if you’re trying to buy a house it’s easiest to do so with a good agent. Time is money, and if you don’t have the agent’s access to the information/locations you need, you’re going to end up spending your own time making up for that fact. Either you spend your own time or you spend the seller’s money, but you’re still using extinguishable assets.
Martin Ringlein
on 23 Aug 07@Mike Rundle
Is this part of the East Coast the only ones that have access to something like www.homesdatabase.com? It is an amazing resource with all MLS information—if you pretend to have an agent (it gives you even more detailed information).
Mo
on 23 Aug 07I did the same as Martin Ringlein in NoVA, found the house I liked, got the seller’s agent to do all the paperwork and give me some discount. So instead of making 2.5%, the agent walked away with 4% and passed the 1% savings to me (1% of $480K is $4.8K, I will take it any day). She lives in the same neighborhood and she helped us out while we were moving and we asked her for help with a bunch of local information even months after we had been in the house.
Morten
on 23 Aug 07So is the sellers agent :-)
RJ
on 23 Aug 07Great idea. I also think it’s good to have agents who are qualified. But apparently you’re not worried about that.
DHH
on 23 Aug 07Damon, it works very well in reality. I wrote this post as a conclusion of my own personal experience finding a place on my own and getting to keep the 2.5%.
BTW, I have absolutely no problem with people saying that their realtor is worth it. To me, personally, the work involved with buying real-estate in an area that I’m familiar with totally wasn’t worth the $10,000+ price.
All I have a problem with is the notion that the buyer’s agent is “free” when that is clearly not (in most areas).
FredS
on 23 Aug 07Well said. We’d you land? Wicker Park?
Martin Ringlein
on 23 Aug 07Also, one thing for first-time buyers to keep in mind. Everything is negotiable. If you do choose to get an agent, make sure he only gets paid if we does work!
Many agents will try and get you to commit to them—this means if you buy property during the contractual period, that agent gets a cut; whether you found the property or not. Tell the agent to amend the contract so that if you find a property on your own or through friends/family or perhaps just walking by an open house one Sunday morning; then you can move-forward without the agent. Make him work hard to beat you to the punch. This crazy thing called the internet gives us the buyers access to almost the same tools that the agents have access too.
Damon
on 24 Aug 07DHH,
Good job to you then. That doesn’t change the fact that brokers, in general, act in a self interested manner. The tactics you are advising come with a not insignificant risk losing a deal completely. It happens all the time. Also, I’d note that they are illegal in some states in the US (unfortunately).
To present this as if you can save 3% just by asking is just not an accurate picture of the way things work in the real estate business. It’s ugly, but it’s true.
There’s no free lunch on this one.
DHH
on 24 Aug 07Damon, again, this is not based on one, off realtor agreeing to return commissions without an agent. This is based on four different realtors, representing four different properties in Chicago, who all agreed to cut the 2.5% directly to the buyer (me) without an agent.
And in this downturn market, I surely wouldn’t fear any realtor getting unprofessionally pissed and denying you (against their client’s best interest) a chance to bid.
They can surely say “no” and you can then factor that into your decision-making process (as in, is this property really worth 2.5% extra over the others I’m considering?).
So for me, in the real estate business of Chicago, I had four properties available with a 2.5% “free lunch”. That’s first-person experience. What are you basing your assesment of risk on?
Damon Cali
on 24 Aug 07DHH,
I’m glad things are turning around in Chigcago. I’m not trying to say that what you’re saying can’t happen. I’m just saying that it isn’t as simple as “picking up a check”, and there are negatives to be aware of. So far I’ve mentioned two.
It’s not about brokers getting “unprofessionally pissed” – they’re just acting in their own best interest, which often means favoring the buyers who pay them the most. At best, they say, “we have an offer, but I’m sure we can get a better one – this guy is lowballing you”. At worst, they lie.
I’m not trying to change your mind or tell you what can and can’t be done – just what I’ve seen happen. Forgive the hyperbole in my first comment, but I’m not making this stuff up – its based on my own experience working in the real estate business.
Your post paints, in my opinion, an unrealistic picture of how easy it is to get a broker to give you $10,000. In most of the US, most of the time, it just doesn’t work like that. You can (and should) get away with it in a down market or in certain localities where that is normal, but generally, it’s not a no-brainer to ask the broker for a cut, even if the law allows it.
Brad Coy
on 24 Aug 07Any Realtor worth their salt will disclose precisely how, when, and if they will be paid a commission. They would also be capable of earning their commission by negotiating a good selling price (many times this is under 2.5% of the asking price) and guiding you through the legal hoops of escrow. Find a great Realtor with integrity and ask them what they can do for you. Better yet ask your friends who they used to buy their home. Different markets and sales scenarios may require creative solutions but let’s face it.. buying a home is not easy. As a listing agent I have seen many buyers use bad agents or discount brokerages only to a loss in the bottom line. Great product guys. Keep up the good work.
Braxton Beyer
on 24 Aug 07I am real estate agent myself. While it is easier for consumers to search for homes themselves these days due to the internet, there is still great value in using a Realtor. One, they still make it easier to see the houses since they have access to the homes and the buyer doesn’t need to set an appt. with the seller. They get this access because they have gone through ethics training and are held accountable. More importantly, they are experienced in handling the transaction. There are many people out there who can handle the transaction process with no problem, and if you don’t need a Realtor, more power to you. However, many people need a trusted advisor to help them through the process. If something goes wrong, the Realtor will, or should, know what to do. Other busy people don’t mind paying a Realtor because they are so busy. They let the Realtor handle the transaction saving their valuable time which could be better used doing something else.
By the way, if I list a house for 6% and the buyer buys the house without an agent, then I don’t keep all 6%. I give that extra 3% back to the seller. I know many other agents who do the same.
Mihir
on 24 Aug 07NPR did an interview a while back on how Real Estate Agents are a dying breed, excellent interview conducted by Economist Steven Levitt. (Listen to interview at: http://tinyurl.com/jrpre)
Our online Real Estate Technology has allowed companies like redfin and fsbomadison.com come about. FSBO Madison (based in Madison, WI) controls nearly 70% of their market share.
Although Real Estate agents are a dying breed, they will never be extinct as some people like the personal touch. Me personally, I love to do all my searching from my home office.
dboost.com mihirkothari.com
BlogReader
on 24 Aug 07Agents really don’t make $10k on a $400k sale (if they did even the dork agents around here would be rolling in cash). They have a lot of expenses associated with it—advertising, paying a fee to their agency, insurance as they can be sued if there’s any problems with the sale, etc.
I agree with the above poster in that there’s only $1500 in motivation for the agent to get you another $40k in the house sale. Why would they go out of their way to make a small amount vs what the owner makes? The commision system should be changed so that they get a fixed price for the certain price (say $7k on a $400k house) and then 35% of anything over that. Then the agent is more motivated to get you that extra $50k on the house.
:)
on 24 Aug 07Yes but does it buy you a yellow lamborghini ?
Jon
on 24 Aug 07I’ve used an agent for both of my home purchases and found (at least in the SF Bay Area during an up-market):
a) Sellers agents give preferential treatment to and are more likely to recommend accepting offers from buyers who are represented (probably not a problem if nobody else is bidding on the house). Saw this personally when we sold our house and we had multiple offers; the offers from the people who had agents were more in-line w/ our expectations (read: they overbid the right amount) and had far less weird contingencies.
b) Contracts can be very confusing and contingency dates come quickly.
If you’re going to do it w/o an agent, be sure to get a good real estate lawyer (which you’ll be paying for) and be prepared to do a fair amount of coordinating w/ inspectors and loan agents.
pwb
on 24 Aug 07I would never leave a $400,000 purchase up solely to myself.
DHH
on 24 Aug 07pwb, neither would I! Thus, I retained a real-estate lawyer to review all contracts and ensure everything went smooth. The lawyer works on an hourly rate, though. And he has spent no more than a few hours on my deal. So his fee is pretty minimal in comparison to a 2.5% commission.
Terry Hughes
on 25 Aug 07There are many agents who are only in the game to collect a check. These agents are those whom many of you have had an unfortunate dealings with. As a buyers Agent who approaches each relationship with the Fiduciary definition firmly inplanted in my methods of operation and that of my team members. (Fiduciary) meaning looking out for the interest of the buyer. Hear my statement, we get the best pricing, for loans, the best terms and conditions and gurantee in writting a substantial savings off the home price or a combination of closing cost and price. If we don’t meet our written goal we write a check at the closing table to the buyer. We don’t like to write checks so we negotiate hard for the buyers who chose to work with us.
Terry Hughes, Realtor, GRI, Foreclosure Specialist RE/MAX Gold 1919 Peabody Road Vacaville CA. 95687
[email protected]
P.S. I have affiliates throughout the country who work the same way I do. If your looking for a great buyer agent anywhere in the country just ask me, I’ll get you to the right person who will get the job done with your interest in mind always. For a Fiduciary Agent e-mail me or call me at 707-359-5905
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