Before You Talk to a Real Estate Agent (or “Realtor”)

Real estate brokerage in America is a terrible industry. A naive consumer intending to buy or sell his house will probably sign a long contract with a state-licensed broker (a.k.a. “Realtor”) that traditionally involves forfeiting up to 3% of the transaction value in exchange for questionable services. Before you even talk to a real estate broker, please consider the following:

Buyers

As a buyer, you will be encouraged to sign a contract enlisting a “buyer’s agent” to help you find a house. In spite of all the industry obfuscation to the contrary, “Buyer Agents” do not work for the buyer. Their incentive is to close a sale with as little work on their part as possible, and with a seller who will give them as high a commission as possible. Hence, as a buyer working with a broker you must keep in mind the following perils:

  • They do not have an incentive to show you the best house for your needs. Rather, their incentive is to show you a smaller set of houses you are likely to buy that pay the largest possible commission to them. This means they will typically show you full-commission houses listed for sale with them or their coworkers. Then they will show you full-commission houses listed elsewhere. They may show you cut-rate commission houses. It is very unlikely they will show you “FSBO’s” or other homes with low or zero commissions, or that would require a lot more effort on their part to close.
  • They do not have an incentive to help you negotiate the best price on the house you want. Their only incentive is to help you close a sale with as little effort on their part as possible. If you buy a house, it doesn’t matter what they do or don’t do: they get paid the same rate. (In fact, it may be small but technically their incentive is to have you pay as much as possible, since 3% of a higher prices is still a little more.)

Agents may proclaim that they are licensed and that they have a fiduciary duty to their clients. However, in practice this fiduciary duty guarantees you absolutely nothing. So what service does a buyer’s agent actually provide?

  1. MLS searches. They will also ask you for your search criteria and will print out listings that meet those (and their) criteria. However, you can now do this yourself on the internet (and can circumvent their filters on low-commission houses). Thus, value to you of this service: Zero.
  2. Local expertise. They will be familiar with the communities in your search area. But no more so than anyone else. If you are moving somewhere new you will probably know people at the new place you are going to work, study, or recreate. Ask them instead.
  3. Market expertise. Skip it: When you’re buying they always tell you it’s a very tight market and you have to bid high and close fast. When you’re selling they always tell you it’s a soft market so you should be eager to accept the first low offer that comes along.
  4. Referrals. They will refer you to home inspectors, appraisers, title insurers, and any other service provider you may want. There is no guarantee that these referrals are based on quality instead of kick-backs or other conflicting interests. Value to you: Zero.
  5. Chauffeur service. They will setup appointments to view homes and they will drive you to them. However, you could just as easily make an appointment directly with the listing agent and drive yourself.

Nevertheless, even if you don’t value the chauffeur and appointment services, it still pays to enlist buyer agents if only because most sellers offer them a commission. And most of that commission should go into your pocket. Did you know that it is standard practice in the real estate industry for brokers to give 40% of their commission on any sale to a referring agency? This is why there are so many banks and other services out there offering rebates if you work with a broker to whom they refer you. If you take no other advice from this article, you should at least demand up front that your broker share 40% of their final commission with you.

As a buyer, how can you avoid getting ripped off by a real estate broker?

  1. Do not commit to work with only one agent. Every broker will ask you to sign a contract in which you commit to giving them the buyer’s agent commission on any house you buy within a given period. This is absurd – and unnecessary. The industry is suffering a glut of brokers hungry for your business. Visit multiple brokers and tell them you will pay them if you buy a house that they show you. Working with multiple agents can mitigate many of the risks and hazards on the buyer’s side.
  2. Negotiate a share of the commission for yourself. Since the standard referral rate is 40%, make it clear that you expect to receive at least 40% of any commission. Negotiate your share upward based on the amount of work they actually do to help you find and buy a house. (Note that in a traditional sale of a $2MM house they will walk away with a $60k commission. What’s a fair wage for driving you to a few houses and sitting at your side during the closing?) Note that in 12 states commission “rebates” are illegal. So in those states don’t call it a rebate; call it a subcontracting fee, partnership share, or something else.
  3. Align the incentives. If you aren’t doing your own legwork in the MLS and FSBO sites to find houses you want to look at, then ensure that your broker has an incentive to show you houses that pay low or no commissions. For example, offer to pay them an hourly rate in lieu of commission for their work. Or offer to pay them a minimum “commission” if the seller of a house you end up buying does not.

Sellers

People who want to sell a house are in a less flexible position than buyers. It is practically impossible to list your house for sale with more than one agent. (It is possible to list it with no agents, but even today that all but guarantees that 95% of potential buyers will never see your listing.) Furthermore, unless you offer buyer agents a 2-3% commission then many potential buyers will never be shown your property (due to the buyer agent conflicts of interest noted earlier).

Compounding the situation of the seller is the fact that a good seller’s agent will invest a significant amount of time and money marketing the house. This results in better visibility and, statistically, a higher selling price. Agents deserve to be compensated for this work (if they do it). But there are still many bad agents who will make you sign a contract for them to list your house – often for 6 or more months – and then do nothing to market it. And why not? Even if they don’t do anything there’s a chance someone will offer to buy it during that period, at which point they get their full commission.

Seller agents face most of the same perverse incentives as buyer agents: Namely, they would rather close a deal with less work on their part than with more. Though they get a higher commission from a higher sale price, they are only seeing at most 3% of the upside. Suppose you’re selling a $1MM house. How much harder do you think your agent will work to get you $1.1MM if at most $3k of that extra $100k ends up in their pocket?

As a seller, how can you avoid getting ripped off by a real estate broker?

  1. Do not sign a long-term listing contract. An agent might invest significant time and money marketing your house. They deserve to be compensated for that. However, I know top-rated agents who offer listing contracts with a 15-day opt-out. I.e., no matter what they have invested to sell a listed property, the seller can choose to opt out of their contract with 15 days notice. A good agent should offer a contract like this, since if they are doing a good job you have no incentive to take your business elsewhere. An alternative contract would allow you to opt-out if you pay their sunk costs. I.e., if you want to take your listing elsewhere make them hand you receipts and time-logs of what they have invested, pay them for their work at a pre-agreed rate, and move on.
  2. Negotiate a share of the commission for yourself. Remember the 40% referral rate and use that as a starting point. You could even insist that the listing be free of any seller’s commission, and instead offer them a fixed fee, or a time-and-materials contract, perhaps with a performance bonus based on how much the selling price exceeds a fair appraisal.
  3. Do offer a full 2-3% commission to the buyer agent. Unfortunately, due to the buyer agent hazards there is a good probability that if you don’t offer this incentive you will have fewer lookers, fewer bids, and ultimately a lower selling price. However, this is not necessarily unfair: If your buyers are savvy (as suggested above) then they will be pocketing a large part of the buyer agent’s commission. In essence, you can look at the buyer’s commission as a built-in discount to the selling price. I.e., if your property sells for $1MM with a 3% buyer commission then everyone involved knows that the buyer is really only paying about $970k. (Of course, this isn’t optimal since taxes and fees are typically a function of the selling price. Ideally everyone would agree on the sale and then just reduce the price by 3%. But this is the best we can do in the present conditions.)

The market is overflowing with real estate brokers. Some are very good. Many are just out there playing the lottery – hoping to pick up a listing or a buyer on a big sale and walk away with a single commission that they could live on for an entire year. The good agents will not mind contracting with you on terms like those outlined here.

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21 Responses to Before You Talk to a Real Estate Agent (or “Realtor”)

  1. Stephen says:

    As a former appraiser, I never met a broker/agent/realtor who would stop at nothing to do a deal.

  2. Leigh Anson Hunt says:

    Real Estate Brokers, Agents and hybrids are becoming obsolete with the widening use of the Internet.

  3. cambo says:

    As a broker, I would encourage people to try selling their homes themselves. It’s not that hard, considering the cost of using a realtor. But I can say without fear of contradiction that every time someone has bragged to me they bought a house without using a realtor, they have invariably over-paid. The fact is, our database dates back to 1989. Information has value in a negotiation. People who buy without a realtor are basing their decisions on list prices on MLS or the mis-remembered prices of other houses they know have sold. Considering the listing agreement provides for payment to the listing realtor – out of which a buyer’s realtor gets paid – the seller is on the hook for the entire amount, even when the buyer goes directly through the listing agent. That is, the buyer doesn’t save a dime. But they lose all the access to data. Frankly, when people tell me they sold their own house, I congratulate them. When they tell me they bought without a realtor, I say (to myself) there goes another dummy.

  4. Rick says:

    I must be working in a very different world. I don’t give referral fees to vendors. I use them because I trust them to do the job for the best interest of my customer(s). I do show FSBO properties. In fact, I recently sold my customer a FSBO property that was considerablely under the price they were initially looking at and which paid me less. The seller’s had no idea what they were doing, they were just being cheap. The seller’s then thinking they could do it on their own went and bought a home in another community that was offered FSBO. Bingo! they felt they had save money on the selling and in ther purchase. Oops, they put down a large downpayment. Failed to have a clause regarding the appraisal. The house appraised thousands less. The moral: they overpaid by 10,000 more than they saved!

    You paint with a broad brush, people like those above read your comments and pay the price. Plus you actually encourage people to violate the laws prohibiting rebates by calling them something else. Sound as ethically challenged as those you criticize as having a conflict of interest.

    • Cindy NJ says:

      Hello Rick, I agree with everything you said. It’s untrue and unethical for a Realtor to conduct business in that manner. Agents do show what the buyers are looking for and it’s not based on commission fees. It does not matter which inspectors, mortgage brokers ect. the buyers use just as long as they are licensed. We do refer based on expertise. Who ever wrote the above article knocking the professional realtor, clearly has no idea.

  5. federalist says:

    Please note that I am not encouraging people to undertake real estate commerce without expert assistance. Rather, I am encouraging everyone to ignore the morally hazardous traditions of the industry and to only engage agents on terms that are mutually beneficial. The problem is that state regulation and professional associations in this industry have created a false and unjustified sense of security and trust in real estate agents.

    Regarding state laws on rebates (and most other real estate agent regulations): The only purpose of these is to maintain a cartel. Everyone who uses a real estate agent in those states is a victim of that cartel. I am not a lawyer, so I don’t know if a “rebate” by other means is a violation of those laws. (But even if it is I believe consumers are justified in resisting the cartel while we wait for the antitrust regulators to break it.) Fortunately, consumers don’t need to be lawyers: Just demand that your Realtor find a way around the laws they have advocated to bilk you.

  6. Ben says:

    Eventually all real estate brokers, sale agents and Realtors will gradually but surely dissapear from a face of the earth because of the internet. One can sell or buy a home through internet very easily, without all these parasites roaming around.
    Good luck in finding other jobs.

  7. Portland Realtor says:

    Wow…a bit off the mark!

    While I do respect and agree with the basic premise of your post, the facts are way off!

    1) The standard referral fee is 25% NOT 40%.
    2) In my State (Oregon). Sharing or “kicking back” commissions is ILLEGAL!
    3) It is also ILLEGAL to stear a client to a preferred vendor and to receive “kick backs” from vendors.
    4) The issues with Realtors that you describe are valid, as the VAST majority are worthless. But, by doing your homework and interviewing some of the more highly regarded Brokers in your local area you will find that using a Realtor on either side of the transaction almost always works out in your favor.

  8. Renting in Ohio says:

    I had to sell my 1-bedroom condo in 2005 (ballpark $100k). I called all the Realtor Agencies around in the book and they all wanted 7% of the deal (3% going to the buyer’s agency). When I asked them for a deal, they balked at even a 1% discount! They snobbed me!

    But my persistence paid off, I finally found an agent, who was willing to work for half that. He wasn’t necessarily happy about it, but we sold within about a month, if I remember correctly. He showed me all the breakdowns, according to which he only got paid about $900 (net). Well, it takes me a week of full-time work to make that. Sounds at least fair (if not generous!). And no, it didn’t take HIM a month to earn this money. It took some hours marketing the house and a few showings. Hardly a week’s time.

    There should not be realtors, people don’t need agents to buy/sell used cars, then why used houses? Instead, there should be agencies charging flat fees (like License Bureaus, Title Bureaus, etc.) notarizing the transactions and ensuring legality of terms.

    And realtors ABSOLUTELY must not dabble in financing and mortgages, THAT should be illegal for realtors to broker mortgages!

  9. Buyer beware! Seller beware! Writer beware! EVERY field of human endeavor is filled with those who profess but can not perform. They always make up the brunt of “professors”. Re-read the article then read the comments. There is as much specious information as valid information. Get my point? Get the facts!!
    The wise consumer investigates all those who provide services before committing and remains skeptical and critical. Those who elect NOT to work to carefully select associates and guides are destined to be victims.

  10. pkowen says:

    Cambo says “The fact is, our database goes back to 1989. Information has value …”. Welll you are contradicted. Guess what, people? All one has to do is go down to their county assesor / recorder office to get all this same data. Some counties have web sites for free (this is public information). Redfin and others have tapped into this data as well and provide it side by side with listings. So why do I need a realtor to tell me previous sales information?? I can and do find it myself.

    I believe realtors are like any other service – except in their case they have a history of overcharging through a ridiculous ‘customary’ 6-7%. My advice to anyone is use a realtor if and when you find their services to be beneficial and in line with what you are paying – like any professional.

  11. Greg K says:

    I fired my first two agents. Both were incompetent – despite a long a detailed interview, they didn’t show us houses that met our requirements. The third agent, had been in the business a long time, showed us three houses at or below our budget that met or exceeded all our criteria. She did her homework and had a very good understanding of what we were looking for. Instead of spending months looking at a lot of houses that didn’t meet our criteria she showed us three that were great within days of meeting us. The final one we purchased way exceeded our expectations.

    I have recommended her to a number of my friends and colleagues and they all had a similar reaction. If I were buying in my area again, I would hire her in a heartbeat. The money we saved by not being pushed into a house that stretched our budget was far greater than any money lost from her commission.

    My advice: use your friends that are very happy with their home purchase and ask for recommendations for an agent. Second, get a 20% down, fixed rate loan from a credit union – best rates, no funny business and they still hold my loan to this day. If you cannot afford a fixed rate loan for the home, you cannot afford the house.

  12. Jennifer - Attorney/Broker says:

    Don’t condemn the entire profession just because of a faulty system. Most professions have a similar problem. For instance, doctors/dentists/psychologists have an incentive not to completely treat their patients so that there’s a need for further checkups/treatments. Lawyers on hourly rates need to keep cases in litigation to get paid more. Mechanics/repairmen need to find many repair needs to maximize their profits.

    The answer is not to get rid of the entire profession, but to do some homework before hiring someone in any field: get referrals from people you know/trust, interview the referrals to see if s/he fulfills your needs (expertise, negotiation skills, resources, interests…), negotiate any fees you feel is unfair, keep your commitments as low/short as possible (stay away from long-term contracts and avoid paying upfront), find creative incentives to make sure the person you hire has the same interests as yours…

  13. Steve York says:

    My experience differs. Early in 2004 we foresaw a downturn in house prices and decided to sell and semi retire in Mexico two or three years earlier than planned We spent ayear prparing our house for sale and shopped for an agent. I felt the house should fetch $250,000. I approached three agents I knew who quoted 3% – 4% commissions and wanted to list at between $225,00 – $250,000. My lawyer had recently acquired an RE license and wanted to list for $180,00 and charge me 2%.
    I owned an entertainment booking agency for years and constantly explained to my clients the value of paying a good agent a commission. I took my own advice and contacted a local agent who , during the 12 years that I owned the house, had constantly walked the area and who would leave notes complimenting minor cosmetic changes such as a new door knocker!Impressed by his attention to detail and knowledge of the area I contacted him.
    He was the only agent who asked me what I thought the house was worth. I told him I was thinking of listing for $280.000 and accepting $250,000. He told me that was realistic and asked for a few days. He came back to me with a starting price of $315,000 and I signed an agreement with him for 7%.He sold the house 12 days later for $296,000.
    I was lucky. This was September 2005. Had the house not sold then I would have been lucky to have got $220,000. The moral is that there are good agents out there but you need to research thoroughly. Having been an agent in a different field I still belive in the value of paying a real pro to do his job.

  14. kwithyerbelliakin says:

    I agree 1,000%. Every house I listed to sell, the bragging Realtor did NOTHING but give me a “high ball” estimate to get my lisitnng and follow that with “my unrealistic expectations” in this “soft market”. Lie lie and LIARS. THEY GAVE ME THE PRICE ESTIMATE. Guess what? I got tired of hearing lies lies and more lies and sold it ABOVE listing in one afternoon. I made some flyers and handed them out at the local strip mall parking lot. In ONE DAY, three offers two above asking. I AM NOT SALESMAN, why were they so crappy at their own work? They are a bunch of retards. When I bought a house both times…they act like they were buying toys in a store. No negotiating skills at all. DUMMIES! I took over and wrote my own offer. Both of the MORONS (one was a broker of all things) asked me how I learned to write such a good offer! These punks only wasted my time. I was the idiot for signing a contract giving them big bucks for NO WORK. I think we need to make them illegal. No more REALTARDS. Several couldn’t even pronounce the title “REAL – A -TORR”. In California you only have to have an IQ above 50 to be a REALTARD.

  15. Reasonable Outrage says:

    “Their incentive is to close a sale with as little work on their part as possible, and with a seller who will give them as high a commission as possible.”

    Blanket statements are worthless. A dentist has an “incentive” to grind your teeth. A mechanic has “incentive” to sell you more crap. Everyone has an incentive for something. That doesn’t mean everyone is out to get you.

    My agent talked me out of a buying a house and I am glad he did. It wasn’t right for me. I never did buy and stayed put.

    The 6%-7% commission number is not real anymore. The national statistic is about 5.2% and I doubt it is that high. The reason commissions are high is because few will pay an agent upfront. It is high risk – high reward for the agent now. Low risk for the seller who may never sell their home.

    And really real estate is a service industry and the sale of the home is not their main service. It is protecting you from getting into a bad spot. A friend of mine sold their home their self and 3 months later the buyer still hadn’t performed. She had never bothered to have an expiration date on the contract.

    Just like so many other things, people bitch about what little they know. Think it through first. The more I go over your post the more you sound like a jilted lover who hates everyone of the opposite sex.

  16. federalist says:

    NYTimes reports that buyers are beginning to sue “buyer agents” for failing to fulfill their fiduciary duties. They quote one real estate lawyer saying, “Agents have a lot of fiduciary duties, but they don’t make money unless they close the sale. In an inflated market, there are built-in temptations to cut corners.”

  17. federalist says:

    WSJ reports that you can’t trust title insurers either, so be sure to shop around for title insurance (or, instates that set the prices, look for rebates).

  18. Kay says:

    What you have written is right for many realtors. But as with everything, there are exceptions. When we bought our first house, I did not see my Realtor after I signed the contract!
    Down the road from scientist ….Teacher …Computer programmer, I became a Realtor!
    I changed four big name companies in four years and took all their trainings.
    After all that training I am unable to focus just on my commission and always think what would be the best price solution for my clients. So I end up showing many houses, burning tons of mileages and sometime just to learn that some other good talker Realtor trapped them or they went in an open house, fell in love with that and forgot all about me, who was too nice to ask them sign a Buyer agency in my first meeting.

    I think the Realtors who can put your interest ahead of their own interest are rare, but can help you more than you can imagine. Now how to find such a Realtor! I think if anytime somebody is pushing you or telling you to decide something or the deal will go away or they walk away is a sign for not to put your signature on anything!
    Anyway I am still the same and I get peace while working (some times commission checks also!) when I know I am doing the right thing!

  19. While that is true, I think the most successful buyer’s agents are successful because they know that getting a buyer into a 175K house rather than a 200K is still better than not getting them into any house at all because they were too shady/pushy. If your BA’s margins are so thin he’s putting the pressure on you to buy bigger, you might want to try to find one who is not so desperate to make a couple hundred extra dollars.

  20. Jaime D. says:

    GREAT POST! I’m an agent and I agree with just about everything you said. In fact, I’m sharing similar insights on my blog as well.

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