Great question and absolutely a flaw in the traditional compensation process for selling agents representing buyers. While it's nice to believe that all agents/brokers hold the client's interest first, there are instances where it just isn't true. My profession is one where the majority are paid only after a deal closes and this can (and does) cloud judgement . Emotion and motivation can cross-up an otherwise squared away transaction. If it didn't, we wouldn't have a Grievance Committee (I'm on it) or Professional Standards Committee in place. It's the elephant in the room. If you ask challenging questions and feel like you have trust in your representation, I'd suggest you are in good hands.
Anyway, there is no fixed compensation or standard. Homes listed on the MLS will include an amount the seller's agent/broker has negotiated to pay cooperating brokers. Yet you can negotiate any compensation plan you like with the agent representing you. She/he can pass on the opportunity if is doesn't meet her/his needs. So get creative and see what happens. A graduating scale based on level of service and negotiation might be more rewarding for both parties.
Good luck (and welcome to Austin)!
Keep in mind that while your real estate agent is negotiating for you, what you agree to pay is ultimately your decision.
If you've done your own due dilligence and homework on what properties comparable to the one you are interested in are selling for - you won't have to worry about the agent "making you overpay to collect a higher commission" - because you'll know yourself the price at which the property is a deal.
The bottom line - do a little of your own research on one of the biggest investments you'll ever make, so you won't have to trust someone elses opinion/advice blindly. You'll have a much lesser chance of getting ripped off or overpaying this way.
Hope this helps!
Also regarding our possible gain in commission for not being as aggressive negotiation wise, for every $10,000 of the price the Realtor only makes an additional $300 gross. Out of that gross with my broker, Keller Williams for example, they take 30% off the top. And then the IRS takes about 35%. Therefore I would make an extra $100 if I didn't negotiate as hard for that extra $10,000 it would cost you.... Definitely not worth the risk of losing a client's trust, future business and referrals, and also shirking our responsibility as a legal fiduciary. I understand typically human nature is to do what's best in one's interest, but our self-imposed 200+ year code of ethics is adhered to very strictly by those in the business that take their jobs as seriously as I do. Please click on my photo and review my Credentials and Client Testimonials, and feel free to contact me if you would like discuss working together. Just as added proof that I am more concerned about you than myself, I have been so busy this year helping buyers like you, that I have not turned in my commission sheets yet to get paid. I have closed about $3-$4 million in business and still have not collected one penny from Keller Williams. I am honestly just too busy to worry about that right now(it takes a couple of hours per deal) and I'm too concerned about getting the deal done than lining my pockets!
Joe Jarusinsky, REALTOR/Master Instructor,Keller Williams Realty, Austin's #1 Real Estate Co., Ranked #1 by Buyers and Sellers yet again (JD power and Associates 2012)
P.S. I'm dictating this on the road so please forgive any syntax or grammar mistakes. Thanks, Joe
I don't know that it it conflict of interest so much as a (perceived) disincentive for the agent to negotiate the price downward as much as possible. From my perspective, I want you to get the best price possible as a buyer primarily because whatever conceivable 'loss' I take by negotiating you a lower price will hopefully be more than offset by you recommending me to a friend/colleague because I did a good job for you and with your best interest in mind.
As for being represented for free, it's a nice marketing gimmick, but I don't believe it is entirely accurate. After all, it is YOUR money being used to buy the house. Your money goes to the seller who in turn pays his broker who in turn pays yours. If the total agent fees for a $200,000 house amount to $12,000 (paid out of seller's proceeds), I would submit to you that you should pay no more than $188,000 for that same house if no agents/brokers are involved.
Of course, that is precisely the reason sellers SHOULD use an agent. Why would they spend the time and energy in an area in which they may not be an expert to avoid brokers' fees when they will likely sell the house for the same net? Furthermore, as a buyer, is it in your best interest to enter into negotiations for a house in an area with which you are not familiar and against a real estate professional who negotiates home transactions for a living? To add insult to injury, if you go unrepresented by a buyer's agent, the seller may STILL have to pay the full commission to his/her listing broker.
Call me and I can explain more about how the listing and buyer representation agreements are written here in Austin and we can together determine which way you want to go.
Thanks for your time and I look forward to hearing from you.
REALTOR :: Agents for Change Real Estate
mobile :: (512) 739-0457
10% of our net agent fees at the closing of our client's property will be donated to a charitable organization of their choice. We do this with ALL clients. This is our way of expressing our appreciation to both our clients and the worthy causes dedicated to the betterment of our communities.
9600 Escarpment Blvd :: Suite 745-75 :: Austin, TX :: 78749
Sponsoring broker :: David Komie, Attorney-at-Law (License# 584762).
Then Clinton's administration applied additional legislation and the social activists in the administration began to see a problem where it didn't exist, unfairly applied standards. Janet Reno actually sued banks that were applying rational standards of credit worthiness to force them to lower their standards for people of poor credit. This had a very strong effect on those standards causing relaxation of them, rather than fight the government in law suits. Simultaneously getting rid of the
Glass-Steagall act allowed commercial banking (I call them financial sharks) get into the business.
This new variable brought in clever ways to hide the true risk associated with high risk loans by combining them into large complex financial instruments where no one could fairly assess the risk associated with them. Commercial banking did not have, and does not have the same mind set and incentives that local and regional banks have. They figure out ways to avoid or spread the risk that are not available to the smaller entities.
At the height of the crisis, I often told people that the standards (due to over wrought social activists pushing for "everyone" to be able to buy a home were so relaxed that if you had a pulse and were breathing, you could "qualify" for a loan. On top of that, the Fed was making so much money available that lenders freed from the usual banking standards began to offer ever more ridiculous terms (interest only loans, 105% of value loans, no doc loans etc.)
When you have a huge supply of money with no apparent concerns about the ability to pay it back, and a finite number of homes available, you create demand that exceeds a rational market expectation and supply of homes. This led to the inane bidding wars as everyone was trying to get in on the act to take care of their own unique circumstances and "get their fair share." What was missing was the government's normal oversight to ensure the market was rational, indeed, given that Reno was suing responsible banks to force them into the "everyone should be able to buy a house" game, it only made sense to participate.
My own assessment is that the government was responsible for setting the stage, and then when the sharks got into it, there was no way to deal with it. A classic overheated market (similar to run away inflation, it's more about expectations than real conditions.)
As stated earlier, the buyer agent's incentive is both financial and logical. His/Her job is to do the best they can for you in any given situation, and that might involve making the best bid in an overheated market (as we saw in the bubble areas like California, Nevada and Florida) or negotiating the best price possible in areas where this kind of rampant price inflation wasn't present. I, and most agents I know, take seriously our fiduciary responsibility to our clients and do our best to inform them of the conditions on the ground where we are working and allow them to make an informed decision. As stated elsewhere, the difference of commission for negotiating a $10,000 reduction in price paid is likely $300 or less, depending on the commission being paid by the seller. That is simply no deterrent on a typical total commission, but making my client happy with my ability to take care of THEIR needs far outweighs any small increase in my compensation. My happy clients refer others to me, and there is a multiplier effect there that simply cannot be denied.
Basically, as an economist, you understand supply and demand and it really is the determinant variable in all of this business. We are seeing a huge spike in rental prices in Austin due to the supply/demand curve. Forecasts suggest we'll have 50,000 people a year moving to the Austin area this year, and in each of the next four years. Rentals are always the leading edge indicator in this kind of market, so we can logically conclude that prices for purchase homes will be escalating here as well, but will lag the rental market for some time. The rental market is also being hammered by a supply shortage as new construction of rental units had nearly stalled and it takes time respond to the increased demand. Reaction is slower than the demand rise so we're likely seeing a bubble spike in rentals and it will be followed by one in purchase homes, unless something dramatically changes in the economy and people stop moving here.
That being said, Austin has a historical aversion to the kinds of increases other areas have experienced, and from what I'm seeing now, it continues.
A couple of points I want to make. I understand that there are honest agents who will do the right thing despite misaligned incentives. That is all well and good, but such agents will find it *easier* to do the right thing with a better aligned incentive scheme. From a public policy perspective, you subsidize activity that is positive (e.g. education) and tax activity that is negative (e.g. pollution). From an industry standpoint, activity that benefits your client should be encouraged.
Note, this misalignment has broader implications. When both buyers' agents and sellers' agents face an incentive to increase house prices, this leads to overvalued homes. As we've witnessed, overvalued homes can lead to housing bubbles. This is not good for anybody, and certainly not the real estate industry.
To be sure, I've studied the financial crisis in depth and believe most of the blame to be upon securitization of mortgages (and also on the Fed). Securitization is yet another case of misaligned incentives. A bank reselling a mortgage no longer faces an incentive to care about default risk, so will loosen lending standards. This highlights the importance of aligning incentives. Agents played a small role in that buyers' agents were in the best position notice that houses were overvalued and raise a flag to say that a bubble is forming. They didn't do so because higher prices were good for their commissions. Economists failed to raise a flag as well, and misaligned incentives are to blame for that as well (high degree of political hiring of economists).
With properly aligned incentives, where half of the agents want higher prices and half of the agents want lower prices, the industry will want fairly and accurately priced homes, and the market will stay balanced. The incentive for the industry will then be upon maximizing volume, or making home buying and selling as easy a process as possible. And guess what, that's exactly what home buyers and sellers want as well.
I have often considered this position/outcome. It makes some sense for sure. I am an open minded business man and would like to interview with you. I like to discuss different tactics with you.
Bill ~ 512-709-6343 or firstname.lastname@example.org
If it were only price and commissions to consider this might work, but there are so many other variables in play that you would need a really nice OR model to calculate all that is in your best interest and the best way to compensate for this.
As I indicated to one buyer this week, your risk is not that I can convince the seller to accept your price. I probably can. The problem is the time it will take me to do this, and your competition. Over about a week to 10days timeframe I negotiated nearly a 10% price reduction off a fairly priced home in better than average condition and quality. Only to be sniped before we could sign off. So another buyer now has the house under contract.
What are the buyer costs at this point? Higher interest rates probably have negated any savings they might have gained by the prolonged negotiations.
I don't know the Austin market, but expect it is heating up. So what if other buyers are bidding over list price? How does that affect your compensation plan. You want to bid to win right? Not bid to loose. So the highest price wins, not the lowest price.
Every agent is different....their motivations are different and how they work is different. Pick the recommendation of a friend or trusted advisor. I personally would rather you get the best price we can, get the best house we can, in the best neighborhood we can, and do what works best for your family. I want to provide you with the best service I can. I ALWAYS think of resale.....I want not only your business....but all your friends, family, and coworkers....and I want your resale when you move. I dont want to have you overpay now, because that will cause me damage in the future.
There are so many variables I just don't think you can or should try to compensate for all of them. What if the very best home is under priced and you should bid high to lock it up. Under your plan the agent might not show you the house. They'd rather show you the most overpriced house, so they can perhaps negotiate the biggest discount, even if that means you are still over paying for the home. I can think of easily 100 scenarios where this simple idea is flawed.....for example what if the house is $100,000...and the seller tells your agent compensated under your plan....I'll sell it at $100K and your buyer can keep $15,000 worth of fridge, washer, dryer, flat screens etc. or if your buyer doesn't need all that stuff I'll give it to them for 90K.
Just some things to ponder....for your thesis...
I understand your concern about the buyer's agency. The right agent, however, has much more to gain from good performance than bad. Agents that have good reputations, have been in the business a good amount of time and expect to continue have everything to gain from getting you the best price. Not only does it gain your gratitude and usually referrals to other people who might be buying or selling, but also your return business when it's time to sell.
Always insist on seeing the comps yourself and ensure that they are using the right criteria, making sure that you are comparing apples to apples at the time of writing an offer.
Most importantly though, contact a couple of agents and talk to them. Ask them some tough questions and, if at that point you aren't satisfied, contact more.
Good luck with your search and if you need to get a name or two you could drop me a line, but plenty of my colleagues here sound willing and able!
I can definitely understand your logic but in reality I don't think that is really a problem. It's my fiduciary duty to always help my clients negotiate the very best deal on a home. My clients interests always come before my own but I can understand and fully know that not all agents work that way. If you pay an extra $10,000 for a home I would make an extra $300. That is not really an incentive for any agent to get their clients to overpay for a home. My business is based on referrals so it is essential to always help my clients and ensure the entire process is as smooth as possible.
About 6 months ago and agent actually asked a question here on Trulia that blew my mind. She asked if she could legally go after her client because she found a willing buyer and her client was able to work out a deal with the bank to keep her home. She was going to lose it and was trying to do a short sale to avoid foreclosure.
During the process the bank was able to work out terms and at the same time her agent found a willing buyer. The agent asked what she should do about getting that person to pay her the commission. I honestly let her have it and I received a best answer from the Trulia community. I told her that she must be a starving agent who was desperate for that commission. She should have been happy for her client being able to keep her home instead of being forced to sell and rent an apartment or home instead. I just couldn't believe that agent would pose such a question. With people like that in our business I can definitely understand your concerns.
As a Realtor there is a code of conduct that we all must follow. My duty to my clients is to not only get you the very best deal but also to look out for anything that could happen to you along the way. It is my job to educate you on the market and what homes are selling for. When it's time to put in an offer I don't directly tell you what to offer but my job is to inform you so you can make an educated offer based on the facts. What comparable homes actually sold for as those homes were successful in obtaining their objective.
I help a lot of clients relocating here form California and the rest of the country with companies growing in the Austin market like PayPal and many others. I would be happy to assist you in any way that I can. If you really want to save some money I am also a licensed mortgage broker and can give you an absolute fantastic deal on your financing far better than what any bank or broker can even offer you.
If you would like to talk about how I can help you achieve the very best interest rate with the lowest fees available please give me a call. If I am making a commission on the real estate end I will get you the absolute lowest wholesale interest rate available on the market with the lowest fees, guaranteed. Even my normal offer to a client beats just about every bank and broker in town so I can definitely save you a lot of money.
Call me if you would like to discuss and see if we would be a good fit to work together. Best of luck to you on your move to Austin.
REALTORÂ® | Mortgage Broker
Keller Williams Realty | 360 Lending Group
o 512.669.5599 m 512.633.4157
email@example.com | http://www.AustinListed.com
First, I would be really excited to work with you, and we can discuss any incentive structure that you deem fair and do our best to make it work. On a side note, the economist in you probably has given this some thought, but I never liked the argument that the buyer pays all commissions. I understand they are the only one's bringing money. However, tell that to the seller who is underwater and has to bring money to the table....I promise you....they feel it is coming out of their pocket when they see the line item on the HUD.
I digress. As for negotiating, I want to let you know that I enjoy that aspect of the job. We will do a thorough market analysis to determine our market value and negotiate from there with that being top dollar you pay.
Please feel free to contact me anytime.
I am interested. Contact me and tell me what you have in mind. However, you need to know that a buyer's agent (if a representation agreement is signed) should and will represent the buyer's best interest regardless of commission. The conflict of interest could appear only if there is no representation agreement because then the agent is a subagent for the seller. Call me and let's talk about it. I will give you a quick lesson in who represents whom in a given situation (i.e. brokerage services)
Sierra Homes Realty
Your question is interesting. A buyer agent works for YOU. They are negotiating on your behalf and performing a fiduciary duty to help you find and negotiate the best deal. The SELLER - not the listing agent - is paying the REALTORÂ® fee. There is liability on both brokers. If the buyer agent was not under contract with you, the buyer, (it is referred to as subagency) they would technically be under the listing agent's liability and basically have the seller's interest and not yours and not compelled to work hard to find you the best deal possible. They cannot point out flaws but literally just tour you around and provide you information that is public. Do you want that kind of representation or do you want someone who will actually provide discovery?
Look at it this way: You are getting representation for FREE! Although...
A buyer agent CAN charge you fees. We could charge you a one-time fee for showing you a home. Or we could charge you an additional percentage of sale. We could charge you just time and gas. It's endless. And all negotiable. The point is, each scenario based on the agreement set forth between the seller and the listing agent is already in place.
A good agent should set out making your role as easy as possible and make it a memorable experience. I would like the opportunity to be your REALTORÂ®. Feel free to contact me below.
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