Most prospective house hunters or sellers think they have a “good” agent. Either it’s someone who they previously worked with or perhaps a referral from a friend for co-worker. One of the big reasons for having confidence in their agent is a belief that the agent is “on their side” and “honest” etc etc. I would suggest however that by a certain point in the process, your agent is your enemy and you are negotiating against them more than the other party. This post deals with the buy side of the house buying game. The next post will deal with the sell side.
In the beginning: happy friends
When a house buyer first signs up with an agent then things are usually pretty rosy, the agent assures the person that they can find an appropriate house for a price you can afford and everything will be great. The agent has “lots” of experience and knows the area inside out. At this stage of the game, you and your agent are mostly on the same page. You want to buy a house and they want you to buy a house. Your agent will most certainly want to get the process over with sooner rather than later but that’s usually the case with the buyer as well.
During the search: uneasy allies
Agents know that they need to spend a fair bit of time with a buyer especially ones who want to look at a lot of houses. After a while however it’s not worth it for an agent to continue a long search especially if their contract is running out. This is the time when the agent will start trying to convince the buyer to lower their standards and raise their prices. Sometimes this is educational if the buyer has unrealistic expectation but mainly this is to speed up the process so the agent can get paid. I should point out however that real agents are normally quite useful during the search since they often know more than you do about the general real estate and can get you access to private showings. The other big benefit is their access to sale price information for similar houses.
Thinking about putting in an offer – Trust no one!
The point when the buyer submits a offer on a house is a time when a lot of house buyers – particularly first timers feel out of their element and defer to their agent for advice. This is the worst thing you can do. Your agent gets paid when the deal gets done and only when it gets done.
This is a time when knowledge of the real estate market should be a big help in determining how much negotiation should be done. As well, if the buyer is not in a hurry to buy then that sets up a great negotiation opportunity. However if there is one thing that real estate agents don’t like it’s clients who negotiate hard – why? Because the only way to negotiate properly in a deal is to be able to walk away if the price you want isn’t met. The way an agent sees this type of situation is that if a deal falls through then they have to spend a lot more time looking at houses before they get paid.
Things that your agent might say (and you should ignore) when you are about to put in a bid are:
- “Don’t bid too low or you will offend the sellers”. This is garbage – if the sellers can’t handle a low ball bid then they are unrealistic. And what exactly is a bid that is “too low”? I’m not saying put in an unrealistic bid but don’t be afraid to start lower and work your way up. As I mentioned before it’s important to know the market so that you don’t have to rely on the asking price or your agent to tell you the proper market value of the house.
- “Don’t bid too low or you might offend the selling agent and might I have to work with them in the future”. This stunning example of gall and self-interest was actually told to Mr. Cheap. I don’t think this one needs any further comments.
- “You should get a bid in quickly before someone else puts a bid in”. This is a favourite of my agent – create a sense of false urgency, get the deal in motion and get it done ASAP. Sometimes this is good advice but other times – such as when the house has been sitting on the market for a month or longer then it’s just not appropriate.
- “Someone else is looking at the house later today and they are really interested”. This lie usually originates with the selling agent but smart buying agents are usually more than willing to play along because it will increase the chances of their buyer putting in an offer in that day.
Negotiation – don’t listen to a word your agent has to say.
At this point you are potentially pretty close to buying a house. You want to buy the house but at the lowest price, the seller wants to sell the house to you but at the highest price and your agent wants you to buy the house and doesn’t care at all what price you buy it for because they just want the deal done right now. Since paying a higher price will get the deal done quicker a lot of agents will encourage you to bid higher which basically means that you are negotiating against them as well as the seller.
Things that your agent might say (and you should ignore) when you are negotiating are:
- “Meet them halfway or in the middle”. This sounds quite reasonable at first- if the asking price of a house is $500k and you bid $460k and they come back with $490k then isn’t splitting the difference at $475k quite reasonable? Not if you can get the house for $470k or $465k. The fact is that the asking price of the house and your first bid are very arbitrary numbers and splitting the difference between the two might end up in a price that is not market value.
- “Are you willing to lose this house for $2,000?” (or $5k, $8k) This is a tough one – on the one hand it seems silly to not buy a house and be only a half of a percent away from a deal but on the other hand shouldn’t your agent be asking this question to the seller? Ie – “we are going to walk, do you really want to lose this deal for $2k?”
- “Are you willing to lose this house for $12 a month?” This is part two of the previous point which is applied if you don’t bite on the first attempt. It’s also a more useful gambit if the “separation” is a bit greater. If you and the seller are $12,000 apart then that sounds pretty significant but what if you are only $75 a month apart (for 25 years) or even better what if you are only $63/month apart (over 40 years).
Conclusion
The more you educate yourself about the real estate market you are looking in and how real estate agents operate then the better off you will be when buying a house. Real estate agents are quite useful because they can get you access to houses for sale and will often drive you around to look at them plus they have access to the sale price of other houses. Whatever you do, never forget that they get paid when the deal gets done and only then. They don’t get paid for showing you more houses or walking away from close deals.
Tune in tomorrow when we take a look at the trustworthiness of real estate agents when selling a house.
Take a look at another perspective on real estate agents that Mr. Cheap wrote.
Do you have any good “lines” that you were told when buying a house?
{ 24 trackbacks }
{ 152 comments… read them below or add one }
← Previous Comments
Wow. The comments on here are nearly as good as the article. As a buyer half of me wants to use a real estate agent to protect myself and do the process right. However I know what I want, I know where to find it (I run multiple websites and know about trulia and zillow) and am on many realtors email lists, which are great.
I am much more tech saavy than most realtors. Heck, most humans on earth. However access to foreclosures is tough to come by. I did find a realtor who will email the new foreclosure listings to me, so problem solved.
I am living in my parents basement, I have 20% down for the price range I want. Now I just have to wait for someone to sell it. I know where I want to live but theres just not a lot of people moving out of the area.
I found a house I loved in a location I hated. I was very close to making a bed. I slept on it, worked the next day. Thought about my life there and realized I’d rather be closer to a grocery store that wasn’t a complete craphole. I’ve gotta eat every day right? That means I’ve gotta goto the grocer often. So now the new area I am looking at has a very nice grocer, a Wal Mart and a Sams Club within a half mile of it.
Gas is getting expensive and location is becoming even more important *(not that it wasn’t huge beforehand)
A quote from Steven Levitt of Freakonomics fame:
DG: One of the cases that you make is that we hire experts because we want their closely guarded information. With the Internet becoming more of a tool that people use to get information, maybe more so in the future, is this going to change the way we perceive experts, and how we acquire expert information, or will things continue, and will people like real estate agents self-adjust for this incoming threat to their livelihood?
SL: No, I think real estate agents are probably an endangered species. Just like travel agents and full service stockbrokers… the access to the information on the Internet is devastating to real estate agents. In Madison, Wisconsin, “for sale by owners” are something like 25% of homes… Real estate agents are paid a fixed fee, but if you go to the dentist, you pay by the hour or by the procedure. You don’t pay them a percentage of your income. I think what’s going to happen is in the future is real estate agents will be paid by the hour. They do provide an essential service: they show people your house and help find you clients. But the model will change to choosing from a menu, a la carte real estate.
Also, see titled “Market Distortions when Agents are Better Informed: The Value of Information in Real Estate Transactions” . Interesting read.
Sam: I loved that part of “Freakanomics” (where they talk about realtors’ homes selling for a higher price). I’ve asked a number of real estate agents if they’ve read it, and surprisingly not one of them has (that they’ll admit to).
You are right-a lot of Realtors are not doing their job, and a lot of Realtors are unethical. It is not just Realtors though, this applies to all business people. It is also a regional thing-if you are in a small town, it might be different than if you are in Southern California, where I am.
Here, there are 1,000s of homes for sale in any give person’s area. They need someone on their side to help them sort through those homes, go see those homes, then negotiate a good deal (and by negotiate, I mean do research to find the true value of the home based on comps that are relative to the market and then convince the sellers that the price offered is fair based on concrete evidence.) I don’t believe anyone, sellers or buyers, should be randomly throwing numbers out there.
Furthermore, when it comes to paperwork, it is great to know you have someone taking care of it for you-that is, if they are really taking care of it. Some Realtors, it is true, don’t do their due diligence (say that 5 times fast).
So, Realtors are invaluable people, just as any other business professional is, but only if they are really good at what they do and they really are looking out for you, their client. And the only way to know that is from referrals of other satisfied clients, word of mouth, your gut feeling, and your own research about that Realtor.
Thanks!
-George Hartline
Team Hartline
http://www.teamhartline.com
The true key is finding a real estate agent that actually gives a damn about you. Like it was mentioned above, there are real estate agents who go above and beyond for their clients whom they treat like family. You just need to find one of the good ones.
I have to mention that not all agents are like this. I am a Realtor in Ohio and I don’t use any of this type of thinking. I would rather fully represent a buyer, walk from deals and get their referrals than try to convince someone they want something they don’t or can’t afford. I have to admit thought, that a large number of short-sited agents do only look at the small picture.
It’s funny because alot of people I show houses to for the first time are surprised at how honest I am and usually call me to show them more. My job is to provide a service of presenting facts and helping negotiate.
Remember, if you work with the seller’s agent, they get double commission so they are really going to convince you to buy. Seller’s agents are representing the seller and are obligated to do what they legally can to sell the house.
This is a decent post and gives me even more insight to do what’s right, I just don’t think you should include all Realtors in this prejudice. My advice, if someone tries to feed you this crap, let them know they work for you and you can find another agent. Also, read the agency disclosures you are signing, they are there for this reason.
Very good post!
Another Realtor with input here, I want to share a story of a client I had this past spring.
He owned 1/2 of a duplex – the *identical* other 1/2 sold six months before i sold his half – and yet I got him $51,000 more.
But I wasn’t done yet. We got him his new place, and I got the price of that one down by $20,000.
After a credible building inspector I use found some wiring issues, I was able to get the price lowered by another $20,000.
I then brought in an insurance guy I know to take a look at the existing policy on the place – did we want to inherit the existing policy, or could he do better?
He said we could do better, and provide an additional layer of protection. (Earthquake). Another $600 in savings.
There was a few months’ gap between the two closings, so I asked him what he was doing with the money in the mean time, and he was just letting it sit in the bank.
So, off to an investment consultant I know – in just a few months she made him almost another $10,000 on that money before it was used at the closing.
I’m absolutely thrilled to look out for my client’s pocketbook EVERY STEP OF THE WAY – and the reason I do it?
You guys have it right! GREED! I want my clients to be so happy that they use me time and time again, and refer all their friends and family to me. And the best way to do that is to do an outstanding job when I represent a client.
And getting the deal done “fast” is never my *goal*. Hey, its GREAT when it happens, who’s kiding who, but after I properly qualify a buyer, I am confident that they are gonna buy something, and I’m not too concerned with the timeline.
I could tell a few stories – but I’ll leave it with just this note:
I don’t even agree that there are “many” or “most” agents are unscrupulous. I believe that many or most are good – there is a 10% that colours the 90.
Another relevant question is how long someone has been in the business. The shysters never last more than 2-5 years. While I risk tarring honest guys trying to break into the business with this comment, cause there are many, I think a crucial question is “how long has the agent been in business?”
It is a business built on co-operation with other agents, and if he’s screwing his clients he’s probably trying to screw other agents too – and once you’ve destroyed those relationships, your days in the business are numbered.
Thanks for the great comment Lawrence – you sounds like a pretty good realtor.
Excellent comments.
I think there are good agents out there but few and far between. I have had my share of greedy agents just looking to make a sale at any cost and giving me one liners as mentioned in the article. My favourite is when you are supposedly a few thousands dollars away from a deal and the agent drops you one of those one liners “it’s just a few $K”. I say a good answer to this is, well why don’t you pay it out of your commission, its only a few $K.
I strongly suggest for anyone planning to buy a house to simply look for themselves and then contact the seller’s agent directly. This works the best for you. When you bring your own agent, the seller’s agent has to split the commission, but if you are dealing directly with them, there is no such thing and by the fact that the agent is looking after both the seller and the potential buyer, you are less likely to get swindled.
wow… what a bunch of sad, unfortunate and paranoid creatures here. watch out for plumbers, electricians, mechanics, farmers, tailors, shop owners, barbers, coiffures, taxi drivers, restaurateurs, masseuse, bar owners and anyone else in business for themselves – they’re all in it for themselves first – duh?!? why is this such a revelation?
what do you do for a living? are you doing it for money and personal fulfillment or have you all taken a vow of poverty and work simply out of generosity of spirit? what is wrong with earning a living by helping others achieve their goals?
sure you can buy and sell your own property, you can also fix your own car, grow your own food, cut your own hair, sew your own clothes or you can hire someone with experience. here, do your research or get a trusted referral.
it really depends how valuable your time is. if you’ve got loads of time and no money, do it yourself but don’t expect free info from realtors of whom you have no plans to compensate.
anyway – a quick universal secret, like attracts like so if you got taken, stop being such a schmuck to others and maybe you’ll have better luck next time.
sad that blogs can turn into such hate-o-spheres…
Passing Through – I would suggest that one of your New Year’s resolutions should be to improve your reading comprehension to a level where you can actually understand a fairly basic article such as this one.
It doesn’t say anywhere in the post that you shouldn’t use a real estate agent. In fact it says they can be quite useful.
I would recommend that most buyers and sellers use a real estate agent because it isn’t really practical to not do so – however the point of the article is to keep in mind that your agent isn’t “on your side” like they pretend to be.
Interesting read. I really do think that there are some inherent conflicts in the real estate game, and that those conflicts encourage some agents to take advantage.
We were lucky in the fact that my in-laws both have their real estate licenses, and were able to make sure we got a good deal. They sold our townhouse for us for free, and even refunded their commission back to us after we bought our new house. That ended up saving us several thousand dollars. My advice – get a family member to get their realtor’s license and do your deal for free!
Pete – that sounds like a great plan!
great read & comments;
My wife & I are currently using an agent to sell our 2 properties – family friends so I do know that they have our best interests at heart (yes, I hear a few of you laughing but…)
When we decided to use her as an agent, we first sat down & went through the process of what we wanted, required and expected. She gave us the same feedback & requirements.
Using an agent has its ups and downs, the “used-car” salesman syndrome can still exist but if you do your homework, chances are you’ll get out if it a winner.
One other thing, since we are moving to another province, we selected an agent that gave us some sense of security – we’re both Army; he’s retired and I’m reserve — I look to the bond and trust to make sure we get a great deal.
I think this article isn’t fair. Real estate agents, do not make a dime until the home is sold. That mean’s they could invest plenty of time, and still not earn anything. There aren’t too many professions that require you to do this.
I just helped a “friend” look for a home, we met at least ten times for several hours a piece, he finally found an apartment, and put an offer on it, but because of board requirements (it was a co-op), and his failure to verify his financial standing, we were rejected (after researching, and spending plenty of time looking at over 20 apartments in that one building alone.)
OK, so he made a mistake, sure enough, I said, we must find you something, so I started over.
I found him another home, this time a condo – that he picked to view, in a town he suggested. OK – he likes the place, and decides to put an low-offer on it. I wiggle the seller’s agent down to it, and we get an agreement.
During attorney review, he mysteriously finds another home, in another state, with another real estate agent (apparently, he had at least one other sending him listings while I was helping him all along).
So I spent well over two months helping this person, gas / car expenses, time spent on researching listings, calling and making appointments, paperwork, negotiating, follow-up with the other agent and lawyers.
Now I will not make a single cent.
John, you are talking about a different situation (compensation from an agent’s point of view).
I couldn’t agree more with you that the compensation structure also doesn’t work that well for the agent, especially in your situation.
Agents should be charging for time and for work completed. Ie charge $50 per house viewed, a set amount for the final paperwork, a set amount for putting in an offer etc.
If there’s any light emerging from the excessive heat of many of these comments it’s the reality that commission as the dominant form of remuneration does indeed create a structure conducive to conflict of interest. Clients want and need to be consulted with rather than sold to!
Some may be comforted to know there’s a growing movement across North America toward a different business model. It’s an adaptation of business consulting applied to real estate brokerage offering transparency, choices and remuneration based on services rendered instead of the traditional one-size-fits-all approach paid for by a sale-contingent commission.
I’ve contributed to this development and employed it in my own practice over the last five years of so. Result: clients have kept more money in their pockets and I have been fairly compensated for my work.
Mollie Wasserman’s piece, ‘Want to Re-Build Consumer Trust? Then Stop Ignoring Human Nature’, in The Consulting Times is insightful…
http://www.theconsultingtimes.com/agent/archives/2009/01/07/want_to_rebuild_consumer_trust.html
Ron Stuart
The 3rd counter offer into buying our first house, it became apparent to me that our agent was working to get the most commission he could. Sitting on his living room sofa I asked him for a moment of privacy to talk to my wife regarding the last “final” counter-offer on the table.
I told my wife that at that point we were negotiating not with the other agent but with OUR agent, and that to get the price we wanted we needed to convince OUR agent that we would walk away if our offer wasn’t accepted. She almost panicked and was worried we’d lose the house, but we looked him in the eye and told him that was as high as we could go and if they said “no” then that was ok and we’d see him next saturday morning to look at more houses. It was tough lying to our agent – a friend of the family – but we had to.
We got the house… and at our price. Our agent-friend still talks about how good of a deal we got to this day!
Ron: Great comment and an interesting article. Glad this has worked out for your practice.
Tom: Sadly I think that isn’t an uncommon experience. I never know what to say to people who say “our agent is on our side! He’s family / a friend / a co-worker / a squash partner / a good guy!”
Good for you that you’re still friends with him! I would have found it hard to let go of if a friend was trying to maximize his commission at my expense.
het did you ever try to sell something for 5 dollars and then somebody offered you 50 cents?…. did you get annoyed? chances are you did!…. A lowball offer might not offend the seller but it could make a difference as far as whether or not they will take you seriously……… Just thought I’d think outside the box you all seem to be stuck in.
PaulC: I wrote a post on exactly this topic you may find interesting.
In answer to your question, if I was trying to sell something for 5 dollars and someone offered me 50 cents I wouldn’t get annoyed. They’ve offered me an option I didn’t have before, nothing says I have to accept their offer. If I had just listed the item, I would politely tell them I’m expecting to get much higher offers but I’ll get back to them at a later date if it doesn’t sell. If the item was worth more than $0.50 to me, I’d thank them for the offer but tell them it was worth more than that for me to keep it (and invite them to make a higher offer if they decide at a later date it’s worth more to them).
There are some bad ones out there but like many have refuted here, it’s not right to say they’re all the same. When you live and work in a small community all your life like I have, people know how you are and either they trust you or they don’t, based on whether or your history and their personal experience with you, also, your role in the community. We treat our clients like the neighbors they are. If we didn’t we would not get very far in this business.
a realtor would not ask a seller if my offer was acceptable without a signed contract and earnest money.SORRY,I ONLY LOOK STUPID….i eat realtors now just for fun.
all realtors are crooks check out this video
http://www.youtube.com/watch?v=fdCVHbeH6rM
Stick to personal finance because you obviously don’t know what you are talking about when it comes to being a Realtor. When a buyer decides he or she wants to put an offer in on a house, there are many things I ask them to base their decision on including ALL of the comparible sales in the area in the past 3 to 6 months. I have shown clients as many as 50 homes before they make a decision they are happy with and I do it gladly. As for any other comments, I have recommended several times that buyers do not go forward with a deal because the price is too high! I agree, there are bad Real Estate Agents. There are also bad doctors, bad painters, bad plumbers, and yes, there are bad financial advisors too who pass themselves off as “financial planners” when they are nothing but mutual fund salesmen who sell the fund of the week with the highest spiff! Believe me I know because I was taken in by one. Yet I still don’t go around bad mouthing people in the personal finance industry.
I am sorry so many of you hate real estate agents. Or you think you eat them for breakfast. I know many agents that are worth there weight in gold. An agent that will keep you as a buyer for 6 months and show you 100 homes is a stupid agent. But the reason that agent is tryin to get you to buy is because by the time you do buy that agent will have enough time in you that they are making about 50 cent an hour. If anyone here wants to make 50 cent an hour go be a real estate agent. If anyone wants to talk about how tough it is to be an agent you can call me at 336-671-8108. Be glad to talk to you. Thanks,
Derek,
I could understand your annoyance if you are showing homes in the $150K range where you are making a commission of around $4500 out of which you have to pay expenses. Showing 100 homes (which seems like hyperbole to me but I’ll bite), taking a couple hours each time you show one would mean you have 200 hours into the project. If you net $3000 on the commission then your hourly pay would be $15.00, not .50 cents.
But I can’t believe you would be showing 100 homes to someone who is only spending $150K on a house so how about a realistic number? When I bought my house I spent $535,000 on it. That means that my agent grossed $16,000. After his expenses and broker costs he probably cleared $10K. He showed us 10 homes and probably spent a total of 30 hours with us. By my calculations, he made $333/hr. Not bad money.
What is more disagreeable for the consumer is that the home SELLER is taking a bath in the market right now and any hope of netting any thing AT ALL on a sale is nil. If I wanted to sell my house right now I probably would have to put it on the market for around $500K and I would be happy to get that much. Meanwhile, I still am going to have to pay $30,000 in commissions which means that I would be upside down on my house by, not $35,000 but by $65,000 after adding the agent commission costs.
This is why, if I have to sell, I will sell on my own. I could spend $15K on advertising as well as a little for a real estate lawyer to do the paper work and I will be WAY ahead. I’ve done it before with a two different home sales and it works MUCH better than paying an agent to list the house and sit back and wait for some other agent to show up with a buyer.
IMHO, real estate commissions should be somewhere around 4% MAX. The listing agent can get 1% for doing the paperwork, setting up some open houses and putting a few ads online and meanwhile, the buyer agent still gets his 3%. This commission should be sliding so that more expensive homes can still be competitive on the market since the seller is not trying to come up with $30 or $40K in commissions.
Dan,
you may think your agent made 333 an hour. I will break this down as close as I can. Dan you are a unique buyer. I would love to have you over and over as a buyer. First only looking at 10 homes before you buy is awesome. You dont have analysis paralysis like a lot of buyers do. Second you buying a $535,000 house puts you in the 6% of the buyer out in the market. I will show you a lot of the cost in selling 1 home here. My numbers come from either the National Realtors Association (stats) or from real estate coach (business stats).
First there are 3 types of cost. Before you meet your client cost. During the time you are with your clients cost. And after the deal is done cost.
Before you meet your clients cost.
You have marketing. Real estate coaches tell you to never spend more than 7% to get the client. This means on a $100,000 deal you should not spend more than $210 to make the client sign with you. (100,000×3%=3000×7%=210) This is what you spend in marketing. This is a low number for most agents because they do not do a good job in marketing the right things. (Ex. advertising in magazine, $400 a month should bring you at least 2 clients buying a 100,000 house.) Most agents will advertise in a magazine and get nothing. You must be a Realtor to get the benefits. This is about $500 a year, $1.37 a day. You must have a e key to show homes. This is $130 a year, .36 cent a day. Your license cost $40 a year, 11 cent a day. Your privlage license cost $50 a year, 14 cent a day. You have to pay for the MLS $420 a year, 1.15 a day. If you are associated with a franchise like I am you pay a desk fee. Mine is $600 a year, 1.64 a day. I also have to pay for internet fee and a contact manager fee, but we will not count those since they are not mandatory. So your total bills are just to open your doors and call your self a real estate agent are.
210/for half page ad to get your 100,000 buyer.
500/1.37 daily for becoming a member of Realtors Association
130/.36 daily for an ekey so you can open doors to show property.
40/.11 daily for real estate license.
50/.14 daily for privlage license so the government knows your in business.
420/1.15 daily for having access to the MLS.
600/1.64 daily for a desk fee at a franchise. (Mine is cheaper than most agents, some can go as high as 2000 a month.)
So you have spent just to open your doors and meet your first client.
1950 a year/ 5.34 a day to just meet your first $100,000 client.
Now this does not include vehicle expense, technology (computer) expense, EandO insurance expense, office supplies expense, phone expense and any web site expense. I could make this list very long on little expenses. But, this is the bare minimum to operate. So far we are at $5.34 a day. This is not bad so far. My business actually runs on about $10 or 11 a day. This includes all the other expenses I did not count. I am bare bones. To be doing everything I want I would be operating on $26 a day.
Over all $2000/ 5.34 daily to open your door.
Expense during your client.
The Realtor Association says the average buyer spends 10 weeks looking. The average client is a first time home buyer. The median price point in my area is $185,000. Dan you are in the top 6% of home buyers buying a $535,000 house by the Realtors Association. I would even go to say you are in top 2% (my opinion, Realtors Association did not go that far with it). Realtor Association says that most buyers look at 10 homes before buying. I thought this number was low, but the Realtors Association says it so we use it. So if you spend 2 hours a house and say $2 in office supplies for each house and 1 gallon of gas at $2.65 (price in my area). Lets say the agent spent 2 hours going over agency paperwork with you as well. You have spent 22 hours, $20 in office supplies and $26.50 in gas. Now the buyer has found there home to buy.
CMA and Contract is in progress. CMA cost lets say $5 in printing material and 2 hours of time. Contract takes 1 hour to write and 2 hours to review with buyer and $3 to print. Lets say it takes .30 minutes to deliver contract and 1 gallon of gas at $2.65. Lets say it takes 3 counters to work the deal out (my opinion) at 1 hour each counter (.30 minutes on phone with buyer and .30 on phone with agent to give the counter) for a total of 3 hours. Now offer has been accepted. So 1 hour for agent to make all corrections and for you sign. So again .30 for delivery of contract to other agent and 1 gallon of gas. Now the agent must do a lot of paper work behind scenes. Turning in paperwork and getting scheduled home inspections, getting attorney set up for closing and getting paperwork to loan officer. This is a total of say 3 hours. It does take more, im being concervative. So you go to a home inspection, this is usually 2 hours and well say 1 gallon of gas. Paper work is made and negotiations is started again for repair items from home inspection. This takes say 1 hour to type this up and .30 for review with buyer and sign. Lets say sellers agree so there is no negotiations. Before closing you go to a last inspection of the house. This takes 1 hour and 1 gallon of gas. Now you head to the attorney’s office and it takes 2 hours and 1 gallon of gas. That is done.Up to this point you have 20.5 hours in time and $13.25 in gas (4 gallons). This was a pretty simple transaction to. You did not have to negotiate repair request, there were no paperwork that needed a signature, i did not add in any time for driving nor did I add in any time for getting paperwork to everyone. I assumed the buyer’s agent used email where the third parties did not need originals. Most agents still drive the contracts and paperwork everywhere. So at this point we have
Now the cost after the sale.
There are closing gifts. Lets say on $100,000 buyer we spend $50 on gift. There is getting them a copy of all the paper work to there new home. This cost usually about $10 in printing and 1 gallon of gas and 2 hours of time. The real killer is the commission check you have to split with your company. So on a $100,000 sale, I bring back to the company $3000 back on a 3% deal. The company takes that $3000 and deducts a franchise fee out (6%) to equal now $2820. Than the company splits this with me for my commission split with the company of 50% to equal $1410. This is my part of the block of cheese. $1410
The grand total the $100,000 buyer cost you is
44.50 hours of your time. So lets say we spent a total of a week with this buyer. $91 in office supplies. $42.40 in gas (I was very concervative in this). And lets say since you spent 44.5 hours with this buyer it cost you a week worth of holding your doors open which was $37.38 for the 7 day week. Grand total cost was 168.13 for the expenses and 44.5 hours of time. This breaks down to basically you made $27.91 an hour. So it wasn’t .50 cent and hour. When you take in the amount of time you spend to weave out the tire kickers and the problem contracts this number goes down. I also did not include all the other expenses like I said a while back. Cell phone, dry cleaning the list goes on and on with these small leaks that would flood a big ship. I operate tight on money and my business operates on $10 to $11 a day. So if anything my numbers are low. I know I was low in gas. Also my money for a half page ad was 210 for only 1 month. Times that by every month your numbers really jump. That alone would make this a $10 a day operation cost instead of a $5.34 daily. I think truely most agents make about $10 an hour when the smoke clears. Dan I understand you would sell yourself. You would be in a mode that you would have to. Your house feels the market. There are some out there though believe it or not that are not feeling the market. They are thriving. I have tons of stats if anyone wants them.
Real Estate Agents are total liars … just look at what they have been suckering people into buying lately as the sun shines through the clouds in the eye of the storm … this isn’t over and real estate agents know it’s only getting worse … And if you don’t believe me then read this article which says the USA is going to be ripping down entire neighborhoods so the city can keep thriving … my house will become a farm field: http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5516536/US-cities-may-have-to-be-bulldozed-in-order-to-survive.html
We real estate agents havent been suckering people into buying things they dont need. We cant sell someone something the bank wouldnt give them the money for. Also to most people buying a home is an emotional decision. Most agents try to get there clients to not have emotion thru the process. It rarely works concidering Americans are posession driven people. So it was not us agents that made the economy bad. It was emotional and greedy Americans and the banks opening the doors to the lending world. That is what caused the economy to turn south. If you look up the history of the economy changes its always greed also. Greed is really the reason the economy ever changes. I think the government knew this down turn was coming. They post pone the recession from happening on 9/11 with a real estate boom. The real estate boom rode its course and could not continue forever, so we find ourselves in a recession. So dude stop blaming the real estate agents for everything. There are 1400 real estate agents in my local area and 200,000 people. I wish I as a real estate agent had that much control over people. If I did I would of sold alot more houses with that kind of control.
Derek,
I think I would like you to be my real estate agent. I am looking to buy a house, and I’ve been with 2 estate agents so far (not at the same time). None of them spend 2 hours on a house with me like you did. In fact, most of the time they spent 20 mins on a house. I don’t think they spent > 1.5 hours driving. Also, they show me houses close by at the same time so we often are able to visit 2-3 houses on the same trip. So instead of spending 6 houses to visit 3 houses like you suggested, they spent 2 hours… a saving of 4 hours by doing it this way.
But really Derek, your calculation is flawed because you did not consider the ECONOMIES OF SCALE. I hope in your advertising you are not only posting 1 house, but instead MULTIPLE housing. If you close 2 houses in a month, over the year you are suggesting that you spend $2,184 in office supplies excluding computer cost ($91/house x 2 houses x 12 months). That is insane.
I hope drafting a contract will also take less than 4 hours. I believe contracts are fairly standard and most work are done by lawyers, not agents. The first contract may take 4 hours, but I hope by the 10th deal you have it should take 40 minutes instead.
My analysis may have missed something so please feel free to shred some light.
Dear Homebuyer,
Some of my calculations are off a little, some times they are low and sometimes they are high. There are factors that I did not even take in concideration, but they are cost. The reason is because I do not have a way to measure them to give them a price. As far as the time for showing homes. I think it is close because I also added the time to schedule the appointments, plan the route, showing the home, going back and giving feedback, filling the list with your file.
The contract issue. There is a standard contract, but each case needs different things. So there usually is some extra addendums and disclosures. I also before ever writing a contract I check to see if property is in a flood zone, if a new highway is coming thru the back yard anytime soon. I do a CMA to determine value of property. I check anything in public records such as if there are any leans and what did the owner pay for the property. So yes a contract does take me at least 4 hours minimum. There are some contracts that are very long and take way over 4 hours, such as a Foreclosure from Country Wide Mortgage. There basic contract is about 50 pages. My basic contract is 8 pages. My basic new construction is 11 pages. My average contract though is about 12 pages.
Yes attorneys do some of the public research for you to. But, if you have a buyer’s agent that is free why would you not want him to do this for you for free before you have a contract and money tied up in the deal. The attorney cost and he usually does this after you already have money wrapped up in the property thru any inspections and any upfront fees the bank may ask you to pay such as an appraisal. I had a deal recently where a planned highway was being built 600 ft. away behind the house. The sellers told my buyer there is no such thing. My buyer questioned me because she was friends with the seller. I gave the paperwork to the buyer and they took it to the seller. Only than the seller said ol ya I remember this. These people were friends. And the seller lied. If my buyer had went forward and bought the house she would have about 1000 up front money in the deal and than a day before closing the attorney would of called and told us about the highway. My buyer would of also probably had her place packed up and already scheduled a moving company. You have to pay them regardless, so it would of been more money. Great example why not to buy a for sale by owner by the way.
Basically it’s like this everyone who hates agents.
A home is the largest purchase most people ever make. Why would you want to find a way to save a few thousand on commission on something you are going to be paying for the next 30 years. If nothing else, it is great to use an agent to have someone who will carry the liability if a mistake is made. That alone is worth the commission. If you dont believe me. Go to your local court and find cases where for sale by owners and buyer’s are in court fighting. Contact them and ask them if they wish they had a realtor.
There is a saying about this. As the mouse layed in the trap tryin to get the cheese. He thinks forget the cheese I just want out of the trap. Suddenly the cheese isn’t important.
(I love this disagreeing back and forth. This is much better than a site where we agents give advise and try to look like we know everything).
Derek,
Thanks for enlightening us with your industry insights. I thought a real estate agent preparing a contract must use approved forms with minimal additions and changes. Otherwise, there will be a liability issue because of unauthorized practice of law. Therefore, for the sake of risk of liability issues most agents defer that to the lawyers to do the work. This may work differently in your area though.
I guess it is tough to pay someone several thousand grand when we “think” we can do the job. I think once we know the value added services agents provide we will have an easier time to swallow the bill.
Home Buyer
Contracts can be very differnet. Everyone buying and selling has different things they want or different contigencys that they want so they can back out of a contract if something happens. It’s like if you were buying a house and the home owners association is changing there price or they are doing work in the neighborhood and they are going to access everyone for it. This would be another 2 pages in the contract to allow you a door to back out of the contract if you find something that you do not like about the home owners association. If the home owners association was a sound and never had accessments than you probably would not worry about wanting a door to get out of the contract. If the house is older than 1978, there should be a lead based paint addendum. If it is newer than 78 you don’t have to have a lead based paint addendum. This is 2 extra pages. There is an insurance addendum, new construction addendum,3 different property disclosures, owners association disclosures, addendum to contract, amendment to contract, addendum A and additional provisions addendum. All of these are extras that can be attached to a contract. Each of these are 2 to 5 pages of extra pages to the contract. I am in North Carolina. I think our contracts are simple. Basic contract is 8 pages and usually my contracts come in around 12 pages. My father lives in Washington DC. There basic contract is 40 pages. It is not uncommon for a contract to be 50 to 60 pages. They have crazy addendums like air addendums and tree and shadow addendums. SO there is an addendum for the air that blows to your neighbors house or trees that shadow your neighbors house. Craziness I think. Foreclosures are over 100 pages.
There is no law that says a contract has to be in a standard form. As long as an attorney draws it up and it is all the legal talk to bind someone to do something. I think the courts would upstand the contract. We have a standard contract because it would be really expensive to have a special contract drawn up every time a home sells. Now the Country Wide Mortgage contracts I talked about earlier. There contract in my opinion breaks North Carolina law. So I think there are things in there contracts that buyer’s sign saying they will comply. But if it ever goes to courts the buyer would win because the law was broken by the seller making the buyer sign and comply with the contract. You have to remember. We have to comply with all laws. Federal , state, and local. The purpose of the foreclosure companies with there own contracts is so they can take your rights to back out of the contract away. They also say they will not make any repairs. So property being sold as is. COuntry Wide makes you get pre qualified with them on all offers. To me this is wrong. They make you open your financial door and show them how much you can afford before you try to offer them less on a property. I think also there is some rights they try to take away that by the law you just cant take. This is my opinion and is not deemed to be correct.
As far as the liability. Attorneys wrote the contracts for us agents to use. So unfortantly the attorneys have made themselves unliable for anything in these contracts. That is why you buy title insurance. If the attorney misses anything, he does not have to pay. You payed for it at closing to be covered. Attorneys have worded everything so that all the liability has been put on the buyer’s, seller’s, agents and lender’s. Attorneys never get sued in a real estate transaction. Agent’s and lenders get hit every time. Buyer’s and seller’s get hit about half the time.
Derek,
Thank you once again for your insights. The more I read from your posts, the lesser doubt I have that you are an excellent real estate agent.
However, I think you may be the exception rather than the norm. I looked up the North Carolina’s agent licensing requirement, and it boils down to this:
1. go to 75 hour class (2-week class)
2. write multiple choice exam
3. background checks etc.
4. get the license.
http://www.ncrec.state.nc.us/pdf/LicensingBooklet/general.pdf
How that 2-week course and multiple choice exam are able to prepare an agent to deal with complex contract law involved in foreclosures and other legal matters is a bit unsettling. I think the real estate commission should raise the bar higher so that people like you who possess more knowledge may differentiate yourself from other “average Joes” who went with the bare minimum requirements.
Home Buyer,
Thank you so much. I appreciate your comment. I do agree with you the bar is not that high to be able to go out here and call your self a professional. The class is really hard. I eat, sleep and breath real estate and it took me 3 times to pass the class and 1 time to pass the state exam. the average drop out I think is around 50%. I am also proud to tell you that as an agent you only use about 10% of what you learn in that class. All that blowing fuses in your mind just to learn 10% ablut being a real estate agent. The board tells us that we can not practice law. So I think in a true by the books with agents. Most of the time the only answer an agent can really give you is to consult you to a specialist, like a home inspector, builder or an attorney. We are not supposed to answer questions about law. We are a source of the source but not the source so to speak. The way we still answer these questions without getting in trouble is by stating that things are our opinions not our facts. We are only suppose to be there to help you find professionals to help and to market your property. In the real world if an agent was only this and told you to go to someone every time you had a question, we would not be working for you to long before you tell us to go somewhere. I will tell you homebuyer the area I have learned most from is from just simply being a sponge and reading about real estate like crazy. I have read about everything you can think of about real estate. This has been my strongest weapon for me. This is why I feel confident about tackling on anyone who thinks agents are bad on this blog here. I have so much information and places to get stats from that if your coming in with what you think, I can shot it down in a hurry. So I cant say I know much because I have a license. I can say I know alot because I have a goal to read 1 book a month, or to learn a new stat about my market every day. I also have learned alot because I am out here everyday trying to make it work. The hard part is I havent figured out how to market that I read 1 book a month on real estate or money and why this is beneficial to buyers and sellers. The market wants to hear us agent say I’m a Multi-Million Dollar Producer or I’m a specialist in _blank_ market. By the way it doesnt take much to be a multi million dollar producer. Over all though agents work hard. Alot of them do make mistakes. Real estate is ever changing to though, so it is like what you learn today is worthless tomorrow. Go to http://www.youtube.com and search Did You Know 3. This video will show you how fast we are changing. Just a tid bit. This is why 9 out of 10 agents do not make it there first year in business. There are so many people that want to stick there hands in your pockets. So many things go on behind the screen that other’s do not see. Like a show. No one sees the hours put in to creating a stage performance. They only arrive and watch the show and than complain about how much the tickets cost. They don’t think that this show was probably in planning a year ago. They don’t think about the many years the person performing spent trying to learn how to play an instrument. They only think man 60 or 80 bucks for a 2 hours show. Anyway, enough of my going on and on. Home buyer thanks for your comments. If you need any help at all, let me know I would be glad to help you as much as I can, even for free if you have an agent. If you want to learn about real estate on your own, give me a call I can tell you some great books to read to get an idea on anything you want. My number is 336-671-8108. Thanks,
WHAT IT REALLY COSTS TO BE A REALTOR
IS THE GRASS THAT MUCH GREENER ON THE OTHER SIDE?
I suppose I can’t blame most people for believing that a Realtor’s job is easy. If we do our job competently, honestly and diligently, as is required by the Real Estate Law in Quebec, we make such an important investment and transition as buying a home feel easy, smooth and hassle-free. Yet when we put all our experience, training, tools and heart in providing our clients with this kind of service and obtain above average results, the value of our services is put into question.
I have had the opportunity over the years to analyze Quebec Realtor’s financials. Regardless of the banner they affiliate with, their year-end bottom lines always end up within a couple thousand dollars. As an illustration, averaged over the last 4 years and based on $ 150 000 ($411/day) gross commission (= 24 x $250 000 transactions (12 listings & 12 buyers) @ 2.5% ) which represents a typical income for a top 35% realtor, here is what it really costs to do business:
Costs $19844 / year ( $54.37 / day)
$409 / year Broker’s association licence
$537 / year Local Real estate board
$588 / year MLS
$600 / year Errors & Omissions
$6000 / year Desk fees
$4210 / year Affiliation fees
$7500 / year Franchise fees
Expenses $ 71650 / year ($ 196.30 / day)
$ 29850 / year Income Tax (including the portion of pension and health care contribution which are normally paid by the employer)
$ 9800 / year Car (80% of lease, insurance, maintenance, gas)
$ 3125 / year Telecom (cell phone, long distance, telegrams, internet, answering service)
$ 5000 / year Supplies
$ 1025 / year Administration, legal
$ 17500 / year Advertising
$ 2300 / year Training (courses, travel, conventions, seminars)
$ 1025 / year Tools & Technology (equipment, software, etc.)
$ 2040 / year Client care & protection program (legal aid, transactin protection, etc.)
non-Benefits: $11 000 (usually provided by employer but non-available to realtors )
$900 / year Disability (usually 50/50 with employer)
$6600 / year Vacation pay (based on 4 weeks after 10 years 8%
$4125 / year RRSP contributions (employer programs)
Overtime pay / Shift-work premium or allowance Unemployment insurance
Workman’s compensation
Job security / permanent full-time benefits
It leaves $47500 / year NET ($130 / day or $19.79/hour for 48 weeks @ 50 hours/week).
Sure there will always be the fly-by-night, used-car-salesman type of agent who invests next to nothing in his/her business, rushes people into self-serving decisions, cuts corners with his/her due diligence, undersells his/her services, cashes his/her checks and lives the high life for a few months or years until his/her cut corners come back to haunt him/her and incurs liability or until he/she realizes what the real cost of doing business is, and then flops out of the business only to reappear as a Real Estate advertising “advisor” or worse yet “a do-it-yourself” coach. These unprofessional short-sighted agents give us all a bad reputation and a bad name.
The vast majority of agents having survived 5 or more years in the industry have done so at great sacrifice: they work days “behind the scenes” (administration, strategy, planning, training, etc.), nights and weekends on the road with their clients, barely ever managing to take 1 day a week off, but never without their mobile devices hooked to them 18/7 (if not 24/7), miss or are late to countless soccer matches, dance recitals, family events.
While our intervention may not necessarily make the difference between life or death as an ER physician for example, we have to CARE and LOVE what we do for people to be putting in as much dedication.
Let’s not forget that as a customer, you may only have these extraordinary expectations (sometimes even demands) for a few weeks or months, the time it takes to find or sell your property, so what’s the big deal for an agent about working 3 nights a week for 3-5 weeks? Well, the big deal is that what you see is only the tip of the iceberg and that once your transaction is completed and waiting to close, the realtor starts the same cycle over with someone else.
As also mentioned in an earlier post, your agent also has to spend of his/her own money UPFRONT to incur all the fancy and most often useless advertising that vendors so like to see their properties published in or to incur all the expenses “schlepping” so many insecure, disloyal and often ungrateful buyers around, treating us like glorified taxi drivers rather than valuable allies in their life’s greatest investment. BUT, we only get paid AFTER the closing and everyone else (mortgage, mortgage penalties, property taxes, various types of credit lines, etc..) and ONLY IF THERE IS ANY MONEY LEFT! Yes, ladies and gentlemen, it is not an uncommon occurrence that vendors… ooops … forgot to mention x or y debt and..oh..we’re so so sorry, but there is nothing or little left to pay your brokerage fees.
So, dear Mike, as you write your scathing criticism about how uselessly overpaid realtors are, my question to you is: How little would you accept to earn to work days, nights and weekends at a job where you have no job security, no workman’s comp if you get injured on icy stairs, no benefits, a job where you are expected to supply all you own equipment, supplies, incur all your work related expenses, solely carry liability related to your professional activities and for which you would “maybe” get paid 70 to 180 days after you have done your job if and only if your employer has not spent your “paycheck” on an all-important 120-inch plasma movie theater? Does $36 gross / hour 2-6 months after you have done the job seem like an unfair compensation to you?
Let’s not judge, or more importantly MISJUDGE, hardworking people until we have walked a mile in their shoes because the grass next door is far from always being as green as how it looks from the lounge chair on your pool-side deck…and let’s not chalk everybody down to the lowest denominator of their field.
I’d be curious though… next time you, or someone you care about, find yourself in a Do-It-Yourself real estate bind and your Notary/Attorney has gone home for the night, weekend, or longer… who will you call to pull bail you out?
Here is the whole problem with the defense being proffered by agents talking about how hard their job is and how little they make. How about selling more homes for less of a commission? Volume??
How much it costs the agent to do his or her job is really irrelevant to the home seller. That’s your problem. If I run a café that costs me $20,000 a month to operate but only sell 50 sandwiches a month, am I justified in charging $400 for each sandwich so I can meet my expenses? Ideally, I should sell at least 2500 sandwiches/mo. and charge $8 each for them in order to break even. $8 is reasonable for a decent sandwich while $400, not so much.
The problem most people have with the rates agents charge is that agents are living on just a few sales per year and not really being that effective in selling the listings they have. A seller is out of pocket $30,000 on a $500,000 home sale (on which he may have a $520K mortgage). It could sit on the market for 2 years before some agent manages to sell it (which is unacceptable in my mind as the whole point of listing with a pro is that you should get pro results). Heck, most people can list a home themselves as a FSBO and sell a house in 2 years.
Most people would be happy to pay a buyer agent $15,000 to sell their house. But they are not so inclined to pay another $15K for someone to list it (which, admit it, any doofus can do).
A lot of the problem is that there is a glut of real estate agents with most of them not making a lot of money trying to chase too few buyers (so they end up chasing sellers instead). If there were say, 10% of the number of agents we have right now, those 10% would do quite well selling homes sharing a 3% commission, because they would be selling 10 times as many homes in a year (round numbers). Some agents are just going to have to find something else to do (just like the café owner who can’t make a living selling $400 sandwiches).
Regardless of the cost of doing business and how many sleepless nights the agent has trying to run their business – welcome to the real world. Home owners simply do not have enough money coming out of their home sale to pay the very high commissions related to the sale and the fact that the agent is working their fingers to the bone isn’t an excuse for over-charging. This is why new methods of selling homes are finding their way into the market. The traditional 6 or 7% commission structure is just not cutting it any longer and so real estate agents need to get with the times or find themselves a new line of work.
Deal Marcelann:
Thanks for the cost information – quite interesting. I would have to question the advertising budget however. I’ve sold 3 houses and as far as I know there was never any ads placed anywhere – only the MLS listing which is all that is necessary (in my opinion).
2 points:
1) Your cost breakdown and net income analysis helps prove that the real estate fees/compensation model is very inefficient. I don’t care how much/little of the commission goes to the realtor I only care about how much the fee is. An MLS listing shouldn’t cost any more than an AutoTrader listing – it’s the same technology! The paperwork and legal fees shouldn’t cost more than $1500-$2000 per transaction. If you require the services of a real estate agent then they should be charging by hour or some equivalent model. I’m actually planning a post on this.
Bottom line is that to sell a house that goes fast shouldn’t cost more than $5k. Regardless of the value of the house. If you are selling or buying and the agent has to spend more time then yes, they should be paid for it.
2) If the compensation doesn’t match the job then why do agents continue to do it?
← Previous Comments