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How about that. I actually got quoted in Money Magazine. Albeit my statement appears a bit truncated, it is not incorrect. I’m quoted as saying “People offer higher commissions because it works”. I’ll stand by that. Offering a higher commission to a buyer’s agent does help sell your home. It doesn’t necessarily help you get a better price but it will get you slightly more traffic. I’ll explain, but first, this is what I’m talking about. The February 2007 Article entitled “Is your Realtor on your Side?” by Stephen Gandel discusses the value of having a buyer’s agent. More than that, it actually gets into the morality of the strategies some homeowners and builders are using to sell their homes. 

Steve’s seems to be trying to get his fingers on the pulse of real estate but can’t seem to get past the waiting room. I spoke with Steve on the phone after he wrote an article in the December issue of Money Magazine, “Best Ideas for 2007″. I had disagreed with him on many of the assertions he had made regarding strategies buyers could use to get a better deal. To be fair, I agreed strongly with his suggestions for sellers. In our conversation, he admitted that he ‘doesn’t have access to the same information that agents have’. Thus he has to “rely on other people” in order to write these real estate articles. He’s essentially trying to analyze data from hundreds of markets and collate that into advice that could be applicable nationwide.  He’s not an expert in the sense of personal experience but rather is forced to rely on so-called experts from across the country to give him accurate information regarding the stories he researches in order to make the valuable conclusions. I’m honored that I can fall into that category. Unfortunately, I disagree with some of the advice in the latest article. It seems the article plays more to what buyers would want to believe rather than the truth about what will help get you a better deal.  But then again,  who knows what agents across the country tell him.  This is how it works in Denver and what I disagreed with…

(If your not sure what commissions are and how they work, check the end of this post)

 Why would offering more money to a buyers agent work? Because brokers want to make a living and will be more likely to show your place in among others of the same type. This is often true in the case in newer condos or builder-owned homes where there is often a lot of competition. If you have ten other condos in your building that are essentially the same home at the same price, and then there are lots of other condos in other buildings, most agents want to narrow down what building their client wants before showing them everything that is available in one building. There are literally hundreds of condos that are similar. Do you want to go view all of them or would you like someone to help narrow it down? Most people would like some help here. Well, if I have to pick which one to show first, and they appear all the same, why wouldn’t I pick the one that pays me better, especially if they’re are all priced the same? That’s just good business. 

Unfortunately for sellers, this doesn’t seem to bring them a higher price, it just gets you more showings and helps to sell your home faster. From all the home sales I analyzed to prepare my information for Steve, I noticed that of the homes that had higher commissions sold slightly faster than homes that didn’t.  It’s not obvious when looking at homes offering co-ops slightly higher than the average because often that money is being offered to get brokers to overlook the obvious problems with the home and bring someone by.  While it might not have been as clear in the ’slightly more’ group that higher commissions bring faster sales, it definately becomes clear in the ’slightly less’ group.  When you offer less than the average commission, there is a marked difference in time on market.

I took a look at this and noticed that time on market goes up immediately when offering even slightly less than the average co-op.  Days on market increased by 12% when agents offered less than the average co-op.  This can affect the sale price since a long time on the market is viewed poorly.  

When should you offer less than the average co-op?  I did find situations where offering a below average commission didn’t hurt your time on market.  It was usually when the properties perceived value was easy to see.  Low priced homes in high interest areas, and other properties that were obviously priced low in order to bring a quick sale.  The seller and listing agent knew that the number of showings would not be necessary since the price & value of the property would sell it quickly.  

When should you offer a higher than average co-op?

1. Too much competition - The home has a lot of competition of equal value. Set your home apart somehow. Preferably with some upgrades to the home. If you can’t do that, attempt to influence the people who set up the showings.
2. Complications - The process of buying the home will be more complicated than a normal purchase. Typical when dealing with banks and corporations.
3. New construction - A bit of both of the above. Some builders have taken to offering ridiculous commissions to buyer’s agents. Personally, new homes sell themselves because they’re new. Unfortunately, new homes are often not worth the asking price. Any agent that isn’t pointing out this truth is not working in his client’s best interest. Not only does he not deserve his commission, he doesn’t deserve to have a real estate license.

Remember though, regardless of what you offer the buyer’s agent, in most cases it won’t affect the price you get for your home. If you overprice your home, you won’t sell it.  Agents don’t sell homes, the home sells itself. If a buyer walks in and doesn’t like it, then it doesn’t sell regardless of what the buyer’s agent might say.  Agents are there for pricing, marketing, negotiations and coordination.  Sales skills are in there somewhere but you should know that no amount of sales skill will manipulate a ‘well educated’ buyer into buying an overpriced property.   

For this reason, I’ve found, their is no reason to offer a higher than average commission if your home is priced appropriately. If a home isn’t worth the price you’re asking, no amount of bribery will help you out. You might get showings but it still isn’t going to sell. Here’s the only times you should consider offering a slightly higher co-op to set your home apart to the buyer’s agent.

Should buyers expect that their agents should give up some of their commission? That’s between you and your agent. In most cases, the amount your agent (the buyer’s agent) is getting paid has been pre-negotiated between the seller and the listing agent. It is independent of your offer in the sense it doesn’t affect the net to seller and thus doesn’t improve the price you get the house at.  On the other hand,  their are situations where you have done most of the agents work and can rightly feel he didn’t earn it.  Whatever the case, if you want to take the money from your buyer’s agent, remember for that to be legal, it has to happen at the closing and show up on the HUD-1. The lender needs to know.

Lenders have limits with how much the buyer can walk from the table with. Most lenders won’t let the seller pay 3% of closing costs and your prepaids in addition to your broker giving you a kick-back from his commission. There are limits for both agent’s commissions and seller concessions that vary for each lender. When it comes to what the seller can walk away with, that depends on the appraisal. All the lender really knows is you’re willing to attempt to pay back what you put on the contract. It’s not the seller’s money, it’s not the buyer’s money (yet), it’s the lender’s money. To claim otherwise is an over simplification of the truth. There can be no money if there is no house. The house has value and thus a trade has to take place. You could argue this “chicken and egg” causality scenario all day long without being any closer to an agreement.

My advice to buyers:

1. Understand how your agent is paid - Negotiating your agent down does not always improve your bottom line or the value of your offer to the seller. If your offer can be improved by decreasing how much your agent makes then this should be discussed. In most cases, this involves more than your agent, it also involves the other agent and the seller reaching a mutual agreement.
2. Agree on how your agent will be paid and get it in writing. Agree on a maximum they can make on the purchase (expect to have to agree on a minimum as well) or you could agree on a flat fee.
3. Discuss with your agent how he will handle any bonuses offered. He should disclose if there is a bonus, especially if it will affect the terms of the offer.
4. Never go directly to the listing agent. I’ve said it before and I’ll say it again. You probably are going to overpay. Most homes are overpriced by as much as 20%.  Who cares if you get the home for 10% less than the list price by negotiating down the seller and then the sellers agent’s commission only to find out you still overpaid? I’m sure you’ve seen the murder suspects try to represent themselves instead of having their own attorney. I’m sure you’ve also heard of people trying to negotiate their own divorce. I’m sure you know how successful these methods are.
5. Do more of the work - There are many tools for buyers to help them find a home for themselves. While its not efficient using sites like Realtor.com or REColorado to find a home, it is possible. Many Agents including myself offer tools to help you as well as a discount to clients that do much of the work themselves.  While these tools may help you do more work for yourself, they also cost money. The agents somewhere along the line will want to be compensated.  If you do find a home yourself, it is possible to still have representation and save money. Call a buyer’s agent and tell them the situation; most would be happy to assist you in exchange for actually working with a real buyer.  Most would give you a significant refund on the price of their services. (Keep in mind 1-3 on this list and my comments on lenders and concessions, they all play a part.)
6. Don’t be that guy - Trying to work your agent over for every last dime can be counter-productive. Stick to what you agreed upon. You’ll get what you pay for. Make sure you understand what to expect from your agent. Since different relationships exist as do different levels of service, get it in writing before moving forward.
7. Educate yourself - Umm..what’s a commission and why talk about this?  Usually, the seller has negotiated a commission with the listing agent that he earns if he sells the home.  The listing agent turns around and offers to split this commission with a buyer’s agent if they find a buyer.  This widens the net quite a bit and has given rise to the popular MLS systems around the country.  Thus the co-op has come to mean what is being offered to other agents to bring a buyer.  80% of homes listed on the MLS in Denver sell with the buyer having their own agent.  There are no set commissions but there are definately averages that have become acceptable compensation for the work and risk that goes into the business.  These accepted ’standards’ that used to be quite stable and in line with the cost of living have varied greatly in the recent past as more agents and home buyers have taken advantage of the internet to make life easier.  In addition, the housing boom has increased the value of a percentage based commission faster than the cost of living standards than most career choices.  Because of these factors, many different real estate companies are ahead of the learning curve when it comes to the rest of the National Association of Realtors and have been able to offer savings to their clients both when buying and selling a home.

Other Posts about home buying and commission:

• Money Magazine - Bad Advice for buyers
• How to sell your home quickly for top dollar
• Buying a home? Think before making your first offer
• Most Denver Homes are Over Priced

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