I wonder how much Redfin.com just saved in advertising by getting their side of the story pitched on 60 Minutes. I think the casual observer would have been quite taken in by the story. It was a strong example of yellow journalism at its best for students out there. You start with the premise, “Realtors make too much and do very little,” and build that into a story. It’s a shame that it was so one-sided. I agree that the real estate industry as a whole needs to be disrupted. Many agents do very little for the money they make. But there are other agents that earned every penny of their 6%-7% commissions. Their clients would swear by it. Change is coming to the industry, but it won’t be Redfin that makes it through the change. To all you VC’s out there that are all caught up in the hype of Redfin, you should take a break. The business is more expensive than you think. There is much more overhead than you are observing. One in every 86 adults is a Realtor. That’s a lot of competition. While everyone agrees that the Internet is changing how real estate is transacted, the Internet is not the method most people use to choose their agents. Whatever the case, the 60 Minutes story was misleading to consumers.
Here’s my observations on the story.
1. Does Redfin deserve a commission at all? They don’t do enough to earn 33% of the commission. The money they’re rebating to the buyer is the buyer’s money. Why not just knock it off the price? Do they even show the home to the buyer or do they encourage the buyer to meet the listing agent at the home? After the buyers have taken advantage of the listing agent, why should they involve Redfin? They aren’t knowledgable local experts; they’re just filling out forms. I don’t see how working with Redfin.com has any value to the consumer. Buyers are the only ones showing up with any money. They ultimately are the ones paying for the broker’s services. If you’re paying anything for a buyer’s agent, I hope you’re getting at least a level of service that can inform you what the true value of a property is. I’m not talking about referencing local sales and checking the Zestimate. I’m talking about the art of pricing.
2. Realtor commissions are not fixed at 6% as Leslie Stahl would have you believe. They vary all over the country. There are a wide range of service options currently available to the consumer. My brokerage model is based on the idea that if you offer full service for less, you’ll spend less money on acquiring more business, because you’ll benefit from the referrals of your past clients. We actually do the whole listing side of the sale for 1% of the sales price. That includes all the things traditional brokers would be expected to do. There are other models that attempt to offer less service in various forms but I have yet to see one successful, profitable business model. If it was out there, I’d be in it. HQHomes of Denver is one of the few profitable discount models in Denver. When the Help-U-Sell’s and Assist to Sell’s are failing, we are still growing. It’s not perfect yet but there’s no discounting service. The agents make money, we save our clients money and we do everything you would expect of a full service company. At the least, my clients can be assured that I handle more sides of a transaction a year than 95% of the brokers in Denver. The consumer can have expertise and save money without having to lower their expectations.
3. I cringe at the term “discounters”. It’s an offensive label. I’m a full service broker. I might not hold a costume-themed open house with men on stilts, party favors and clowns but I do hold open houses if I think it could help sell the home. How about calling us “industry pioneers”?
4. Reduced levels of service are currently available to the consumer. But that doesn’t mean it’s a good idea. Unfortunately, in any market buyers and sellers should be working with agents that have a firm grasp of value. That’s where most of these limited services fall apart. The agents at a place like Redfin don’t know anything about the local markets. Most homes in Denver are overpriced by as much as 20%. Will Redfin be able to show their clients when a home is overpriced and when they’re not? If they tried, how could they possibly be right without actually going there?

5. The value of service will vary depending on the type and quality of service provided. On a million dollar home, paying $60,000 for commissions might seem like a lot but really that depends. If your million dollar home would only fetch $850,000 as a FSBO (limited exposure), $900,000 with a limited service listing agent and you could possibly get $1.1 million for it listed with a full service agent. At which level of service did the agent earn his $60,000? That being said, as a buyer’s agent on the same million dollar home, if I let you write an offer for a home $1,050,000 when you could easily have got the house for $950,000 with an agent that actually knew the market, did I earn my $10,000? (33% of a 3% commission). If all I did was show you a picture on my website, you filled out an online form for the offer, I made a phone call and faxed over your offer, did I even earn $10,000? Just because you save money doesn’t mean you get a good value. You can’t automatically assume that saving money means you got a good deal.
To those that have read this, here’s what some other good folks have to say.

• 60 Minutes’ Redfin.com story delivers 400 hits in 60 minutes flat . . . Bloodhound Blog

• Redfin On 60 Minutes Tonight – Real Estate Market Disruption TechCrunch.com

• Redfin’s Corporate Blog

Here are some similar articles where I discuss this topic:

• Why I can’t justify high commissions

• What should be in a market analysis

• Think before making your first offer

Technorati Tags: Redfin, commissions, “60_Minutes”, discount, brokers

The settlement sheet shows that I’m going to receive ___% of the sale price of the home. But I don’t get to KEEP all of that. I take out a dollar bill and hold it up as a visual example. If another agent listed/sold the home, I have to split my money in half with them. RII-IIIIIP! (Ripping money, even just a dollar, gets people’s attention.) Then there’s my split with my broker (riiip!), my franchise fee (riiip!), my split with my partner, my E&O insurance, Uncle Sam’s portion, and all the money that I put in up front in gas, marketing and so on. Gentle reminder: my job does not have insurance or a 401K, so for those I’m on my own. We end our discussion looking at my little confetti pile and the tiny scrap of dollar that I’m still holding. It’s very small, if I’m lucky about the size of a postage stamp, but usually less than that. I do not earn what the public thinks I earn. Educating my clients keeps them from feeling rippped off at the successful end of our quest, more likely (I hope!) to use me again or refer me to friends and family. A quote from Sarah Cooper’s Blog

Here’s why I don’t think you can justify high commissions selling a home in Denver. (and probably just about anywhere with a good MLS)

1. Nobody cares. All businesses have costs and overhead. There are thousands of people out there who are self-employed in the same position as a Realtor is. You don’t see them tearing up money just to make a point. Most business owners manage business costs closely. Realtors, as a whole, do not.
2. As home values go up, so do commissions. 10 years ago in most parts of Denver, the cost of a home may have been $150,000. Your commission at 6%? $9000. Today, it still takes the same amount of work to sell the same home. Home value? $350,000. Today’s commission, $21,000. Even after splits and co-ops this is a lot for the amount of work that’s involved. Even after calculating in cost of living adjustments, you’re still in pretty good shape.

3. It’s easier than ever to sell a home. Especially for a listing agent. When you look back at the time spent it’s typically much less than that spent with buyers. Denver has a very cooperative MLS. If you offer a co-op, all those agents out there spending money to find buyers will come with their buyers to the house. In the end, 80% of homes on the MLS sell with the help a a buyer’s agent.

It’s pretty short-sighted to gouge consumers for more than you need to in order to make a good living. I’m not saying it’s not expensive to be a Realtor. There is definitely a point where you can’t go any lower without operating at a loss or cutting service. Most discounters go straight to cutting service. That’s why not all discount agents are successful. They believe that they really are worth those high commissions so they cut their services proportionate to their fees. Bad idea. Work a little harder for a change.

I like being busy. I sell homes for less because it makes me more money. That may seem funny to other Realtors but not to the rest of the world. If I offer the same service for less, who do you think they’re going to go with? It’s amazing how easy it is to get listings when you are telling people what they already believe. Just wait until they tell their friends.

Want to talk about selling a home in the Denver Area? Click Here

Technorati Tags: Denver, Real, Estate, Marketing, Commission, Realtor

Legend has it that Pablo Picasso was sketching in the park when a bold woman approached him.

“It’s you — Picasso, the great artist! Oh, you must sketch my portrait! I insist.”

So Picasso agreed to sketch her. After studying her for a moment, he used a single pencil stroke to create her portrait. He handed the women his work of art.

“It’s perfect!” she gushed. “You managed to capture my essence with one stroke, in one moment. Thank you! How much do I owe you?”

“Five thousand dollars,” the artist replied.

“B-b-but, what?” the woman sputtered. “How could you want so much money for this picture? It only took you a second to draw it!”

To which Picasso responded, “Madame, this took me my entire life.”

It’s always amazing how the public views what you get paid strictly by the amount of time you spend on something. Truth is, it’s not that simple. There are costs and risks that are above and beyond the time itself that you spend. Not to mention that nothing can replace the experience you gain going to more closings in a month than most people do in their entire life. There is definitely a line you have to draw with clients when it comes to valuing your time. The public wants a Realtor’s opinion, access to people’s homes, and access to the database that Realtors have been maintaining for years. But few want to pay you for it. I’m not here to argue the point of how much an agent should make. Should it be flat fee or a percentage? I don’t care. But when it comes up, each agent needs to decide what the best long term approach should be for his or her business. There are still good agents out there that bring real value to their clients. I’m sure every Realtor who reads this will feel that statement applies to them. We aren’t offering a free public service. Sooner or later you need to decide what your time is worth and let those that want to ‘go it alone’ do just that.

Technorati Tags: Realtor, commissions, picasso, real_estate, buying, selling, home

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

Technorati Tags: Denver, Real_Estate, Stephen_Gandel, Money, Commissions, Realtors, Buying, Selling, Home

  One of the best things people can do to protect themselves in real estate transactions is to keep in mind the following:

1.     Buying a home? Have someone represent you.  In most cases, the cost that would be paid to a buyer’s agent has already been agreed upon between the seller and listing agent.  If there is no buyer representation, the selling agent just makes more money for himself.  This being the case, the listing agent is probably the least likely individual to treat you fairly and get you the best deal.  Their allegiance is to the seller.   Some states allow agents to work as an agent for the transaction, providing equal services to both buyer and seller.  In reality though,  it’s unlikely that the listing agent will be completely unbiased.  You can eliminate much of the headache of the transaction by pushing the work on a good agent.  For legal reasons, if you have already signed a contract with a listing agent, you may not be able to bring in a Realtor.  That should not stop you though from having a lawyer review the contract terms and be present at closing. Especially if you’re not comfortable with reviewing a HUD-1 (a what?) at closing.
2.     Selling a home? Make sure you list it on the MLS so the largest group of buyers will be aware of it and you can get the best price.  Do your own homework as to the value.  If you’re listing with a Realtor, have him provide you with comparables.  Drive by them yourself and make a decision of how comparable they are.  Still not satisfied? Go see the homes your home will compete against. Check out this great advice in Money Magazine.  

3.     Facing a foreclosure? Beware of real estate investors.  Most investors prey upon the weak and desperate.  The only thing they care about is making a quick buck.  Make sure you understand what you are signing.  Any contract should be clear and straight forward.  You should not have to make a decision on the spot.  In most cases the deal that is being presented to you isn’t really the best option for you.  It’s just the best deal for them.  If possbile, seek legal advice.  Contact an Attorney who also works as a Realtor or find an agent that is specialized in negotiating with banks.  Banks don’t want a foreclosure and will often accept a lower price than what is owed to avoid it (called a short sale).

4.     Know a Realtor’s Code of Ethics.   In most States, the contract itself will describe the responsibilites of both you and the Realtor.  If a Realtor fails you in a manner where you actually lose earnest money,  don’t be afraid to take legal action.  All brokers/broker associates in Colorado must carry errors & ommisions insurance for when they screw up.  Most Realtors, if they recognize it’s their fault, will be quick to make amends with you. If you can’t settle it, file a compaint with your State’s real estate commission.

5.     Avoid breaking the law.  In most cases of fraud, the buyer and/or seller actually know what’s going on and they don’t care.  They are actually pressuring their agents to make the deal work.  To avoid being an unwilling participant, remember the following:  Disclose property defects.  Don’t attempt to slip something by the lender.  Don’t exchange anything of value outside of closing.  If it won’t show up on the final settlement sheets that go to the lender (HUD-1), it’s not legal.  Make sure everything in the contract stays with the home when moving out. Maintain the home in the condition the home was in when the contract was written.  If any repairs become necessary on the home, these should be disclosed to the buyers.

Technorati Tags: Denver, Real, Estate, Realtor, Ethics, Investors, Foreclosure