What Does A 6% Commission Get Me? (Part II of II)

Yesterday I broke down exactly for what a seller’s agent is paid and today I will discuss what a buyer’s agent performs in that same real estate transaction for their 50% share of that 6% commission.  For this segment, I elicited the help of my friend and colleague Noah Rosenblatt, a successful buyer’s agent at The Halstead Property Company who is also a fellow blogger of UrbanDigs.com.  Noah and I have developed a friendship over the past couple of years as we both share the desire to make the residential real estate process more transparent and more honest.

Here’s Noah’s take on what a good buyer’s agent should perform:

Buyer’s Agent 3% -(directly from my InBox from Noah) 

I must admit that the majority of my sales business is on the BUY side, representing first time buyers or even veteran buyers who are seeking to upgrade. The consistent feedback I get from my buyer clients regarding the level of service that is both expected and wanted, is that they want unbiased, value oriented consulting to determine a best of breed product in a particular price point. Buyers actively tell me that my focus on profit potential at resale is what they admire best when I go and view a property.

Its a product to me and buy side brokers should focus on property quality, property valuation, profit potential, individual scalability, comps analysis, bidding strategy, negotiating, and providing a smooth process from contract signing to closing. In addition, I usually consult my buyers on the anticipated closing costs, renovation ideas & costs, and the loan/rate process. Having an unbiased and product oriented focus while you view 10+ properties is sometimes hard to do, but buyer brokers must adapt to what the buyers’ needs are and take in what they like and don’t like about a specific property as you view with them. In the end, this allows the buyer broker to fine tune their strategy for that specific client and actively look for a product that not only is the best value in the price point, but also one that can extend a time-line to own and offers the best resale potential for down the road.

The days of sugar coating an overpriced property to get a quick deal are done and will only insult the buyer’s intelligence and result in a lost client!

Having worked with buyers from all walks of life, I would agree with much of what Noah suggests and it is obvious to me that he excels with buyers from the financial world who really view their property as part of their overall portfolio.  But I have to wonder how many buyers out there feel like they are getting this level of service?  And the bigger question is that I wonder how many seller’s feel like the buyer should be paying this 3% side of the commission?

Now it’s true that a buyer’s agent takes part in the negotiation process and the preparation of a Board application in the case of a Co-op sale but both of these responsibilities are aligned with the buyer’s interests so why is the seller paying their commission?  I have long been a proponent of a change in commission structure but for now we work with what we have and that is a system where a seller pays a buyer’s agent for all of their time and hard work leading up to the showing of their property as well as the responsibilities that the agent incurs from the point an offer is made to the closing table and beyond.  For the record, I don’t think buyers have reached the point where they would be comfortable paying for an agent’s services but if more agents work like Noah, that may change.

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12 Responses to What Does A 6% Commission Get Me? (Part II of II)

  1. avatar Noah says:

    Thanks for asking me to participate Doug!! I appreciate it!
    Question: In your new commission structure idea, sellers would pay 3% and buyers would pay 3% to the broker on their side?
    What if we eliminate buyer brokers altogether, lower the sell side commission to 3%, and there was a flat fee or hourly rate that buyers can pay for buy side consulting and then submit a bid on their own? This way, the seller broker doesn’t have incentives on taking one buyer over another and buyers can choose whether they want representation at a cheaper cost than 3%, as buy side closing costs are high already?
    Thoughts? Of course this would never happen, and if it did, agents and brokerages would tear the new firm apart!

  2. Noah,
    Thanks so much for your contribution to this piece! You know I’m on the same page with you here. It would be a painful transition but one that would hugely benefit the consumer.

  3. avatar hsw9001 says:

    Isn’t the buyer the indirectly paying for both brokers b/c it is the buyer’s money that is being given to the broker (via the seller). The problem is that the buyers broker commission is based upon the sale price, so the higher the price, the higher the commission – which can lead to bias against the buyer. Now, if there was a fixed commission, then perhaps the bias would be less.

  4. I totally appreciate your perspective and have heard it before but I think that’s a bit of a stretch. If that were the case you would see that for sale by owner properties sold for exactly 6% less than those sold by agents and that isn’t the case at all. Some sell for more and some for less of a discount than that. The fiduciary responsibility of a seller’s agent is to the seller.

  5. avatar JC says:

    I totally agree with hsw9001.
    Doug, the only reason why FSBO’s sell for the same price as agent properties is that the seller is acting as his own agent in an effort to capture this 6% spread. There would be no point to selling the place yourself for 6% less while having to do all the extra work and risk the reduced exposure etc that comes with the FSBO decision. If every agent agreed to work for free, and the market is efficient, then you should expect to see prices drop uniformly by 6% overnight. This is exactly what happens when a stock pays a dividend – it drops by the div amount on the ex date. So I maintain that the buyer pays everything – seller side closing costs, taxes and all. For example – If taxes on capital gains double for all sellers then they will just add that into the selling price to create the same economic incentive for the sale. Every dollar more in costs associated with a sale is a dollar less incentive for me to sell. Thats one dollar more that the buyer has to come up with to make the seller part with the asset.

  6. JC,
    A solid and convincing argument and I completely respect and appreciate your perspective. Having said that, try convincing a seller that the buyer is paying all of those fees. My point is that regardless of from where a buyer or a sophisticated consumer like yourself thinks the monies come, no seller would ever admit that their buyer is paying all of those fees.
    Regarding your comment on just adding seller costs into the asking price…that would certainly work in an ideal world but just speak to some sellers around the country in declining markets and see if they have the luxury of doing this. They don’t. The market dictates the value of a home, not the seller despite their costs so I still maintain that sellers believe the expenses of selling a home are inclusive of broker fees. I will absolutely concur that many buyers share your opinion and the psychology that they are paying for everything that the seller needs to sell their home, but again, that just isn’t the case.

  7. avatar JC says:

    I agree with you Doug.
    Sellers (and buyers) are irrational. I think over the long term, on a ‘whole market’ basis, my argument should hold true and be reflected in overall market prices. The irrational sellers would just be forced to the new price point by the first few rational sellers. If prices go up because capital gains taxes go up, I don’t believe many sellers would look at the tax and price increases as ‘offsetting forces’. You’d hear a lot of “my house is worth more (just because) and these increased taxes that I have to pay are an unfair burden on the seller”.
    One of the most remarkable observations one can make of large systems like the housing market is that rational behavior can emerge from the system as a whole based on seemingly irrational behavior on the individual/micro level.
    It’s like bees in a hive. Bee hives carry out some pretty remarkable stuff, but I have never been overly impressed by the intelligence of a single bee.

  8. avatar Lyn Smith says:

    Where I operate in Bangkok the total commission is 3% and the agent has to deal with both seller and buyer

  9. avatar laurie says:

    Doug, this thought process holds little water from a consumer perspective. Bottom line: the fees are in the asking price; buyers and sellers know this. It would seem that ethical, diligent agents would get away from the whole argument about buyers “paying the fee” (they are- it’s in the asking price)and focus on transactions where both parties receive fair representation. It’s not consumers squawking about the fees of a buyers agent, it’s the listing agents. Consumers want their homes sold- getting it done is the priority. Comprehension of buyer agency by Realtors in NY is really behind the times- make the leap, and don’t worry about anything more than a fair price for the seller and the buyer. You’ll be amazed at how complicated the NY Realtors have made a simple, fair agency process, with great results for consumers. It’s time to change the perspective and gear it to consumers on both sides of the purchase.

  10. Thanks for the inout Laurie but I still maintain that if you suggest to a seller, who by the way is also a consumer, that they are NOT paying the commission you would have quite an argument on yoiur hands. Often both sides of the transaction are convinced that the expense is solely theirs.
    I completely agree that there should be a shift in focus by the real estate community to act in the best interest of the consumer. It’s long overdue. But who are we kidding, most industries need an overhaul to become consumer-centric as everyonbe is looking out for their own best interest. I truly think we’re in the midst of a consumer led movement for better and more transparent services in real estate and beyond.

  11. avatar laurie says:

    Doug, what’s unfortunate is that the real estate industry in NY, rather than educating consumers with respect to agency and fees, is being (as you state) “lead” by the consumer to positive changes. As professionals, shouldn’t the notion of a fair transaction for all parties be instigated by the real estate community? Even appallingly late in the game, it would benefit Realtors to consider ethics and clarity for both parties, and respond accordingly. You’re likely right that change is coming due to consumers understanding questionable agency relationships- too bad that they lead the real estate community into the correct behavior, and not the other way around. It further denigrates (justifiably) the Realtor community.

  12. Laurie,
    I think we’re almost on the same page here. This blog was born from the need to raise the bar in the real estate community. That said, we must be careful not to group ALL real estate agents (by the way, most NY agents are NOT Realtors) into the same category just as we shouldn’t group all attorneys or bankers together. I have always believed that the profession needed an overhaul not unlike many service related businesses in the world and businesses in general. That said, it takes more that an independent agent blogging about higher ehtical standards to effect change and I would argue that most often change is effected by the savvy consumer and again, not just in real estate. I also agree with you that the change should come from within but the business has been done for so long in the same manner and it’s human nature to fear change rather than embrace it. The good news is that consumers are in fact driving change in my industry and real estate professionals will either embrace new ways of doing business or they will choose a different career path.
    Thanks again for inspiring thought and intelligent conversation.

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