When I made the Salesman Steve post last month, I expected some responses, critical and thoughtful, as I usually see on AR. But only one comment posted: Yolanda asked
Hi. Maybe I didn't understand fully your story, but why didn't you hire Salesman Steve to represent you? (I gather he's licensed and practicing). If he is, shouldn't the check you sent him go through his broker?
I still think the story is interesting, however, so I'm going to make a few comments here.
In response to Yolanda's first question, I offered to hire Steve, but he declined my offer. I think maybe Yolanda means, "Why didn't you sign up as Steve's buyer so he could be procuring cause of the sale and get a coop compensation from the listing broker?" Answering that question requires an understanding of (A) interbroker compensation in MLS (B) the value I think brokers bring to buyers in transactions and (C) the value I was asking Steve to bring to this transaction.
MLS compensation: Most (though by no means all) brokers get paid on a commission, often a percentage of the gross selling price, paid only when a transaction closes. The listing broker puts the listing into the MLS, offering a coop compensation (often between 2.1% and 3.0% of the gross selling price in our market - let's assume it was 2.7% on this listing). The cooperating broker earns that commission by being the procuring cause of a sale. Even though the cooperating broker may be the buyer's agent (under Minn. license law), he receives the lion's share and usually all of his compensation from the listing broker. (This is a quirk of history dating back to times when sub-agency was the common form of relationship between listing and selling broker.)
Note also that the price structure of the traditional commission factors in Steve's risks. In other words, if he works with a buyer from scratch, he is betting his efforts showing the buyer around will pay off in a coop commission. But he may get nothing if the buyer declines to buy. Presumably, he receives enough on the transactions that DO close to cover his time on ones that never come to fruition. Brokers can address this issue in other ways (with different fee structures, etc.) but doing so swims upstream against the prevailing MLS compensation approach, where the listing broker appears to pick up the tab.
Please do not tell me that the seller pays the buyer broker, or that the buyer does not pay the buyer's broker. The compensation paid to the buyer broker is a transaction cost. Both principals bear it, because without that cost, the seller would net more, and could accept less from the buyer. Theoretically, the offering price would split the difference...
Assuming the coop comp in MLS on this listing was 2.7%, Steve could have earned around $5,400 for being the procuring cause. He works for a "100% broker", meaning that he does not split the commission with his broker, though the broker might impose some transaction fees, etc. Frankly, I leave those details for Steve to work out with his company.
Value the broker brings to the buyer: I think a real estate broker has great value to bring to a buyer in a transaction. I see the value as breaking into three phases:
- Location advice: I can't imagine anyone better than a real estate broker to help me find the right property, based on my needs. The best ones have a detailed knowledge and understanding of human psychology and the real estate market.
- Negotiation advice: Market understanding and negotiation skills are essential to a successful contract negotiation.
- Closing facilitation: Brokers know better than most the problems that can crop up between acceptance of a purchase agreement and closing - title problems, financing problems, etc. Resolving these problems is essential to getting the transaction wrapped up.
I value the first and second items the most, because that is where the broker's expertise, rather than persistance and tenacity (both of which I have in abundance), come into play.
The value I wanted from Steve. In this case, I did not need Steve for location advice: my parents had already located the property they wanted. If this deal had fallen through, they had a couple other options, but those listings were located in suburbs where Steve was not as familiar with the terrain - I would have wanted local experts to help me if we had pursued either of those.
As for closing facilitation, we had already selected the service providers we wanted to use - title company, mortgage company, etc. The transaction was a conforming loan, with a substantial down payment, for which my partner and I qualified with full documentation. My partner is a VP at the mortgage company we used, so I expected no processing delays :-)
It was that middle bit, negotiation advice, where Steve would be indispensible. That's what I wanted Steve for.
Note, too, that I proposed to Steve a zero-risk compensation - I offered to pay him for his advice, whether or not the deal closed, whether or not we even ultimately made the offer.
In short, if Steve's location advice, negotiation advice, and closing facilitation, plus his self-insurance against the risks of clients who never close deals, was worth $5400, then his advice on negotiations alone should be worth something less than that.
As it happens, I would have been willing to pay Steve between $1,000 and $2,000 for his advice during that call, not contingent on having the transaction close. In fact, if he had asked me to sign the buyer rep agreement, I might have agreed to - in light of the fact that his advice was saving me $10k, it would have been worthwhile to me to share that amount with him, but then I would have left his compensation contingent on the closing. I would also have insisted on a short termination clause so I could work with another expert in another part of town.
Who gets the check?
Yolanda also wanted to know if I should have paid Steve's broker instead of Steve. There are at least two potential answers:
1. I didn't retain Steve for brokerage services - he refused to let me hire him and he refused payment. That makes my check to him a gift, not a brokerage fee or commission. (OK, even I don't buy that, but I'd make the argument if someone asked me to :-)
2. I assume that Steve behaves ethically and legally, and that if the money should have gone to his broker first, Steve signed the check over to his broker, and they worked it out between them. As Steve is his broker's agent (in the common law sense), I'm entitled to rely on Steve to do whatever is in his broker's interests.
Conclusion
This post went a bit longer than I wanted, but I'm curious what you think... Was my thinking about how to work with Steve wrong-headed? Did he make mistakes working with me? Are there lessons for other folks here?
-Brian
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