On first meeting with a licensed real estate salesperson or broker the licensee is required to provide every potential buyer or seller with a state mandated consumer disclosure which explains the various legal relationships that are available to the consumer in that state. Without going into detail on each option within this article, the options include: a) transaction brokerage also called facilitation, b) agency, c) dual agency, d) designated agency e) sub-agency f) broker agency or g) no legal contractual relationship or unrepresented.
The most common across the land would still appear to be seller agency. There is some buyer agency but nowhere near as much as seller agency and therein lies, so the theory goes, a certain imbalance or benefit to the seller at the potential disadvantage (expense) to the unrepresented buyer.
Transaction brokerage was introduced in 1990 in Colorado as a way of equalizing the negotiations between the parties, reducing conflict and insuring in essence a “level field” between the parties that is inherently not possible under agency, especially if the buyer is lacking their own agent to balance the influence of the sellers’ agents.
What is involved in negotiating and with that what are the advantages if any of an agency relationship over a neutral transaction brokerage one? This blog will outline the typical and most common aspects of a real estate negotiation in order to make it clear what is actually in play in the purchase and sale of real estate.
PRICE: The first and most commonly significant part of any negotiation is over the price. Under the theory of agency, a seller determines what they want for their property and then they instruct their agent to go out and try to get that price. (under the law of agency, the “agent” is an arm of their principal and must follow their lawful instructions – “obedience and loyalty”).
In the real world most experienced agents provide their clients with advice and market information and if they hope to sell the property and earn a fee, they had better be encouraging the seller to be “realistic” in their price. Regardless of this advice however, many sellers, knowing they have an agent who is required to do as instructed, will often price their property above what is called “fair market value” and sometimes way above.
A transaction broker however is not an agent of their client but instead has a degree of independence and separation that allows for greater objectivity. Their responsibility is to educate the client as to fair market value with the goal of starting from somewhere in that neighborhood with the result being a faster sale at what should normally prove to be a higher net to the seller than might otherwise have been achieved. This may seem counterintuitive but is proven to be the case especially where sellers have insisted on their price with their agent and began way above fair market value. Months, extended carrying costs, inconvenience and deep discounting later the property eventually sells below fair market value.
CLOSING DATE: Although usually much easier to negotiate based on the needs and convenience of the respective parties, a closing date must be settled upon. Generally this requires little if any negotiation and is easily agreed upon.
FINANCING: Financing by buyers is the norm in 98% of all residential sales other than very high end but the sources and types of financing can vary widely. From local lenders to the huge national mortgage companies, from 20% down payment conventional loans to 98% or even 100% loan packages there is much to consider as a buyer and seller and negotiation can enter into this part of an agreement. There may be differences in the approach an agent would take in this part of the negotiation from that taken by a facilitator/transaction broker.
INSPECTIONS: The length of time given to complete various inspections is usually about the only aspect of inspections that has to be negotiated. A seller naturally wants to keep the time frame shorter but sometimes buyers need extra time due to the number of inspections or their travel or location constraints.
CONCESSIONS: This is a pretty broad category and may include negotiations at the outset such as seller contributions to closing costs which is often seen with the low or no down payment financing packages. Concessions are sometimes negotiated following the inspections where items requiring attention have been identified by inspection and will incur expense to remedy. The best way to avoid these post inspection concession negotiations is for sellers to have a pre-listing inspection done to identify what needs to be addressed and then to either fix the issue or disclose them to prospective buyers. Pre-listing inspections commonly save the seller money in the end and absolutely saves the unpleasantness of post inspection negotiations. (Buyers should always have their own inspections even when provided a pre-listing inspection report).
PERSONAL PROPERTY: This category open for negotiation has to do with things like furniture, outdoor equipment like lawn mowers, tools etc. Typically in our region the kitchen appliances usually are all included in a sale if they are there during showings and washers and dryers often are included as well.
MISCELLANEOUS: This category might include the amount of acreage being sold if the buyer is looking to only buy a portion of the seller’s property, or who pays for a survey, who pays property transfer tax, whether some work gets done before or after a closing etc.
CONCLUSION: While it is true there are many details that need to be considered and included in the contract for the sale and purchase of real estate and they are all subject to some negotiation, the one detail that is of primary interest above all others is price. The rest usually fall into place if price is agreed upon.
How much influence do real estate licensees have over the final price? In this day and age of close scrutiny and review by not only better informed consumers and multiple on line sources but also by lawyers, by appraisers, banks, inspectors and town or city officials, by and large the ultimate selling price in 98 cases out of 100 generally and accurately reflects fair market value.
If this is true then is it possible that a licensee, regardless of their legal status as agent or facilitator, can influence the outcome to any significant degree? Doubtful and even if an agent is able to assist their seller in negotiating a particularly high price, as soon as the bank appraiser conducts their appraisal, the price will logically end up being adjusted to reflect fair market value. The purpose of the appraisal is to insure the true value of the property so the bank is not put at risk.
What advantage then is there to starting out the selling process with an agent as compared to the services of a neutral transaction broker? This has been and will no doubt remain a lively topic of discussion and some disagreement between those practicing and advocating agency and those practicing transaction brokerage/facilitation to the extent that consumers are left in a quandary as to which is better for them in their situation.
If advantage over the buyer or seller is what is the primary goal then in theory anyway, consumers would want an advocate agent. If on the other hand being fully informed and preferring to take the quickest least conflict ridden path to a successful closing then the neutral path that leads to fair market value and a contract based on meeting the needs of both parties given equal weight then transaction brokerage/facilitation is the most efficient route.
By considering what is actually negotiated in a typical real estate transaction, it becomes clear that there is little an ardent agent advocate can achieve over and above fair value anyway so why introduce the principle of advocacy and conflicting interests at all? Why not focus on fair value and finding common ground? If that is recognized as the preferable path to a sale then the model of agency which is really more akin to the practice of law when done correctly, may prove either ineffective at gaining any benefit or worse, causing added expense or tension in what is already understood to be an emotion laden process.
In the real world of real estate most agents tend to operate more as facilitators anyway, if they are at all successful. They cannot alienate the other side through over aggressiveness, they must be credible by seeking to price their listings relative to fair value, they must take the interests of the other side into account to be able to fashion a negotiation and contract that works for both sides.
Also in the real world, between peers, agents constantly emphasize cooperation (that is part of the National Association of Realtors® Code of Ethics), they frequently socialize together, engage in fund raisers for local charitable entities to build good will in their communities, they are told to seek to be “liked and trusted” by the public, they will work a neighborhood using door hangers, mailings and other means of building their image and they generally try to project a positive and friendly demeanor in their market.
In other words real estate agents do not behave as advocates in any strong sense like attorneys. If anything, the opposite. Can we picture lawyers holding social get-togethers with other lawyers, doing chili fundraisers, playing golf with the members of the local bar association as real estate agents do, or generally looking to project an image of friendliness and good will in the community? A recent Active Rain article described an agent who does annual free neighborhood pet photography to attract clients. Can you picture any of those behaviors or activities by any lawyers? Litigators generally advertise in yellow pages and on TV about how aggressive they are and how they win big settlements for their injured victimized clients. and to make sure they are never accused of being "friendly" with the opposing counsel they sure don't socialize with them on a regular basis.
Is the agent really behaving much more like a transaction broker with a few exceptions such as recommending a high list price? Is the agent really capable of gaining any advantage over the other side or are they more practical and obliged through the inspection, legal and appraisal review processes to craft a negotiation that meets the needs of both sides as well as reflects fair market value?
Much ado is made by advocates of agency but in the real world of daily real estate is advocacy over-rated as compared to the benefits of reaching common ground as quickly as possible for the benefit of both sides of the transaction.
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