Buyer Services are not FREE! They’re just Financed.

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Education & Training with Your Move Made Simple

OK, be warned. This is a rant, but I need to get it off my chest.

buyersIn this tough market, with so many sellers underwater, there is an increasing need to work with buyers and we’re seeing even seasoned listing agents working with buyers out of necessity. But with it, the frustration is increasingly oozing out of AR on the lack of buyer loyalty, how no one wants to sign a buyer agency agreement, that even if they sign it, you can’t enforce it, etc, etc, etc. See Mimi Foster’s excellent post An Intense (and embarrassing) real estate lesson to see a great collection of comments voicing these frustrations.

I personally never worked with buyers without a signed contract (just as I never would take a listing without one) but that’s not the point of this post. There IS much less buyer loyalty than seller loyalty but I will opine that it goes far deeper than whether a not a contract is used. It goes very simply to a falsehood that we have repeated to buyers for years and is now coming back to bite us:

“Mr. & Mrs. Buyer: don’t worry about my compensation - my services are FREE to you!”

This statement is misleading at best and patently false at worst and it has engendered behavior in buyers that make us want to pull out our hair. If our services are FREE, then why should they value them much? If they’re free, why should they be cognizant of the time they demand from us since it cost them nothing? And why in the world would one sign a contract for FREE services?

Our services to buyers are not free - they’re simply financed. Don’t believe me? Then, think for a moment of a huge expense to buyers that is also not free but unlike our current system of compensation, is paid for visibly and up front: the cost to move.

Unlike real estate services, we don’t roll the cost of the buyer’s move into the price of a house. They pay for the moving truck and all the other costs associated with the move out of pocket. Can you imagine offering a buyer the ability to finance their moving costs by rolling it into their mortgage? It would certainly help them with cash flow in the short run, but imagine the costs in the long run by paying interest on their move for years to come?

The point is that moving expenses are not free! There is a time value of money and there is much less total cost to pay for the service up front then to finance it. It's no different with real estate services. One of our ACRE® graduates recently spoke with a lender who estimated that for the average priced home, the buyer could end up paying $20k over the life of the loan for their “free” services.

Our current “system” not only hides the true cost of real estate services, but inflates the value of sold homes - something we are all too familiar with when doing a CMA and comparing MLS sold properties with private sales. When we try to take into account private sales (something we really need to do to get a truly accurate CMA as private sales are increasing), we end up having to back out the compensation on MLS sold properties so as not to compare apples and oranges.

When buyers are told the truth, a very interesting dynamic takes place:

  1. If they can afford to do so, they might opt to pay their agent for their actual services and time and have the offered co-broke taken off the price of the house, especially if the agent is a trained consultant who can offer this choice OR

  2. If they can’t afford the cash upfront, at least they see our services (especially the fiduciary ones such as the valuation of the homes they are seeing, negotiating and troubleshooting of the transaction) as the vital services that they are. When services have value, buyers are much more respectful of our time and expertise, and are much more likely to sign a contract.

Buyer services are not FREE! They’re simply being financed. It’s time we start telling buyers the truth and stop our industry’s circular shooting squad. OK, my rant is over - thanks for listening folks.

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Rainmaker
686,609
Hella Mitschke Rothwell
(831) 626-4000 - Honolulu, HI
Hawaii & California Real Estate Broker

I do an exclusive Buyer Representation Agreement when I am asked to make an offer on a specific commercial property. And because it often takes longer to negotiate, I make it for several months. And it states that in that agreement what my commission will be, mostly based on the co-broke on the MLS.

I ALWAYS get a signed listing agreement, and sometimes a Single Party Compensation Agreement, from the seller.

A general Buyer Representation Agreement? I haven't done that. No one enforces that anyway. Better to pick your clients, then make them happy.

Sep 13, 2011 12:37 PM #17
Rainmaker
420,636
Michelle Francis
Tim Francis Realty LLC - Atlanta, GA
Realtor, Buckhead Atlanta Homes for Sale & Lease

Mollie, 

Great way to present it.  They are not FREE, just FREE to the buyer at least from an out of pocket expense.  

All the best, Michelle

Sep 13, 2011 01:19 PM #18
Rainmaker
255,325
Dick & Sandy Beals
Wilmington Real Estate 4U Wilmington, NC - Wilmington, NC

Good points!...however have you ever seen a sale in the records with the sales commission taken off??  A FISBO pays no commission, yet it shows as a comp to a home that did pay a REALTORS fee.  It is a cost of doing business, I'm with Greg on this one....even though I work 99% with buyers.  I still let buyers know that I do not work for free....BUT I will not work for less than x% and they may have to pay me for the difference in the cooperating compensation.

Dick Beals

Sep 13, 2011 01:20 PM #19
Rainmaker
375,516
Lloyd Binen
Certified Realty Services - Saratoga, CA
Silicon Valley Realtor since 1976; 408-373-4411

I'm not sure who pays the commission.  The commission is IN the price, just as a 'sales and marketing' expense is IN the price of every product or service we purchase.  Does a FSBO sell their property for less because they're not paying a brokerage fee?  Not if they can help it.

Too many agents chasing too few transactions have made lots of agent agree to work for free.  They'd rather take a chance that the buyer won't stray, than ask the Buyer to sign a BBA which they probably won't. I hope it works out for them.  I work with a contract, mostly all listings or referral buyers.  But not many of either this year.

Excellent Post, by the way.  An adult discussion.   

Sep 13, 2011 01:22 PM #20
Ambassador
2,341,039
Fred Griffin presently on Leave of Absence
Fred Griffin Real Estate - Tallahassee, FL
Licensed Florida Real Estate Broker

My next door neighbor is an Economics Professor at the University here in Tallahassee.  He is fond of the saying, "There ain't no such thing as a Free Lunch".

You make an excellent point in this Blog, Mollie. 

Sep 13, 2011 02:06 PM #21
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Loreena and Michael Yeo
3:16 team REALTY ~ Locally-owned Prosper TX Real Estate Co. - Prosper, TX
Real Estate Agents

I was on the teleseminar this morning. This was one of the point I don't agree with. I can see the conflict, certainly see where you are coming from.

Another example is what would you say when builders sell at the same price to a buyer - with or without real estate presentation? That builder sales (like cash buyers) do not make enough sales numbers?

Sep 13, 2011 04:39 PM #22
Ambassador
2,844,350
Tammy Lankford,
Lane Realty Eatonton, GA Lake Sinclair, Milledgeville, 706-485-9668 - Eatonton, GA
Broker GA Lake Sinclair/Eatonton/Milledgeville

We see things differently.  If I pay my electric bill with my husbands paycheck is that his boss finacing electricity?  Yes, the buyers bring the money to the table.  They give it to the seller.  It then belongs to the seller who pays my negotiated fee.  A fee that was negotiated long before this deal was struck.  It's on the sellers side of the HUD because when it gets paid... it's already the seller's money.

Sep 13, 2011 04:49 PM #23
Rainmaker
527,444
Jon Quist
REALTY EXECUTIVES TUCSON ELITE - Tucson, AZ
Tucson's BUYERS ONLY Realtor since 1996

Sorry, but the buyers contract are not enforced, which is not the same as being unenforceable. Brokers won't enforce them due to extra work and potential bad press.

And you don't have to say the buyer services are free. You simply tell them where the funds come to pay you. Everything is ALWAYS a product of price, for someone.

Sep 13, 2011 05:16 PM #24
Rainmaker
640,995
John Juarez
The Medford Real Estate Team - Fremont, CA
ePRO, SRES, GRI, PMN

You are comparing apples and oranges if you say that a seller’s loyalty, or lack thereof, is unlike a buyer’s loyalty, or lack thereof. You are comparing apples and oranges if you compare a listing contract to a buyer-broker agreement. You are intimating that a buyer’s agent brings no value to the transaction if you believe that the commission to the buyer’s agent is an additional financial burden that should be redistributed to the buyer.

I disagree on all three points.

Sep 13, 2011 05:19 PM #25
Rainmaker
427,389
Leslie Ebersole
Swanepoel T3 Group - Saint Charles, IL
I help brokers build businesses they love.

Seller offers to sell a house for a certain amount of money that includes real estate commission. The seller chooses to sell the way he wants, in most cases through the mls with a listing broker offering cooperative comp to a buyer's agent. A good BAA will explain this.

Sep 13, 2011 05:22 PM #26
Rainer
329,226
Donald Reich
Prudential Centennial - New Rochelle, NY

Nothing in life is free. However, they buyer is not paying MORE for the home because of the services provided by the broker. They would pay the same amount (or close to it) if the home was a FSBO(assuming they found the home).

The market determines the price, not the listing agent OR the buyers agent.

Sep 13, 2011 06:15 PM #27
Rainmaker
99,808
Mollie Wasserman
Your Move Made Simple - Framingham, MA

Wow, lots of good comments. As Lloyd said: It's an adult conversation. My point in this blog is not to get into an argument as to who pays what (though that is a great discussion). My point is that we do ourselves a great disservice by telling the buyer that we are free.

Many of you talked about how buyers and sellers are apples and oranges. But as long as we treat each as a client, providing client-level services, they should be treated the same vis-a-vi contracts and obligations. To treat a buyer as a client without expecting any loyalty on their part, and telling them that the services they're receiving do not impact their pocketbook bothers me a lot. How in the world do we convince a buyer that we're a great negotiator when we're willing to give them the benefits of client-level service without expecting anything in return?

Thanks to everyone.

 

Sep 14, 2011 01:40 AM #28
Rainmaker
749,943
Jackie Connelly-Fornuff
Douglas Elliman Real Estate in Babylon NY - Babylon, NY
"Moving at The Speed of YOU!"

In my office, the EBA is enforceable. The buyer signs it knowing they are working with me exclusively and there is an end date. If the buyers end up buying a home through another agent while this agreement is in effective, you betcha I'll get that commission. My fee gets worked into the offer, not the financing. My buyers never have to pay my brokerage a separate check for my services.

Sep 14, 2011 02:08 AM #29
Ambassador
758,687
Charita Cadenhead
Keller Williams Realty - Birmingham, AL
Serving Jefferson and Shelby Counties (Alabama)

Mollie overall I agree with you from the standpoint doling out free services.  I beg to differ though and so would a seller that the buyer is simply financing the commission (in other words, the buyer is paying the commission).  If the seller has equity, then the amount of the commission is just that much less of the equity that they receive. I am currently enrolled in the ACRE course and am enjoying every minute of it.  I believe that we will come to a fee system as a standard of practice.  It will be hard fought, but well worth it in my opinion. I believe "change agents" such as yourself and all of the other ACRE advocates will benefit greatly when the rest of the world catches on that we bring value and should demand to be paid for it just like any other service.

Sep 14, 2011 06:41 AM #30
Ambassador
758,687
Charita Cadenhead
Keller Williams Realty - Birmingham, AL
Serving Jefferson and Shelby Counties (Alabama)

Hooray to Customer comment #33.  I totally agree.  I personally am preparing for that day.

Sep 14, 2011 09:31 AM #31
Rainmaker
99,808
Mollie Wasserman
Your Move Made Simple - Framingham, MA

Jackie: Good for you! Until we start enforcing buyer contracts like seller contracts, we will always look at buyers as second class clients, at least in our own mind.

Charita: So glad you're enrolled. Looking forward to welcoming you to the ACRE community - we're growing quickly.

Mr/Ms Consumer: Thank you so much for your input. There are some of us in the industry that feel that the time is long overdue to innovate. Like Charita, we at ACRE believe that clients should pay for their own agent, thereby taking away the conflict of interest. The stumbling block has been convincing the mortgage industry to allow the agent's fee to be financed like other buyer costs.

We also believe strongly that the consumer should have a choice in the services they can receive as well as how those services can be paid for. With technology taking over so many administrative level tasks, our value and future is providing the vital fiduciary services that technology can never provide.

Sep 14, 2011 11:50 AM #32
Rainer
97,429
Glenn Freezman
Nucazza LLP & Home Buying Evolution, & Family Abstract, Inc - Fort Washington, PA

Consumer, all the Realtors in the world can say anything they want, YOU get to decide.  

Thoughts: Would any of you ever hire a negotiator to negotiate anything on your behalf if you knew they were being paid by the opposing negotiator?

 

 

 

Sep 14, 2011 01:07 PM #33
Rainmaker
484,057
Jennifer Allan-Hagedorn
Sell with Soul - Pensacola Beach, FL
Author of Sell with Soul

Great discussion, Mollie. Here's my take...

I agree that commissions are a cost of doing business and the argument as to who pays that expense really is moot - it's IN the transaction which means the buyers pays more and the seller gets less - and since commissions are such an integral piece of the financial picture of a real estate transaction, it's hard to make a case that one OR the other party "pays" them.

But here's where my mind went after reading the blog and comments.

The buyer representative will be paid (in a perfect world anyway!). And that pay will come out of someone's pocket - it doesn't just materialize out of thin air. And that little factoid brings up three questions/observations:

1. Is "financing" the commission, as Mollie described, a financially wise way to pay for buyer agent services? 

2. As some have mentioned (and I concur), does it really send the right message to imply to our client that the other team is paying our fee?

3. Not really discussed here, but certainly relevant - if a buyer agrees to pay us non-contingently (that is, a fee for our services whether or not they go to closing, and that the removal of risk (on our part) results in a much lower fee for them (but a guaranteed paycheck for us), shouldn't they have that option?

 

 

Sep 15, 2011 02:38 AM #34
Rainmaker
134,231
Marcia Kramarz
Re/Max Executive Realty - Medway, MA
CDPE,LMC,CBR

This clearly is a hot topic - Great Post and Great Comments - If I had to guess, I'd say well over 50% - maybe closer to 80% of realtors present their services to buyers as free - SO the dis-service is pretty deep and probably has set a perception in the market place - about the value of a buyer's agent -

Thanks for posting - Important topic!

Sep 26, 2011 01:01 AM #35
Rainer
478,183
Not a real person
San Diego, CA

Valid points. When I was a real estate agent many decades ago in Houston, I never had a problem with loyalty. However, with the Internet and all it offers, I think that buyer loyalty is harder to come by.

Happy Wednesday!

Sep 28, 2011 05:26 AM #36
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