Kate's Commission-Cutting Crusade

Blogger's Note: Kate in the Valley is back -- still house-hunting after five unsuccessful bids, still blogging. In Chapter 3 of her diary, she explains her plan to single-handedly restructure home financing and why it didn't work:

"Want to hear about this great idea that I latched onto?  Well, it turned out to be not such a hot idea after all, but I'll get to that later.  Anyhoo, I thought it would be Super Smart to restructure the traditional home purchase offer.   Traditionally, when you buy a house you just give the purchase money to the seller and the seller pays the 5% commission out of that.  But when you think about it, you are agreeing to pay 5% more for the house, and that translates to a bigger down payment, a bigger mortgage and bigger property taxes every year.  So I figured it would be brilliant to subtract the 5% off the purchase price and pay the agents' commissions separately myself.  Seems like no big deal, right?  Wrong.

Let's say I agreed to pay $750k for the house.  Traditionally, the seller would give the agents $37,500 in commissions and take the remaining $712,500 to pay off his expenses, etc.  I need to cough up $150k for the down and take out a $600k mortgage.  My property tax is $9,375 per year.

But if I just give the seller his $712,500 directly and then pay the 5% commission to the agents separately, the 5% is reduced to $35,625 (saving $1,875) because it is based on $712,500 and not on $750k.  The seller is getting the exact same thing, only the agents' commission is reduced.

My 20% down is likewise reduced to $142,500 (saving $7,500).   My mortgage is reduced to $570k (saving $30k principle and 30 years' interest on that).  My property tax is reduced to $8,906.25 (saving $468.75 each year I own the home).  Sure, it requires a little bit more cash upfront to pay the commission separately from the purchase money, but the savings are meaningful, so I absolutely loved this idea!

Guess who absolutely hated this idea?  The agents. 

Read more: What happened when Kate bid on a house using her new-fangled commission structure...

Their commissions are getting cut to the tune of about $1,000 each, and the comps for the neighborhood are going down a bit. My agent argued that I was only hurting myself by doing this because I was lowering the comps in the neighborhood and saving only a few thousand dollars.  So, let me get this straight: I should pay extra for my house so that the comps are up for the neighborhood?  That makes no sense.  In this scenario, even the seller benefits because the escrow and closing costs are reduced.  The only ones taking a hit are the agents, the mortgage brokers, and the title companies because their fees are all based on this reduced purchase price.  In fact, when you think about it, it's the exact opposite of the cash-back scheme, which inflates all those fees.

Ultimately, my agent begrudgingly wrote the offer.  The house went into multiples and guess what happened?  The seller's agent refused to counter my offer.  Yup, they countered everybody but me.  The house went for a price that I would have happily paid, but I was excluded from the bidding.  Needless to say, it was an idea that was ahead of its time, and I have stopped using it.  When the buyer pool shrinks, the structure may work, though.  Feel free to give it a whirl.

Comments? Insights? Let loose.
Photo Credit: Kate in the Valley

Comments

[Peter Viles]

Kate -- I admire your moxie, but this is tilting against windmills, I think -- even though it makes perfect sense. The vast majority -- I'm going to guess 90% or more -- of home-buyers do not have an extra $36,000 in cash to pay the commission, which is why they roll it into the purchase price and finance the commission over 30 years or so. And neither sellers nor realtors want to see stray comps -- call them "Kate Comps" -- that are 5% below surrounding comps. Other than that, a great idea!

[East Coast Reader]

This is an interesting story, and is a good example of the uncompetitive practices that exist in the real estate industry. The Federal Trade Commission and the Department of Justice put out a report earlier this year entitled "Competition in the Real Estate Brokerage Industry." The report can be read as saying that in much of the country the real estate industry has gone to considerable lengths to squelch competition, preventing individuals like Kate from structuring transactions in outside-the-box ways.

Here's a paragraph summarizing the report:

While there have been many positive developments in the residential real estate industry, there are some indications that consumers are not enjoying all of the possible benefits of competition in the real estate brokerage industry. A number of developments have raised competitive concerns, particularly laws and regulations in some states that limit consumer choice of real estate brokerage service offerings and that prohibit rebates to consumers, anticompetitive agreements among brokers, and industry practices that impede competition. These practices can lead to substantial consumer harm through reduced choice of real estate brokerage services, higher fees, and limitations on the ability to access information about real estate listings.

The full report is available at
http://www.usdoj.gov/atr/public/reports/223094.htm

[www.BetterVillage.com]

Kate,

Too much excercise book learnin' and too little street smarts to achieve what you're setting out to achieve unless your goal is to expose the industries dirt rather than actually buy a house.

How do you know that "the seller's agent refused to counter [your] offer"? Do you have any evidence that the seller actually saw your offer?

One of the things that has bugged me most over the years, in my own purchases as well, is the tendency of listing agents to control the process in their own favor (and definitely not necessarily in the best interest of seller). What mechanisms exist to keep the process honest? Mysteriously, even for homes that sit on the market for months, "multiple bid" situations erupt. I can understand why a listing agent would want twice the commission for "double-popping" the sale - I've enjoyed this myself when my buyers produced superior offers - but aside from a nebulous "duty" to protect their client, what specifically can be done to keep the process legit? Realtors? I know agents that make a big show of refusing to play the "dual agency game," but in my experience they don't wait for the buyer to find their own rep; usually they recommend someone within their own company or sphere of influence.

[Kate]

Pete:

I'm sure it's true that most buyers don't have the extra 5%, but much to my surprise there are a lot of all-cash buyers out there. Oh, what am I saying? It's totally moot as long as traditional agents are running the market.

East Coast Reader:

Thanks for the link! I love it! The article reminded me of the reaction I get from listing agents when I mention Ziprealty (a popular discount broker). They are positively scathing.

Better Village:

You, Sir (or Ma'am), have hit the nail on the head. I am definitely set on buying a house but a lot of interesting things have come up on the way and I certainly have gotten side-tracked with what is going on behind the proverbial curtain. I like to think that I am back on track now but maybe that's because the next shocker has not yet revealed itself to me.

All of my information on that particular bid, came from my agent. She told me that the seller's agent described my offer as "too confusing" for the poor seller. This struck me as highly unlikely as the seller was herself a transactional attorney. Due the allegedly highly confusing nature of my offer, the seller decided to counter the other bidders but not me (despite the fact that I submitted proof of funds, pre-approval letter, and 3% earnest money with my offer).

As far as what can be done, I suspect that ultimately companies like Redfin and Ziprealty will win the war. Especially when the younger, more tech savvy, generation starts to buy.

[www.BetterVillage.com]

Not sure how the word "excercise" got in my last post... but just ignore it...

[Edwin Waggens]

Just as an aside Kate, ZIP Realty is NOT a discount broker. They listed several homes in my area of Woodland Hills, and I talked to several of their agents.

What they are is a full service brokerage with a significantly lower overhead. So they give breaks to the sellers, and offer buyers a rebate on the commission. The business model is not that same as other brokers, and the approach is making huge inroads into the business of the "big Three" which is why their agents get their backs up when you mention it.

In my opinion, it's a zero-sum business and every sale one company makes is one another didn't get.

Contrasted to discount brokers where you do everything yourself, or pay ala carte for any agent services, ZIP is closer to old-line brokerages. The difference is they don't have an office on every corner. They are in cyberspace with the buyers. One of the agents told me "we know over 75% of potential buyers and sellers start their search online, and that's where we meet them".

[Pat]

If you had offered to keep the commissions the same, you would have still been able to save on the property tax. I would guess that the agents (yours and the seller's) would not have pushed back in that case.

[kate]

Edwin:

Thanks for the clarification. I am a big fan of Zip and certainly didn't mean to imply that their service is anything "less than." Indeed, I find their online tools to be the most powerful available.

Pat:

Yes, I suspect you are correct about basing the commissions on the full price. And while there would still be some property tax savings, I think I shouldn't have to leave the extra two-grand on the table. The commission is supposed to be 5% of the sales price, NOT 5% of the sales price plus commission. Nevertheless, you are correct.

What really gets me is that we are paying higher commissions during the boom (when homes were selling themselves) than we were paying in days past when it was much more work to sell a house. Alas, it is what it is (for now).

[Ann Observer]

I have been in Real Estate 22 years and just when I think I have seen all the hare brained ideas people come up with to undercut the Realtor, this grand moronic idea comes up.. you buyers and sellers NEVER cease to amze me!! It is a good thing most of uf professionals value our time and our profession because as is painfully obvious, the majority of buyers and sellers don't. I am figuring that most o'you just think of us as the necessary evil..

I have news for you folks.. we have been around a long time and we will continue to be around collecting our very hard earned commisions, and trust me they are very hard earned for the most part. Mostly in having to endure people like this brainiac Kate and the legions who think like her and make our life a living hell!!

[Evil Landlord]

Ann- Bitter much?

I don't begrudge a person making an honest living- I'm in insurance for a day job. I also refuse to insult the intelligence of my clients. Several people I know have left the agency model to buy and service themselves online. So far, one has returned, and I anticipate more after any sort of claims process.

Kate's propsition might not have been the best idea, but can you refute her percieved benefit?

[formerlahomeowner]

To Ann Observer,

Gimme a break! Your post is exactly why some people hate dealing with realtors. "Collecting our very hard earned commissions," you say? Get another job because with that attitude and the current real estate market, those commissions will be harder to come by.

Kate,

I don't blame you for trying to save money. Here's a suggestion: Offer 5% below what you initially want to offer - that should take care of the commission. A better suggestion: Wait another year or so and you will be getting a bigger discount. How does 20-30% off sound to you? That should take care of the commission and then some. Happy house hunting. Careful of Ann Observer - she will definitely work hard for her commission.

[KNewburry]

Good for you that you are thinking about alternative ways to write an offer. The full service RE agents are going the way of the dodo and the now almost extinct full service travel agents. Services like Zip will bring the costs down for buyers AND provide better service by putting a lot of info right in front of the buyer on line.

[whodecides]

There is a full blown assault on RE Agents in the media and on blogs at the moment.

Can we just begin to reduce the pay of everyone in every industry. Everyone of your inflated salaries increase the cost of my living as well. If I reduced your salaries, then my taxes would be less, my car would cost less, my computer would cost less, lets just go around and determine who really deserves what they make.

In my years as a business owner, its painfully obvious that with the level of effort that most people display, they dont even deserve a fraction of their salary. Lets cut everyones pay.

[Kate]

Dear Ann O:

I think your "necessary evil" comment is right on the mark. I don't believe that every single real estate transaction requires a real estate agent (let alone two) yet it is almost inescapable.

As far as agents "continuing to be around," I agree. There are some outstanding real estate agents out there. People who know their market, know how to write a contract, and have the necessary connections to bring buyers together with sellers. But surely you've seen a whole crop of new agents (with questionable skills and ethics) arrive with the boom who are bound to be pushed out of the market in the near future.

As to your suggestion that I am "undercutting", keep in mind that my structure still provided a 5% commission. I am only limiting the commission to the purchase price as opposed to basing it on the purchase price PLUS commission. It's not evil, it's just math and what should be the benefit of having extra cash saved up.

But, Ann, I really want to know what you think about some agents' practice of pushing cash-back-at-closing structures. Do you find this practice to be as outrageous as my proposed deal structure? Or do you think there's a justification for the cash-back deal structure? I do hope you'll weigh in because I haven't heard an agent's perspective.

[Pat]

Stock Brokers, Bond Traders, and now Real Estate Agents. What do they all have in common? When they had a monopoly of information, they could charge higher rates for their services. Stock trades now cost a flat rate. Same with Bond trades. Real Estate can't be too far behind.

[Pat]

Cash back at closing is one of the main avenues for mortgage fraud. I would not be surprised to see lenders refuse to finance such deals in the future.

[Kaye Thomas]

Kate,
Just a quick note.. in the "Boom times" commissions did drop in most areas.. it was not uncommon to see 4% or less in 2003-2005. They are back up to now as agents spend more money and time on marketing..

Buyers never believe this but Sellers are funny and don't always want to deal with something different from the standard contract.. A lot of sellers don’t like creative they want basic. If there were multiple offers and all of them were generally the same terms then the seller may have decided not to counter you because they thought your offer wasn't serious... Anytime you are dealing with a multiple offer situation the best thing you can do is to keep it simple if you want the property.
As to your agent not wanting to write the offer because it would bring down the comps in the neighborhood.. that’s just silly. A desperate seller might accept a lower offer, there could be a foreclosure or a short sale . These situations would certainly affect prices more then one sale. A number of situations can happen that might have an effect on sales and agents can't control what people accept or reject .... six sales that are significantly lower will affect prices one sale? .. No way.

Cash backs.. if disclosed upfront to all parties including the lender and for repairs then I have no problem with it.. however under the table transactions that are not disclosed... BAD.. WRONG.. VERY BAD.. FRAUD... JAIL..

[Jim]

Kate,
Why don't you have a real estate license? Be your own broker. You could solve your own "discount pricing" problems by taking your discount as a legal share of the commission.

Better yet, be an active broker or a salesperson. Pay rent, spend money for advertising, work weekends, etc. Then, see how you feel when someone comes up with an offer to "clip" your commission.

People tend to forget how hard and how many years Realtors worked to build up the MLS system. Now, they want the Realtors to give away their knowledge...and methodology for selling.

The government says "Commissions are negotiable." Sometimes, when I really want to sell, I offer to pay a bigger commission, say a 10% commission including 6% to the selling office, and maybe even a bonus for the first acceptable offer. Why, because it gets attention focused on the sale of my property. It gets excitement. Think about it for a while. If you had a salesperson's license, worked for a 50% splitting broker, and you could earn 1/4 of 6% = 1.5% OR 1/4 of 10% = 2.5%, I think that you'll be featuring my property.

[Cal]

It's a nice thought Kate but against the rules and specifically prohibited. It is interesting that your agent (or any of the agents commenting here) didnt know that..

Crisnet (now part of SOCALMLS) MLS rule 9.7:

"The Cooperating Broker shall not use the terms of an offer to purchase to attempt to modify the Listing Broker’s offer of compensation nor make the submission of an executed offer to purchase contingent on the Listing Broker’s agreement to modify the offer of compensation."

Yeah, I'm a nerd and actually read MLS rules.

[Guy West]

Go for it Kate! The system is ripe with flaws, but the NAR continues to shoot itself in the foot by failing to modernize.

The system separates pay from performance If someone buys a house for $400K with 5% commission, puts in a 100K for improvements in 6 months, and flips it for $600K with 5% commission, the agents' omission goes up from $20K to $30K...what did they do that was worth $10K more?

This makes even less sense if the house sells quicker, by less experienced agents in the second transaction.

[AnnS]

(1) we have been around a long time and we will continue to be around collecting our very hard earned commisions, and trust me they are very hard earned for the most part. Mostly in having to endure people like this brainiac Kate and the legions who think like her and make our life a living hell!! Posted by: Ann Observer |

EARNED??? Oh please! Neither agent did enough work on that potential sale to jsutify $35000+.

A realtor does not even need a high school diploma.
A realtor goes to some classes for 1-3 weeks and passes a standard test.

Thats it for education and qualificaitons.

Whining about the costs of being self-employed? Get over it. EVERYONE who is self-employed has to pay their advetising, office costs and all the rest. Tell it to the self-employed plumber who isn't getting the same amount an hour.

With no educational requirements to speak of, realtors think hey are entiteld to such exorbitant rate.

When I was still practicing law before retiring, I would have had to worked 175 hours to make $35000 (and I had to pay all my assistants and staff and the costs of running the business.)

I don't think the 2 realtors on that transaction put in 175 hours or 87 1/2 hours each - and even if they did, they sure weren't worth the same hourly rate as someone who spent 4 years in college and 3 in grad school.

(2) Tell Kate to go look for FSBO properties. They can cut out the whole amount paid over to realtors. There are usually websites for an area where people list their properties. Also, she can find the standard offer and contract forms on-line.

[Steve]

Kate,

This is a lot of work and hassle for chump change releative to the entire deal. You want to save some real money, buy a house outside of SoCal for about 60% less then this dump and live happily ever after.

[Kate]

Cal:

Thanks for the citation to Rule 9.7; I share your geeky affinity for knowing the letter of the law.

After reviewing the rule,however, I am not sure my structure runs afoul. That is, if the listing is offering 5% I am still paying 5%. All I am doing is saying to the seller: "Hey, would you take a lower purchase price if I pay the commissions for you?"

In the case of an aging listing, many sellers would be thrilled to take away the same cash as they would at full list price. My mistake was not the structure itself, it was attempting to use the structure in a multiple offer situation.

Jim:

Funny you should mention getting my license because I have considered doing that. As I already have my law license, I understand that some of the brokers' requirements are reduced.

As to your comment about "giving information away," I whole heartedly believe in this model. Hoarding information creates a market ripe for fraud. That's why you can look up the law -- so everybody has a chance to know their rights. And if you have trouble with the information, then there are professionals who can help you. So in the case of real estate, I say give ALL the information away for free. And then, if anybody has trouble with the information, there should be professionals available to help for a fee.

Steve:

Yes, it does seem like a small amount of money relative to the transaction. But I don't think a few grand is truly "chump change." I could almost get central air installed for that price!

Thanks all for your feedback!

[Mr Income Stream]

The reason, why you didn't get a counter was because no one wanted to deal with your nonsense when they had real buyers at the trough who were qualified and giving the least resistance. Who has time to read through and figure out all your crap when there's a line of people waiting to buy at asking or over. Get over yourself. Nobody cares about your spreadsheets or theories. The thought of an agent not countering you because he/she was going to make 34k instead of 35k is a pipe dream that only fogs your mind. You need to seek employment as a comedy writer. If you were as bright as you thought, you wouldn't be trying to buy a house now at this juncture anyway. You'd be calling banks and asking them when are they going to release the hounds so you can truly get a real deal and save some real money over time. The valley is filled with morons who overspend trying to keep up with the Joneses. In about 6 mo's to a year it going to be foreclosure heaven with the rate that Trustee Sales are going. Another L.A. meathead... so out of touch with reality they need to be living on Mars. Where do these people come from...?

[shockg]

I think the cry baby realtors are failling to listen to what the customers want. The realtors don't set commisions, customers do (or at least should). If Customers don't feel you are worth 5 or 6 percent, guess what, your not! This Industry is a total cullusion with kick backs and referral fees being the norm. What a joke. It's just a matter of time before enough customers stand up and do something about this.