Monthly Archives: October 2020

The Rejected Offer Could Have Been Accepted if only…

I heard from a couple who tried and failed to buy three different homes in the spring. They concluded that they were losing to other buyers who could pay more money in recounting their experience. To get an offer accepted, they would have to overpay for a property, which isn’t something they are willing to do. So they renewed their lease.

Outbid Everyone on Security

Outbidding on price is a choice some of us shouldn’t make without exploring all other options to outbid everyone on security. Structuring an offer to be the highest price is as unwise as it is easy to do. Like a lot of things in life, outbidding on security takes a little thinking. Most people don’t know how to make an offer appealing to the owner who desires safety. Those who have learned realize it’s worth the effort to learn.

Mysteries and Insecurity

Real estate transactions have three parts. Price. A period of time for a due diligence investigation. And a closing date. Offers get rejected or passed over for any or all of these parts. We often think we were outbid on price, and we sometimes believe we couldn’t come to terms with the closing date. I contend that real estate agents and lawyers don’t give enough consideration to the impact of the contingencies that get stuffed into offers. Contingencies make up the due diligence period. The more the seller has to wait for the buyer to complete their diligent review of the property, the higher the level of insecurity. Mysteries are entertaining when they happen to other people, not when our well-being depends on the outcome. 

All Ideas are Not Good. All Contingencies are Ideas.

Every lawyer and real estate agent has an idea of something that should be in an Offer to protect somebody from something that happened to someone once. I offer this as an example of a bad idea: A broker insisted the Offer should include a condition that the owner professionally cleans the house (to a specific standard) after moving out and before closing. The problem to be solved is not as significant as the problems the requirement creates. Namely, seller rejects the Offer in favor of one without this subjective condition. And secondly, the provision is ambiguous, and the parties are unable to force each other to accept their subjective opinions on cleanliness. 

WHY Do You Need the Contingency

Most homebuyers do not need the protection of many of the contingencies that get included in an Offer. Consider reviewing your Offer with the person who drafted the Offer and explaining to you WHY they included each contingency. If the answer is anything like, “because we always do.” Or “I don’t know.” there is a good chance the contingency is going to work against you. Keep those terms out of your Offer.

A Simplified Offer

You don’t negotiate the price in a seller’s market. You don’t have to overpay for a house either. By removing the unnecessary junk from an offer, you make the Offer more attractive to the home seller. Ridding the Offer of protections isn’t placing yourself in a greater risk, but not divesting some of the protections will keep you from getting your Offer accepted. 

Simplified Offers are possible when the person drafting the Offer understands the meaning of the terms. Learning might not be easy, but it’s worth it to your clients.

Don’t Test. The Market Doesn’t Like Testing.

There is only one first day on the market. Use it wisely, and the market energy will work for you. All of the evidence needed to know the outcome of a strategy is available. Trust the evidence. Test the market at your peril. 

Buyers Sit Waiting for the next new listing. The buyers’ pool includes those who lost out on the last new listing and those who have just entered. Their commitment level will vary. Some have not learned what others know. Those who know what is necessary to get an offer accepted paid the price for the education. They’re in no mood to let a novice edge them out.  

Appeal to The Entire Pool of buyers to receive multiple offers and know most of the proposals will be unacceptable. That’s OK. An inadequate offer and a fair offer have the same effect on the persons competing for your acceptance. When you know the terms, and the pool of buyers only knows you have more offers than just their offer, you’re in control. The appearance of control of the conversation is the leverage you need. Even if you have ten offers to consider, only a few have any chance of being made acceptable. But only you know that for sure. Appeal to a broad base, attract the most offers, and you will be in the position to structure the terms of at least one offer to suit your objective. 

Don’t Test The Market; it doesn’t like to test. When the evidence about the market and where the property fits in the market are clear, the opportunity to capitalize is significant. Ignoring the facts and testing a hypothesis or reaching for the stars is a strategy likely to fail. The consequences of missing the market gets compounded when the leverage shifts away from you to the buyer.  

Agency Service Before Agency Agreements. It’s still a thing.

Buyer agency came into Wisconsin in the early 1990s. Real estate agency rules have always required a signed agreement before providing real estate agency service. In life, we expect practices to change to fit the rules. That doesn’t happen. In real life, rules get modified to make the law fit the method. Practitioners resist making a total concession, and enforcers are reluctant to enforce compliance. Buyer Agency is an excellent example of modifying rules to apply to standard practice, with the enforcer’s soft commitment to enforcing compliance.  

WB-36 Wisconsin’s Buyer Agency Agreement

Whether a licensee has the right to act as a buyer agent without a signed WB-36 is a question for lawyers. Depending on which side of the argument, a lawyer could be right. Real estate license law may not allow a licensee enough wiggle room to withstand a challenge. The agent who acts as a buyer agent provides agency service and waits to have an agreement signed until they’ve provided enough courtesy to help the buyer decide they should make an offer on the property is in a dangerous position. 

A self-proclaimed top agent in the Madison real estate market acknowledged before a room of eager first time home buyers of the expectation of a signed agreement before service. He then announced: I don’t have my clients sign a buyer agency agreement until we sit down to write an offer. Maybe he intended to give the audience some comfort in knowing he wasn’t as hard to work with as licensees who comply with Wisconsin law. What other rules might he not abide by? 

Pre Agency. Sub Agency. Buyer Agency. If you’re talking to a prospective home buyer, you are one or the other as a licensee. Pre Agency is one of those modifications made to make the law fit the practice. Pre Agency allows the licensee to provide some nonsubstantial service to a person. The service is at best enough for the parties to get to know each other. Because the need for substantial service comes early in the process, pre agency should be short. A need for disclosure of agency and a choice of sub-agency or buyer agency comes up quickly. 

Illegal or unethical is not up to me. But if the law requires an agreement before providing agency restricted services, and the rules require licensees to put the agreement in writing, it’s safe to assume the Board would have a disciplinary decision to make should a complaint be filed. 

How is this still happening?

Some licensees or brokers might have decided it’s better to capture business than to follow all of the rules. Capturing customers and pretending they are clients might be more comfortable than having a conversation that the licensee or broker is unskilled in. 

The same way we trace an illness back to patient zero, we can identify where the practice of agency service without an agreement exists in each firm. An audit of a firm’s files will provide a dated Disclosure of Agency form, and/or a WB36 Buyer Agency Agreement, and the dated Offer to Purchase. The responsibility for compliance rests with the firm. If files get reviewed as they are supposed to be, a broker should address the agents’ practice. Expecting the firm’s service incidents before the agreement’s cart to be ended quickly and early in the year is reasonable. 

Consumers who are represented by brokers who have not complied with agency law are out there. I know this because we hear from consumers that agents didn’t require a signed agreement in their previous experience. Real estate is a business with a long history of providing essential service for free. Consumers know price opinions, pre-selling consultations, tours, and free are all real estate agent giveaways. Is the buyer agency service just another freebie? Why is compliance so much better with the seller agency listing contract? Or is it?

What are the other optional rules?

Consumers who get agency-level service (negotiating ideas, value opinions, property critique, strategy advice) without a signed WB36 Buyer Agency Agreement may not be getting anything for free. If the signed agreement rule is deemed optional, what are other rules that the agent considers optional? Confidentiality isn’t optional, and failure to keep confidentiality will cost you. 

Real Estate Competition is Coming.

Real estate broker commissions are negotiable. The National Association of REALTORS (NAR) says they are, and I agree. Home sellers and buyers may negotiate with the brokerage firms. Negotiation requires at least two parties to exchange proposals. Are consumers asking to negotiate commissions, and if they are, is there participation from the brokers?

There is, to my knowledge, no coordinated effort by firms to refuse to negotiate. Such a step would surely attract the attention of Antitrust attorneys. The absence of a published policy to control commissions among the NAR members isn’t stopping a class-action lawsuit filed last year from proceeding. The New York Times published this story last week. 

As a developer of a company built on the idea that all real estate commissions are open for negotiations, we have evidence to support the position that consumers desire alternative fee models. In our opinion, no one model is best. Consumers situated differently benefit when they have alternative service models to compare and contrast. Research exists to show billions of dollars paid to real estate firms that consumers could save if alternatives were available. Essential Real Estate, LLC, is an alternative. Our Madison office has a solid start as a complete service option for consumers who desire to save some of those billions of dollars. We will extend our service model option into Eastern Virginia with Essential Real Estate VA, LLC, in Virginia Beach before the end of this year.  

For the free market to work for the consumer, there must be a choice. There are reasons that consumers have lots of options in real estate firms but relatively little choice in service and price. The current state of affairs may be financially beneficial to the broker at the expense of the consumer. We chose to create our business model to be a part of consumers’ solution to keep more of their equity and spend less on broker commissions. There will be more options coming for consumers. It’s exhilarating to be one of the few firms solving a problem consumers need to resolve.

We look forward to more firms entering the market, bringing with them even more business models. Mark S. Nadel wrote a comprehensive review of the brokerage fee issue and the obstacles slowing a shift toward more consumer choices.* A link to his paper, Obstacles to Price Competition in the Residential Real Estate Brokerage Market, is included below. 

*Nadel, Mark S., Obstacles to Price Competition in the Residential Real Estate Brokerage Market (February 22, 2020). Berkeley Business Law Journal, Vol. 18, No. 1, 2021, Available at SSRN: https://ssrn.com/abstract=3571088

Our Clients Wait to See the Offer Before Committing 3.0% to Buyer Brokers.

In this extraordinary seller’s market, some homeowners discovered the advantage of waiting to see the terms of offers before committing to pay 3.0% commission to the agent working with the buyer. In most instances this year, our clients have succeeded in paying 2.0% commissions by offering two percent from the start and retaining their right to pay more depending on the options available to them. If the sale price is $350,000, the difference is a $3,500 savings for our client.  

The money saved by our clients is money not paid to real estate brokers. I’m not surprised that none of the cooperating brokers objected to being paid 2.0% compensation from the seller instead of the 3.0% most often offered through the MLS. There is a high level of professionalism in the members of the RASCWMLS.   

And then there are the others. Over the year, agents (who were not involved in the transaction) have contacted us to object or have told our clients that offering less than 3.0% commission would be detrimental to their ability to sell. The accusation these agents make is that a fee less than the “standard” amount is a disincentive to the cooperating brokers and the agents will not show the house or will take action or inaction to prevent their client from buying the home. Unfounded accusations of licenses violating agency agreements, and acting contrary to the REALTOR code of ethics, is in itself, a violation of the Code of Ethics.  I cringe when I listen to agents or read their emails as they attempt to state their case. They carry a certain confidence in their conviction suggesting they have some evidence, but I think they don’t.

No Evidence exists to make such an accusation. There is hard evidence that sellers pay 3.0% commission to buyer agents way, way more often than any percentage less. From my experience with agents who claim other agents (but not themselves) actively engage in this illegal and unethical practice, have no proof. There may be a fear about buyer agent commissions in the real estate community.  A class-action lawsuit regarding broker commissions and their impact on consumers is one to watch. 

Essential Real Estate, LLC may be the only broker encouraging sellers to wait until they see offers to decide if they should pay 3.0% commissions. We have the evidence to prove you can spend less of your home equity on real estate commissions. Reserving your right to decide after seeing the offer is just one way our clients save thousands of dollars selling with us as their agent. What would you do with a few thousand extra bucks?