If commissions are negotiable, how does one negotiate?

A REALTOR wrote a social media post this week lamenting the trend of brokers offering 2.5% compensation to buyer agents instead of the expected 3.0% commission. The agent believes buyer agents work hard for their money and should be compensated at the highest market rate by the one lucky seller who happens to accept her client’s offer. Should market demand push home prices one way or the other, but not move broker commission?

The compensation method standard in real estate MLS associations has proven to be immune to market pressure. Is that immunity due for a change? Modern real estate practice uses a compensation-sharing formula designed for an old model where agents were (supposed to be) working for the seller on both sides of the transaction. Until about 1991, disclosed Buyer Agency was uncommon in our market. Everyone worked for the benefit of the seller (the only person with a contract promising to pay in exchange for service). The buyer agency assumes an agreement between the buyer and a broker to exchange services for compensation. The broker serves, and the buyer compensates. Does the buyer pay their agent? It depends on your perspective.

Who’s money is it?

Buyers bring the money to the table. Before the money gets to the seller, expenses get paid. By the terms of the purchase agreement, the seller often agrees to pay the buyer agency fee out of the proceeds received from the buyer. Arguably, the buyer is paying the buyer broker with the money first going to the seller. It’s also arguable that the seller is paying the buyer broker with cash that once but no longer belongs to the buyer.
However you sort the money, the fact is that the amount of commission paid to each broker affects the price of the property and the seller’s profit. And that’s where there’s room for improvement.

Without getting into the difficulty of the work or skill required to facilitate a home sale, can we agree that compensation in a free market should rise and fall with demand and expertise? I don’t know that happens in the cooperative system of a broker-to-broker commission payment. I see a scenario where the listing firm obligates the seller to pay a top-of-the-scale fee to a buyer agent to get their property listed on the MLS.

The free market works when we let it

The free market system is working if there is a trend away from 3.0% compensation offers by sellers to buyer agents. Old beliefs and standard practices that once made sense cost American real estate consumers billions of dollars in lost equity. A fair compensation system would require the buyer to pay the buyer agent and the seller to only be obligated to pay the listing agent. The parties would negotiate any change to this arrangement, and the negotiations would start at zero.

Only in real estate do we expect a consumer (the home seller) to promise to pay a top price before seeing the quality of the product (the offer). All offers are not equal in money or risk. Disconnecting the commission into the two parts allows the seller room to negotiate commission and space for the buyer to negotiate the price. If commissions are negotiable, the home seller should not get locked into a non-negotiable position before seeing what they’re buying.

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Competition in Real Estate

Wisconsin consumers have options in selecting real estate professionals. (The WRA has more than 16,000 members). Where alternatives exist, competition should thrive. And competition is the marketplace ingredient that delivers better service and a more comprehensive range of fees. With no shortage of people practicing, real estate brokers must be feeling the pressure to better train agents and lower commission rates. 

The National Association of REALTORS is being pressed by the United States Department of Justice and multiple court cases to be more transparent. This morning I received an email from NAR outlining their position on the competition. Here’s the link: www.nar.realtor/competition-in-real-estate

I believe the Association favors competition to drive brokers to produce higher-skilled REALTORS and alternative business models offering service at a range of prices. Whether or not their actions inspire change across the country is undetermined, but I know our business model is way ahead of the crowd and consumers are seeing the difference.

We created Essential Real Estate to give consumers a choice to work with agents who have better contract awareness and prioritize negotiating better agreements for our clients. After two years, we can prove our strategies reduce selling expenses for home sellers and give our buyers more options to improve their offers without depending on outbidding everyone on price.  

It’s our responsibility to use our knowledge of the real estate business to aid our clients where they most want help; conserving equity and safer negotiations. While the NAR is now working toward more transparency, we’ve been there since 2020. Our clients pay less in commission, receive more ideas to reduce their selling costs, and have more intelligent negotiating advice. 

There are thousands of real estate brokers and salespeople. We’re different. We show you how to increase your profit, decrease selling costs, save on commission, and improve the terms of your offer. 

A Smarter Way to Price Your Home in 2022 .

Have you heard these terms? Zestimate, broker price opinion, mortgage appraisal, tax assessment, market value. Everyone who compares and contrasts your home’s financial value uses information from the same pool of facts. And, then they temper the facts with opinions. The result is likely a price opinion within 5% of each estimation. 

The method of comparison and contrast works well when we can pull from a pool of properties similar to the subject. When real estate inventory is down and stays down for consecutive years, we don’t have to throw up our hands and guess at a price. The information that matters most to home sellers is always available and easy to find. 

We all sell for the same reason: to use our equity for a new life experience. Typical examples are buying a bigger or smaller house, relocating, divorce, and settling an estate. Everyone who contemplates selling has a good idea of the mortgages against the property and at least an inkling of the amount of money they want to have after paying off mortgages and selling expenses. When we know what we owe and have an idea of the money we want, we have most of what we need to set a price.   

Know what you want to do with your home equity. People with a plan have a good idea of what they want to have in hand after the sale. For this example, let’s assume the number is $100,000. If we know the mortgage payoff is $200,000, we know $300,000 will not be enough because we have selling expenses on top of the mortgage. Add ten percent as a roundup number. We have to sell this house for about $330,000 to net the $100,000. Is our home worth $330,000? It might be worth more for some people and less for others. Fortunately, for the first quarter of 2022, there are too few homes for sale to satisfy the demand.  

You’re only setting an asking price. It’s not our place to tell the market this is a fair price for a property. The market tells us. All we can do is use whatever facts are available to guide our thinking. Reasonable judgment is possible when we factor in the relevant facts, and there are always facts to consider. 

Is my asking price $330,000 or $350,000? In this market, pricing to appeal to the broadest market will give us a chance to see buyers compete with buyers. When a person fears losing the house to another buyer, their motivation to improve their offer is the greatest. Without competition, the market is balanced, and that’s not the situation you want if getting the safest terms and netting the most equity is your goal. 

Suggestion. Know the amount you owe. Know an amount you’d like to net after paying mortgages and selling expenses. You now have your lowest price. Consider the facts you can find. Are there any recent sales? How fast is the market? In what way is the market trending?

By tempering your expectations with facts, you will have an idea of a possible selling price and a probable selling price. A possible price is the one that will leave you with more equity for your next move. Probable is the number you intend to beat. 

People who set their asking price closer to the probable price than the possible price are more likely to have the strength of the marketing working in their favor. The perception of value drives demand. Selling is a process of negotiating what each side wants. You know you want to walk away with more money instead of less, and the buyer wants to spend less. In a regular market, it’s more likely that a buyer will win the struggle. Eventually, we will see normal again. Today, set your price at probable and let the power of the market drive buyers to offer more money and security.

How necessary is an inspection contingency?

Most offers are not rejected on price. They’re rejected because the terms of the offer would leave the seller in an uncomfortable holding pattern for two weeks or longer. When owners can get all the money they want, they certainly don’t have to take on the risk and worry of waiting for a buyer to decide if they’re going to proceed or renegotiate. If you think you’re taking on a significant risk to buy without a contingency to inspect, take some time to decide if there is anything that amounts to a risk worth fearing.

Every house has some conditions that owners consider insignificant, and buyers will consider defects. A buyer rarely asks the seller for a concession in a balanced market after discovering conditions that might require a repair. When homeowners have one offer and nothing on deck, conceding to a two thousand dollar price adjustment or making a minor repair is a simple solution to get to closing without starting over. Most renegotiations over inspection issues involve minor concessions of a few thousand dollars or less.

When your auto insurance policy has a $2,500 deductible, is a $2,500 repair to your $350,000 house a risk at all? What if the cost of fixing a hidden defect is $5,000.00 or $10,000.00? Now we’re talking about significant cash. Or are we? Most people agree to pay $5,000 or even $10,000 more than their highest offer to win the accepted offer in times like these. We see it all of the time. In competition, given a counteroffer and a choice to pay a little more than they planned or hold the line and keep looking, homebuyers make the wise decision and pay the price.

Making an offer without including a condition to inspect the property may not be a risk beyond your comfort zone. If you’d pay $10,000 more than your best offer to own the house, maybe you can accept the responsibility to take on a $5,000 repair that may or may not be necessary. There are some homes where the high-cost repairs could be lingering. It’s a rare inspection that turns up anything more than deferred maintenance. The cost of including a contingency to inspect and renegotiate is a rejected offer. Before having an inspection contingency in your offer, decide if an inspection is likely to find anything that you couldn’t live with or you couldn’t cover the cost of the repair.

Inspection contingencies are oversold in part to protect the broker. I think home inspections find their way into offers, not because a buyer thinks it’s necessary, but because the buyer agent fears something and prefers to have the protection of a professional inspection. Don’t let an agent’s fears influence your decision to make your offer more attractive to the seller. Price, security, and convenience will get your offer accepted or rejected this year.