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.

Procuring Cause and Wishful Thinking.

Procuring cause is a simple concept complicated by replacing facts with expectations—those who wish for outcomes unsupported by reality twist, blend, and blur the rules of order. Is gaining a favorable decision worth the price of integrity the storyteller pays? It depends on the values and fears of wishful thinkers.

Inspecting and Testing Contingencies. Are They Worth the Cost?

Children were once immune from injury by monkey bars, kid-powered merry-go-rounds, and teeter-totters. They grew up to be risk-tolerant young adults. Surviving eight grades of recess on asphalt playgrounds prepared them to be teenagers fearless of Normandy and Pacific island beaches.

In 1976, a residential offer to purchase in San Diego was one page. Having faced instant death from ages three and on, a child of the forties was not going to grow up to fear reverse polarity, ungrounded outlets, and cracks in concrete. Prepurchase home inspections were uncommon until the late 1980s. Late Boomers learned to accept risk, the price of participation. That changed when the Gen X crowd came into the home buying market, but let’s not blame them for their risk aversion tendencies. We boomers saw the opportunity to profit from the rising real estate market without holding a license of any kind. Everyone could be a home inspector as long as you had a pen, pad of paper, and a ladder. A slight fear of a giant catastrophe made the $200 fee look like money well spent to ensure a ready supply of ready buyers for the inspector.

By 1992 home inspection contingencies in an offer became the norm. About that time, another scare was introduced to the process—radon gas. A simple radon test and mitigation system generated about $4,000 of income for radon testers and mitigators. ($300.00 was enough to cover all of the parts and labor, but demand exceeded the supply of contractors, and prices rocketed.) There is at least one radon mitigator per REALTOR today. For $650, you can have your house tested today, and a mitigation system, guaranteed to work, installed on Saturday.

Home inspection contingencies and radon testing contingencies take up at least an entire page of the thirteen-page Wisconsin Offer to Purchase. Five years ago, waiving the inspection was uncommon. Three years ago, radon testing contingencies were added to the standard purchase agreement, and the contingency took off. However, by 2020, home sellers had grown reluctant to accept offers with testing and inspecting contingencies. I believe more offers were rejected over testing and inspecting contingencies than were rejected because of price. REALTORS were about a year slow in catching on to the fact that testing and inspecting were luxuries the market was no longer permitting. Early adopters to the practice of writing offers owners would eagerly accept held a big advantage for a long time.

It appears there has been acceptance of the slimmed-down offer by REALTORS and homebuyers. Where we once thought it was reckless to make an offer without inspecting and testing contingencies, the vast majority of offers are written to appeal to the seller, more than to protect the buyer from something someone fears might happen, but rarely does.

The fast-paced seller’s market has returned us to pre-1990 thinking about risk. There are a hundred protections you could insert in an offer. But every contingency you include is one more reason for an owner to reject your offer and sell to someone else. Four offers came in on one property this weekend. None had a contingency to inspect, test, or obtain a financing commitment. Wrapping a client in bubble wrap will prevent them from experiencing any surprises or elation over getting their offer accepted.

Less is more. Give clients a choice to insulate themselves from anything you can think of that might go wrong. Everyone does not want the same protections because everyone has different tolerances for risk. Remember when you’re drafting an offer, this is the buyer client’s offer, not ours. Give them choices, and you give them chances.

Talk, text, email, or send a Notice? Let the client speak for themselves.

In the Candyland game (ages 3 and up), a roll of the dice that comes up three does not allow a player to move four spaces to avoid landing on the licorice square. The penalty for licorice slows the player’s progress. There are no exceptions for players who wished the dice had come up anything but three, regardless of their years of Candyland experience. The game board does not come with a referee. Players who agree to participate agree to self-regulate and defer to the rules to settle differences of opinion. 

An accepted offer to buy and sell real estate is the agreement between opposing parties that set the rules of engagement. Like a game’s rule book, the agreement defines terms, establishes boundaries, expectations of fair play, and consequences for deviations. Players often are assisted by real estate licensees. Prohibited by the license limits from being arbitrators for one side, the licensee is more of a guide. 

When everyone promises to abide by the rules, we expect the process from start to finish will be smooth. Conflicts in home sales happen when someone decides the limitations don’t apply to them. I know what I said. I said I would call a plumber to fix the shower and I did. Unfortunately, the plumber fixed a leak in the bathroom instead. Too bad. I’m not going to pay for another trip and another repair. Take it or leave it.

 Semantics is a go-to resource for bending rules (I said I’m immunized. I didn’t say I was vaccinated.) Another is illogic. Real estate brokers don’t always know what they have for a client until opportunities for doing the right thing arise. When a person reveals themselves as a scoundrel, choosing to help facilitate the offense is a dangerous decision. Licensees must be fair to all parties, regardless of their client’s decision. 

When a licensee calls to tell me their client twists to interpret an agreement to an illogical conclusion, I am speechless. Well, that’s not true. I know what I want to say, but when I’m at my best, I bite my tongue. Why a professional real estate licensee would make a call to try to persuade me to persuade my client to accept this irrational position is beyond my comprehension. Agents who think they must facilitate conversations as their client or client’s attorney demands don’t have to make a phone call, text, or email. They could use a proper form—a Notice from Seller to Buyer or an Amendment signed by the Seller. Drafting may take longer than texting, but drafting is far better for placing accountability where it belongs.

When I say agents talk too much, I don’t mean they can not communicate. I’m saying when you speak, and your client doesn’t, the only documentation of ill intentions comes from you. If a client wants to be a scoundrel, it’s unnecessary to tie our integrity to his sinking reputation.  

Three Mistakes Devouring Home Selling Profits Today.

Market conditions are fluid. We’re all familiar with seasonal, supply and demand, and consumer confidence changes that swing the pendulum of advantage between buyers and sellers of goods or services. 

We consider today, 9/21/2021, to be a Seller’s Market in the Madison, WI area. But that’s a large geographic area, and within that area are thousands of mini-markets with more or less potential to increase your profit and decrease risk when you put your home up for sale. 

Profit. 

We hear about people paying over the asking price to get offers accepted. Those offers increase the profits of home sellers beyond their expectations. Would you care to know even when you get a bid over the asking price, you may not be getting the maximum profit available? How much, you ask? I will show you:

  1.  Promise to Pay a Set Commission to a Buyer Agent. Ninety percent of sellers in a non-scientific review I made recently reported that they paid a buyer agent a 3.0% commission to represent the buyer who purchased their real estate. Three percent is a high-water mark that’s been around for decades, with few exceptions. The most costly mistake home sellers make is promising to pay a set fee of 3.0% when they sign a listing contract, which is well before the day they see any offers. Homeowners who offer 2.0% to a buyer agent and reserve their opportunity to negotiate a higher rate will most likely increase their profit by decreasing their selling expenses. A four hundred thousand dollar house has at least $4,000 of commission to negotiate in favor of the homeowner. 
  2. Agree to fees that the seller always pays. Offer to purchase forms and contingencies are pre-written for convenience. Buyers and sellers have some expenses related to financing, closing, and transferring ownership. In a regular or buyer’s market, the buyer gets off easy, and the owner pays most of the costs to sell. Negotiate to move expenses from you to the buyer, and you can quickly reduce your selling expenses by $2,500 to $10,000. The high costs that the buyer could pick up are Title Insurance, Transfer Fee, property tax prorations, and commissions. 
  3. Agree to Contingencies. “The rest is just standard terms.” The presentation of the offer to the home seller by the licensee or the attorney gets overlooked. Those standard terms are mostly contingencies. Contingencies are included in contracts to allow the buyer to complete their due diligence before being committed to closing. That accepted offer with contingencies is the buyer’s opportunity to eliminate competition and shift time to their advantage, setting the stage for renegotiating everything, including price. All contingencies are not crucial to everyone. As long as a person can leverage you into negotiating, the terms of your offer are at risk. Contingencies are often satisfied to the favor of the buyer by the seller making a financial concession. Two thousand dollars is a typical concession. 

Let’s do the math.  

Mistake 1. Promise to pay a 3.0% commission before seeing the quality of the Offers. $4,000 (or 1% of the sale price)Mistake

2. Agree to pay fees that the seller typically pays. $2,500 +

Mistake 3. Agree to unnecessary contingencies. $2,000

A conservative estimate of profit to be made by avoiding three common mistakes made negotiating is $8,500. I know people are making unusually high profits due to accepting offers well over the asking price. It’s not my business to decide how much profit is enough. It’s my responsibility to show you where you can make a profit, so you have the choice to determine the amount of money you keep from the sale of your home. 

These three mistakes are easy to avoid when your agent knows the contract.

Essential Real Estate Service

There are hundreds of things a real estate firm might do, but not all of the activities are for the benefit of their clients or customers. And only a few activities are services that require a real estate license. The majority of tasks done in the process of a consumer’s interaction with a real estate firm are administrative chores. A smooth transaction and satisfactory experience results when all of the work is done timely and with skill. The end result is intended to be more than just good. Because good-enough is not good-enough, the admin work is important. It’s just not essential real estate work.

The duties of the real estate broker and licensed agents are spelled out in the Statutes. Admin work is selective, the duties prescribed by law are not. The consumer participates in the chores. Hourly employees conduct many of the activities such as staging a home, pricing, photography, paper processing, scheduling appointments. Handling admin chores poorly is not acceptable, but they may be hardly of any consequence to whether or not the sale closes.

Handling the essential real estate services poorly carries tremendous consequences. If the job requires a license you can assume there are skills required, and rules of engagement. Failing to exercise skill or play within the rules can be catastrophic to the transaction’s outcome. And if not catastrophic, expensive in loss of time and money is almost certain.

We created Essential Real Estate LLC to be the firm that strives to make better use of the contracts, and negotiating opportunities for home sellers and home buyers. The advantages a consumer can experience when their broker knows the contracts and contingencies are significant. Giving away leverage because you agreed to a condition that your agent didn’t comprehend happens every day, but not with us. We make it our business to help our clients get into a commitment with well qualified, and highly committed people. We work smart to identify the people committed to closing on the terms they agreed to and separate those who aren’t.

The essential real estate work is contract work. It’s negotiations. Confidentiality is a contract and license law responsibility. Our clients should expect a higher level of attention to the work that requires a license. They should also expect to see a more satisfactory profit after the closing.

Most Offers Aren’t Rejected…they’re just unacceptable as written.

You’re never competing with multiple offers… I’ll pause while you ponder that.

When an owner has a dozen offers on the table, more often than not, they have one offer that’s acceptable as written. Even if a few of the offers have exceptional prices, at best, one offer is acceptable without requiring changes. Most offers can’t be accepted without a counter offer. Those offers aren’t necessarily rejected, they’re simply unacceptable. You don’t have to compete with unacceptable offers. As a listing agent, it’s sad to see a person lose the opportunity to own a house when, except for flaws, and poorly drafted terms, their offer was the better choice.

Contract Drafting Skills are essential in this market. They’re also not a high priority subject of education. That’s too bad. Many years ago I decided I would make sure I was never at a disadvantage to anyone…broker or lawyer, in my knowledge of the Wisconsin purchase agreements and forms. I’m not saying I know the law better; I’m saying I know what’s in the purchase agreements, what’s not, what works for clients, and what works against clients.

Acceptable Offers are easier to craft than the ones that are peppered with errors and omissions. All of my clients can’t outbid the highest bidders. But none of my clients are submitting unacceptable offers because I missed something, or they weren’t given proper choices. Rejection is a fact of life. Acceptance is the goal. Submitting offers that can’t be accepted is avoidable.

Years of experience and ability do not go hand in hand. Some REALTORS get into the field because they like houses, or like working with people. Few people are inspired to get a real estate license because they love contract work. When you’re interviewing agents to represent you, take some time to discover their contract drafting ability and comfort. If you have a choice, expect higher standards.