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 Fee Price 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?

It’s a question of democracy or tyranny. Vote against trump in every race.

Democracy is fragile. Our run of 244 years might have exceeded the expectations of Benjamin Franklin’s generation by 234 years. Democracy dies from the inside out; the people who vote and those who don’t decide its fate. I haven’t lived long enough to say this is the worse. Just long enough to know, trump is an immediate threat to this country’s democracy. There is no single issue to place above liberty when deciding who to vote for on November 3rd. If the National Association of REALTORS is straddling the fence or supporting the current administration, they’re again on the wrong side of history. 

Property Taxes, Home Sales, Tax Deductions. All Irrelevant.

 These are not normal times. A lunatic is in the White House, and we put him there. The consequences of leaving him there are inconceivable. Removing him and his band of fascists and loyal stormtroopers is imperative. The checks and balances to prevent the United States from sinking into tyranny have fallen one after another. The last line of defense is the vote. This election isn’t about which candidate convinces you they agree with you on property taxes, the importance of home sales, or tax breaks. We have to forget about immediate gratification and vote to remove this human stain on decency in favor of stopping the fast slide into a black hole. Every country that traded democracy for autocracy regretted their choice. The job of removing dictators becomes dirty and deadly once free elections vanish.

Unite and fight with votes while you still can.

The days of selecting a candidate based on their stands on issues important to real estate are in the past. We either vote for democracy, or we vote for tyranny. Can the National Association of Realtors and local associations please take a stand against trump? No, I won’t capitalize trump.

There is a place for a la carte real estate.

Sunset Village on Madison’s near west side is a real estate hot spot. From the end of March through yesterday, twenty-three homes have sold and closed. The average sale price of $366,800 is 101% of the average asking price. Seventeen of the twenty-three owners accepted offers within the first seven days. What’s driving this aggressive market?

Is it marketing? Is it Google?

Have the real estate agents become exceptionally good at promoting homes and stirring up the competition? Or, has the process of finding houses and becoming a qualified buyer been simplified so much that there are many more home shoppers for the remarkably few homes for sale? I think it’s pent-up demand combined with modern convenience in the shopping part of the process. 

A la Carte Real Estate

Six percent of the sale price of a four hundred thousand dollar home is twenty-four thousand dollars. For most home sellers, that $24,000 is much more than six percent of their available equity, and it’s the equity we use to pay real estate sales commissions. What are we getting for our money? Marketing? Advertising? Promotion? Advice? Representation? Guidance? Probably some of or most or all of the above. Is it all worth the same?

Essential Services

I worked with a broker who liked to say she sells the sizzle. She was sincere. The service was slim on substance. The question of why people pay real money for fake smoke is worth exploring. But that’s not what we’re here to do. Knowing that the broker fees you pay will come from your saved home equity, it’s smart to consider paying for services you need or services that make a difference and leaving the inconsequential smoke and mirrors out.  

Essential Real Estate Only Charges for Essentials

A la carte services allow consumers the opportunity to pay only for services they consider necessary. In fast markets, home sellers could save significant dollars by not paying for services that are either don’t get used or make no difference in the outcome. We created Essential Real Estate to be a reasonable price option for homeowners who prefer to keep more of their home equity. Rather than break down all of the processes real estate people call real estate service and put a price on each action, we made the process simple. We charge $499 to cover the expense of a sign, professional photography and staging consultation. The one percent of the sale price we collect at closing is our compensation for the essential real estate work. People are going to come to see your home. Marketing and advertising are not driving people to your door. Being one of the few homes for sale is the driving force. The real work is negotiating the terms of the Offer. That’s our expertise. For that, we charge a fair and reasonable price. 

False beliefs about agency fees cost home sellers thousands

Would you promise to pay a “going rate” for something you haven’t seen? Of course not. But, homeowners selling their houses do just that with buyer agent commissions. And, the cost to the owners is staggering. 

Properties offered for sale on the REALTORS multiple listing service may include an offer of compensation to a broker who procures a buyer. More than 2,413 single-family homes in the City of Madison sold this year in the RASCW MLS. Only 174 of those sales included a cooperating broker fee offer, paid by the seller, at anything less than three percent of the purchase price. Once published, the owner is locked into paying that amount, regardless of the terms of the offers. In seventy-two percent of the sales, the owners committed to pay a 3.0% commission from the start…without seeing an Offer. Please, somebody, tell me why.  

The Cost of the 3.0% Buyer Broker Fee Myth

Owners need to know a costly myth about cooperating agents has always been out there, and it survives today. The legend says agents working with buyers won’t show your property unless their compensation is 3.0% or greater. Illogical concepts should die quickly, and yet this one doesn’t. If there was ever a time when a real estate agent could hide listed properties from buyers, those days are long gone. Zillow and similar consumer-friendly sites display homes for sale regardless of the commission the seller offers to pay. The person who offers ZERO percent before seeing an offer will have their house seen on the internet by the same people who see the neighbor’s 3.0% compensation promised place. Does anyone want to challenge that?

Too Few Homes. Many Buyers. 

Markets like this will end one day. When the market turns to favor the buyer, home sellers won’t be able to control negotiations like they can today. Clients of Essential Real Estate learn the facts as we expose the myths. More of our clients offer less than 3.0% commission to the buyer agent and wait until they see an offer to negotiate on the commission. A typical seller offers 2.0%, and because they receive competing offers, they usually pay only 2.0%. Competition and short supply have a way of making anything look better than nothing. 

Discuss this topic with agents

Questions often asked by home sellers have little to do with developing a strategy for increasing the Net proceeds for the seller. That’s too bad; the reason a home is for sale is all about the net proceeds. Increasing your net can be accomplished by increasing the price (provided someone will pay that price) or decreasing expenses. In this market, it’s possible to get higher prices and cut costs. 

If you promise to pay any amount before you see what you’re getting, there is a good chance you’re going to pay more than something is worth. Doesn’t it make sense that an offer of $2,000 below your bottom line on your $400,000 house is a lot more attractive if the fee is 1.0% less? We can do that math without a calculator. 

How much should we offer?

Think broad strokes; time, security, money. Offer as much as you are comfortable and able.

Finally, a house in your first-choice neighborhood came up for sale. You’re one of many people waiting and watching for an opportunity to move into the community. Most likely, you and several others will sit down with an agent to write an offer, and I am sure of this; everyone will ask their agent the same question, “How much should we offer?” 

How much SECURITY do we offer?

I think you should offer as much of everything as you can and still be comfortable. By everything, I mean security and money. Security is time and assurance. Before deciding how much money to offer, know your strengths. Are you able to cover a few thousand dollars in unplanned expenses? Is there work you’re willing to do? Can you give the seller their choice in closing dates? Do you have the necessary documentation to prove to the seller that you have the money in the bank, or that the bank is committed to loaning the money you need? What can you put in your offer, or exclude that gives the seller the evidence that you are as committed to getting to closing as they are? I don’t mean a love letter, either. The kind of information that a seller sees as proof of unequivocal commitment is not something we say, but something we can prove, show, promise, and back with an acceptance of risk. 

How much money do we offer?

Sales of relevant homes in the neighborhood will be used by an appraiser to place a value on the property. Your mortgage lender will loan an amount relative to the appraised value. Regardless of the price you offer, the appraisal will be what the appraiser decides it to be. If the asking price is $400,000 and you offer $410,000 or $390,000, and the seller accepts your offer, you’re okay unless the appraiser decides $380,000 is the value. In that case, you may need to come up with the difference in the purchase price and appraised value.   

I can not assure anyone that they can get a home for less than the asking price. I can tell you a combination of Seller-favorable terms and a price at or above the asking price will improve your chances of an accepted offer. To set yourself apart from everyone else, regardless of the price you offer, show the seller that you have the means and are committed to keeping the price as agreed if the appraisal is less than the sales price. Doing this is a significant offer of security. So is allowing the seller to select the closing date. Saying I’m flexible means nothing. Structuring the contract’s terms to enable the seller to choose a closing date shows the seller that you are. 

Contingencies. Less is More.

Every real estate agent or an attorney can wrap your offer in so much plastic bubble wrap that you can’t possibly be hurt. Your offer won’t be accepted, but if your goal is not to hurt and not own the house, then wrap it up as you wish. Contingencies were created to protect someone from something someone fears. If you don’t have that fear, don’t include the contingency. Fewer contingencies increase the feeling of security the seller has, which’s a good thing for you. 

So, how much should we offer?  Think broad strokes; time, security, money. Offer as much as you are comfortable and able. 

Lead Paint Test Waiver. Did you check the box?

After trying and failing to get their Offers accepted on other homes, a couple finally outbid the competition. All that was left was for the seller to sign the Offer and send it back to the buyer. And that’s when the listing agent noticed an unchecked box on the Lead-Based Paint Disclosure and Testing Contingency, Addendum S. Instead of accepting this Offer, the sellers, facing an approaching deadline, decided to go with their second choice Offer. Once again, this couple came in second, and their search continues. What’s most painful this time is the reason they didn’t get the house was not their fault. The error is common and avoidable.

The Offer defers to included

Unless a buyer elects to waive the Lead-Based Paint (LBP) Testing opportunity by merely putting an X in a tiny box, the contingency becomes part of the Offer. Homes built before 1978 may have lead-based paint or lead paint hazards, such as lead dust, chipping, peeling paint. It’s safe to assume homes built when lead paint was prevalent will test positive for lead. And when they do, the implications are complex and everlasting. Given a choice, home sellers prefer not to have their homes tested for lead paint, and buyers who want to own older homes don’t test for lead paint. The presence of lead results becomes a permanent disclosure obligation from here to eternity. 

But I don’t want to test for LBP

The penalties for sellers and real estate agents for denying a buyer the opportunity to test for LBP are severe. The lead issue is considered a serious health risk by the EPA. Their tolerance for even the appearance of creating roadblocks to pre-commitment testing subject the parties to significant financial liability. For that reason, the LBP Testing Contingency is a condition of the Offer, and the only way to remove the contingency is for the buyer to waive it. Unless the buyer waives the contingency (and they can do that by merely placing an X in a box indicating they choose to waive), proceeding with the Offer will put the seller in a position of discovering the house has lead paint. With that knowledge comes the unpredictable and expensive obligation of mitigation to a level acceptable to the EPA. The closing with this buyer will be in jeopardy. The chances of selling to anyone else are uncertain. If you don’t want the LBP testing opportunity, you have to make sure you waived. 

A Counter Offer is Not an Option

A simple counter offer is all that’s needed to remove a drafting flaw or an unfavorable condition in an Offer. Unfortunately, when the issue is an LBP test, the seller is wise to avoid doing anything that looks like they are committing the buyer without allowing the test. Attorneys have advised using a counteroffer from the seller to the buyer could be interpreted as the seller’s act to deny the right to test. The safe route for the seller who has multiple acceptable offers, including one with a testing contingency, is to seek an attorney’s advice. When there are other acceptable alternatives on the table, it may be safest for the seller to turn to one of the other offers and move forward with one of those.   

An avoidable flaw

It’s not the seller’s or the listing agent’s place to try to fix a flawed offer if the seller has an offer they want to accept. We can suggest changes and explain options. It’s up to the buyer’s agent or attorney to make sure the Offer accurately expresses their client’s intention. Failing to check the box to waive the LBP test is a common error. And it’s avoidable.