Six Percent of What?

Your home has a market value of $400,000. The traditional method of pricing the real estate broker’s fee to sell your property is multiplying your sale price by a percentage factor.  Redfin reports the factor is typically 5% to 6%. In Wisconsin and Virginia, according to List With Clever is 5.85% and 5.3%, respectively. The two states straddle the National Average of 5.45%. 

Even at 6.0%, the factor appears relatively small compared to the sale price. Losing six cents of a dollar isn’t going to change a person’s lifestyle. Here is the formula used: $400,000 X 6.0% = $24,000      

You pay selling fees from your equity, not your sale price. We sell our homes to release our home equity for use on our next life plan. When we apply the product of 6.0% of the sale price to available home equity, we see how the lack of choice in fees might be crippling on some home sellers. A typical American might have $100,000 of net equity after paying off the mortgage(s) and closing costs on a $400,000 home. Twenty-four thousand dollars is 24% of the cash available to use for their next life plan. Spending 24% of your savings on one service could easily be life-altering. 

Do consumers have a choice in service and fees?  Is it a choice when your pool of options is 3,000 practitioners who charge the same price? Today’s consumer of real estate service is more informed when they enter the market than any consumer in the country’s history. They demand a higher level of essential real estate service and are right to expect more at competitive prices. So, where are the alternative real estate models?  

The emerging models. Essential Real Estate, LLC emerged in the Madison, WI market late last year to solve the problem of spending excessive amounts of home equity on real estate service. Home owners who sell for $300,000 with Essential are spending a lot less on commissions and keeping more of their home equity for their next move. The average Essential Real Estate clients pays about 3.4% in total commission. (1.0% plus $499 to Essential, and about 2.0% to buyer agents.) Our service isn’t for everyone. But it is for anyone who prefers to keep an extra $10,000* or so of their home equity and spend less on broker fees.

*$300,000 sale price at 6.0% commission compared to the same price at 3.0% commission plus $499.

Interview Before Hiring a Buyer Agent

It’s Monday in America, and that means thousands of people are learning they came in second on the house they tried to buy over the weekend. Rejection sucks. When the market favors the seller, as this one does, more people will feel the sting of rejection, and very few will feel the thrill of acceptance. For most of those who lost today, their next offer will meet the same fate because they don’t know why their purchase proposals are unacceptable. I believe the solution remains unknown because the person drafting the offer doesn’t give the buyer choices to enhance the terms in the seller’s eyes. 

Two in Ten Offers Are Attractive

I believe there are two assertions about Sundays that are indisputable. One, the first team to 35 points, is significantly more likely to win an NFL game. Second, regardless of the number of offers a seller has in hand on Sunday night, only one and maybe two are good enough to accept as-is. Eight or nine out of ten people are not committed to owning the house. Their offer is a hope, not a promise.

Before you commit to an agent, know their ability

Few licensees understand (well enough to suggest alternatives) the consequences of prewritten contingencies. I heard this true statement from an experienced agent:  I would never write an offer without an inspection contingency. I have to protect my buyer. REALLY? Who decides the protections that go into an offer? Who decides which contingencies are protections and which hinder the opportunity? The buyer who understands the meaning of the contingencies they have to choose from should decide. To know the purpose, the buyer is dependent on the agent’s desire to learn and teach. If you can’t count on a professional to explain the good and bad of the contingencies and offer alternatives, your offer will look a lot like the other rejected offers. 

Plan For Spring Now

The difference between an agent who will be an asset in negotiations and the anchor tied to your ankle is knowledge and ideas. Agents who have trouble explaining contingencies found in an offer are not likely to have opinions on making your offer more appealing without just increasing the price. If you are on the sidelines until spring and are not committed to a broker as your buyer agent, take time to meet with agents. Review the offer and their company addenda. Learn what the agent knows. Find out what ideas they used to give their clients an edge in competition. Find out if they say ‘never’ to options that should be yours to make. If an agent won’t give you the courtesy of respecting your ability to make wise decisions based on information, keep interviewing. 

Beat The High Bid At a Lower Price with Greater Safety

People who lose in home buying competition will assume they were outbid on price. They may be right. Often they’re not. If you’re going to finish anywhere other than first trying to buy a home in a seller’s market, you’re going do so because you didn’t use your strengths. Everyone has strengths. Before you can use them, you have to know them. 

Something Other Than Money

Even people who can count money as one of their strengths have other advantages to tap. So why does the accepted offer not always go to the highest price bidder? Because they failed to see the transaction from the seller’s side of the table. Money matters; after the money comes security. Specific and simple terms with a safe amount of money are better bets than an offer heavy on cash and light on safety.  

Hedging Is a Strategy

It didn’t take long for consumers and real estate agents or lawyers to see a high price would capture home sellers’ attention. A high price offer, appropriately peppered with buyer-safe contingencies, was a potent recipe for outbidding the competition just enough to renegotiate later in the process when seller options have vanished. An owner who identifies a hedged offer will save themselves the pain of discovering the truth behind “too good to be true.”

You’re Stronger Than You Think

High-priced offers come with contingencies unfavorable to the seller because the buyer is not committed to closing. Every contingency is a reservation. Each contingency protects the buyer from being in a position to honor their commitment. A firm offer has promises without exceptions. 

Decide You Are Committed

Overpaying for a property is a choice. If you prefer to pay reasonable prices (and there are no undervalued properties in a seller’s market), you have the first necessary strength: A grasp of reality. From here, we build your arsenal of assets. A person who is fully pre-approved for financing is a match for cash buyers. A person who can make repairs won’t fear the unknown how a person who needs to hire a contractor for simple maintenance. The person who sees risk as an opportunity has an asset. Knowing the truth about the consequences of conditions allows a person to operate without fear. Knowledge and the exclusion of fear are assets. 

Be The Offer To Be Beat

Know your strengths, know market values, and you can commit to being the next owner. Take all of your strengths and put them together in an offer that makes you the offer to beat. Leave no room in security for anyone to nudge you aside. The safest offer is more likely to get a second chance from the seller in the situations where another offer exceeds the safe offer’s price. And when you have a counteroffer, you have a choice. to own or walk away. Flipping the power to you is the goal. To have the choice to accept an offer or give the seller another chance to come to terms with someone else is where you want to be.   

Those who depend on money to tilt the playing field to their advantage are the easiest competitors to beat for the person who negotiates on strengths. And their agents will still think they got beat on price. 

Metropolitan Place Owners Might Be Missing The Market by about $10,000

Home sellers are not getting the full benefit of a SELLER MARKET.  Metropolitan Place Condominium owners are paying a nearly $10,000.00 premium to sell their condos in 2020. A quick comparison of sales in 2020 compared to sales in 2011 proves somebody can save significant money if they had a viable choice. 

2011 Recession Pricing of Condos and Broker Fees

In the first 10 months of 2011 only six Metropolitan Place (360 W Wash) condos sold. The average time on the market was 193 days. Each sale reported to the MLS shows the seller paid buyer brokers a 3.0% commission. We know the RASCWMLS practice offers 50% of the total commission to a buyer agent so let’s assume the typical seller paid a typical 6.0% commission. If 2011 was a buyer’s market (six months on the market and 93% of the final asking price) and the going commission rate of 6.0% was related to the difficulty in attracting a buyer and negotiating a sale, do we expect to see the commission rates change in a favorable seller market? A hundred economists might say yes. Let’s see what happened.

A Fast Market in 2020

Compare the 193 days on the market in 2011 to the 38-day average in 2020. Consider the average sale price to asking price, with no price reductions, is 98.5%. Sixteen units sold in ten months. There are supply and demand. So, what happened to commission rates? Fifteen out of sixteen owners paid 3.0% to buyer agents. Assume that’s 50% of the commission, and it’s safe to conclude the typical commission rate was 6.0% in 2020. If you are an economist, please share your thoughts. Are owners not able to negotiate both sides of the commission? If not, why not? 

Lack of Viable Choice

The average sale price in Metropolitan Place was $357,706. Essential Real Estate, LLC is a choice for complete real estate service at a market rate. We charge $499 plus 1.0% of the sale price to represent our clients. Furthermore, we teach our clients how to negotiate the buyer agent commission AFTER they see the Offers’ quality. Promising to pay 3.0% before you know the terms of an offer is an expensive mistake. Most of our clients receive multiple offers and they negotiate a buyer agent commission of 2.0%. I’m happy to explain how this works. Our clients are delighted to save a few thousand extra dollars.

3.0% + $499 Total Commission v. 6.0% is a Viable Alternative

The average sale price of $357,706 is an opportunity to save $10,000 in home equity. We believe it is better that you keep your home equity than spend it on selling costs and fees. If that seems like a good idea, let’s talk. 

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?

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.