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.

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?

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. 

Earnest Money. The high-impact game changer in real estate negotiations.

The simplest way to make your Offer stand out to the Seller when competing against multiple Buyers is the amount of earnest money you propose. Often overlooked, the earnest money is a low risk, impactful psychological difference-maker in residential purchase negotiations. The agent who suggests a buyer-client offer the least or typical amount of earnest money unintentionally undermines an otherwise impressive Offer. 

Buyer-favorable rules protect the earnest money

Earnest money is a downpayment a buyer may submit with their Offer or after their Offer is accepted by the Seller. (Some states refer to acceptance as ratified.) Acceptance, unless otherwise agreed, happens when both parties sign the identical Offer stating they accept the terms as written. Once deposited in a Trust Account, Wisconsin law determines where and when earnest money goes to the Seller or the Buyer if the transaction doesn’t close. For reasons we won’t get into, ninety-nine percent (or greater) of residential offers include a promise to present a personal check within a few days of acceptance of the Offer. Because you put no money on the line until the Seller commits to you, it’s easier to promise to pay an amount that may persuade the Seller of your sincere commitment. 

Typical Amounts Tell The Seller You’re Typical

If you were the Seller and not the Buyer, given a choice, if all else is equal, do you choose to commit to the typical Buyer or the Buyer who impresses you as most ready, able, and engaged? Which one is most likely to get to closing without stumbling? Of course, it’s the person who puts their money where their mouth is. 

Typical earnest money is one percent of the purchase price. On a three hundred thousand dollar offer, $3,000 is the amount the Seller is most likely to see offered by typical buyers. It’s hard for Sellers to ignore a good offer with substantial earnest money, and the Buyer who makes that Offer is one with whom the Seller is likely to want to find a way to come to terms. How much money is substantial? If you’re going to put down 10%, half of the downpayment is certainly noteworthy. 

The Greater Your Risk, The Greater Your Commitment

You and I know that earnest money rules protect the Buyer from the risk of losing their earnest money except in cases of breach of contract. Don’t take my word for it; talk to real estate attorneys who resolve earnest money disputes. Even the Buyer who acts in good faith might still find a seller reluctant to release earnest money at first. Lawyers know that even in the cases of intentional breaches, the Seller’s best option may be to release the Buyer and move on to the next Buyer. Cases that don’t end in mutual release with no money going to the Seller are more likely to end up with money divided between the Seller, lawyer, Buyer, and lawyer. 

Earnest Money Tells Your Level of Commitment

A person’s commitment to getting to closing is evident by the terms included or excluded from their Offer. Contingencies that provide opportunities for a buyer to reconsider or renegotiate are neon-light red flags. Conservative amounts of earnest money send a message that you’re cautious. The typical home buyer is cautious. In competition, you do not want to appear cautious, or typical, or common if you are none of those.  

Bold, confident, committed, fearless Buyers are ideal partners for risk averse Sellers in a real estate transaction. Promising more earnest money is a simple, low-risk way to complement a well written, contingency-light Offer to purchase. 

A Simple Mistake That Gets Offers Rejected

Smart home buyers are modifying their Offers, promising the seller that they will accept the first ($2,000.00, $3000.00, $5,000.00) in repairs of conditions identified in the home inspection. This safety net inspection contingency gives the seller the security that comes with believing the buyer will not renegotiate over minor issues. Difference makers like this one are often the reason a home seller selects one Offer over others. 

Safety Net Inspection Contingency—Very Smart

A batch of offers on several properties caught my attention this summer. They all had a similar version of the same contradicting, Offer-killing contingencies. The safety net inspection contingency became diluted by a risk-to-the-seller condition of a radon test. Each of the Offers with these contradicting contingencies suffered the same fate of REJECTION. I think this is an avoidable error made when agents or lawyers draft offers and include the radon testing contingency for the wrong reason—protecting the buyer from radon gas. I’ll explain it.

Radon Test $200. Mitigation $600 – $1,200

First, a radon testing contingency will not protect anyone from radon. The contingency only allows the seller to install a mitigation system before closing and give the buyer a retest, showing that the radon level is below an agreed-upon rate. The least expensive EPA approved mitigation method is about $600. I’m sure there are some oddball examples, but ask any mitigation specialist to show you what they’ve charged in the last three years, and you will see $1,100 -$1,200 is typical. The chance is excellent; you can reduce radon in a home to a level below the EPA action level, with a system that is not detrimental to the house’s look for $1,000 +/-.  

Be logical to avoid defeat

A radon test is paid for by the buyer at the cost of $200.00. The buyer who is willing to cover the first $2,000 of the inspection identified defects can save the $200 test cost and install a $1,200 aesthetically pleasing, effective system. It’s illogical and self-defeating to say the seller we will cover the cost of fixing things that cost $2,000, but we will make them cure a condition that will cost only $600 to $1,200. 

Torpedoed By Radon Testing

When comparing Offers, it’s easy to eliminate some because they’re poorly written, have flaws, or are high risk for the seller. In the end, there are usually two or three Offers to decide between. With all else relatively equal, the radon testing contingency torpedoes otherwise acceptable Offers. 

When drafting Offers, it’s wise for the agent or lawyer or buyer to review before signing and ask two questions, WHY IS THIS CONTINGENCY INCLUDED? And DOES THIS CONTINGENCY CANCEL OFFSET ANOTHER CONTINGENCY?

Avoid Training. Pursue Learning

Learning is not training. Contract flaws like this illogical combination of conditions repeatedly happen because training doesn’t require a person to make an effort to learn (in this case, radon is deadly, everywhere, and mitigated inexpensively) the issues, and understand the implications of contingencies. Training tells you what to do. Learning is when you know why you’re doing it.

We often say we can write a safe offer to wrap a buyer in bubble wrap contingencies so that the seller won’t accept the Offer. When a person isn’t committed to owning a property, bubble wrap contingencies will help keep them out of danger of owning. But when a person commits to own, it’s up to us to give them reasonable ideas to make their Offer acceptable. I hope never to see a person lose a home they want to own because an unnecessary contingency makes its way into an Offer.

Service Fees Adjust to Competition. $499 plus 1.0% is our competitive fee.

Costs to be in business, prices set by competitors, and subjectivity are three factors a writer at Business.com suggests when establishing a service fee. According to this New York Times article of May 1984 said the real estate industry lacked “…vigorous price competition among brokers…” According to the writer, the consequences were that the consumer paid a higher price than necessary because they were unaware that there are alternative(s), or discount, brokers who charge less than the standard industry commission of 6 or 7 percent. 

That was then. What about now?

According to a spokesperson for the National Association of Realtors quoted in the article, commission rates arrived at equilibrium due to a very competitive market. Rates were consistently 6-7% in 1984. If that competitive market was the reason, then what’s the reason now? I don’t contend that the real estate commission rate is immune to market changes because of cooperation among brokers. I believe the quoted rate you are most likely to hear from brokers is still six percent of the sale price. The outcome may be similar if firms set their costs before calculating revenue, and project revenue based on a need to cover expenses. By comparing their desired fee to the fees other firms charge, a going rate gets set. Equilibrium is a choice. 

Another Approach Puts the Consumer First 

At Essential Real Estate, we took another approach to price our service and arrived at an alternative rate for Madison, WI area home sellers.

First, we identified why people sell their homes and where the money comes from to pay broker fees. They sell to free the home equity to use for their next life plan. The equity they desire to use gets reduced by the amount of money paid to the broker. To be a service worth offering, we set out to create an alternative that doesn’t deplete home equity at such an aggressive rate.

Second, we built our company to operate on a budget that leaves room for profit. Real estate businesses can load their debit column with the costs of a host of legitimate but not essential expenses. For example, if a broker wants her company to pay for vacations, cars, gifts, personal promotion, charitable contributions, a soiree or three, and still desire a profit to satisfy a lifestyle, more transactions or more money per transaction will be a crucial factor. 

Third, we excel in the essential real estate services. Our fee is only for those services. Real estate agency law sets out the purpose and expectations of a broker. None of those license law requirements have anything to do with spending money on social media, personal promotion, lead generation, brand management, or attendance at motivational seminars in vacation destinations. When a client isn’t paying inflated operation costs, they keep more of their hard-earned equity. 

Pricing Is A Choice

A lot of money changes hands in a real estate sale. The amount of money that goes from clients to brokers is a choice. By choosing to leave more money in our home selling clients’ hands, we created a complete real estate service option for people in the Madison, WI area. Our fee is $499 at the time of signing the contract plus 1.0% of the purchase price at closing. We give our clients insight into how the cooperating broker compensation process works, and our clients make informed decisions to pay the buyer agent a fee of their choice. The typical broker fee might be quoted at 6.0% of the sale price in Any City, USA. Essential Real Estate clients are paying, on average less than 3.5% total commission. 

We exist to provide skilled real estate representation with our eye on your security and a goal to leave more of your home equity with you. Our fee isn’t the lowest. We don’t intend to be inexpensive. We are exceptional where it counts, and we charge only for what matters.