Thursday, August 27, 2015

Fortune Attacks Real Estate Brokers – Do You Agree?

Yesterday, Chris Matthews’ article “Real estate agents may be colluding to rip you off” was published by Fortune while citing to a paper published by the National Bureau of Economic Research and authored by Panle Jia Barwick, Parag A. Pathak, and Maisy Wong.

The article claims that “brokers who charge lower commissions are punished in the marketplace” and that sellers are “uniquely incapable to gauge the quality of what they’re buying”.
According to the authors of the cited article, Conflicts of Interest and the Realtor Commission Puzzle,
“[t]hese adverse outcomes reflect decreased willingness of buyers' agents to intermediate low commission properties (steering) rather than heterogeneous seller preferences or reduced effort of listing agents.”
So, in English, it’s not that seller’s agents’ efforts are adversely affected by lower commissions, but instead, that buyer’s agents, who are generally compensated by seller’s agents, are less likely to bring buyers to properties where they are offered a lower percentage for procuring.

As an industry, we need to make sellers capable of gauging the quality of what they’re buying; to make informed decisions as to commission payments.

To accomplish this, brokers need to explain to sellers that they offer a split of their commission to other brokerage companies in the area (i.e., cooperative brokerage) in order to induce such other brokers to act as buyer’s agents and/or broker’s agents in procuring their purchaser to buy the property (i.e., this practice increases demand and consequently the price for real estate).
Seller’s agents need to explain that buyer’s agents and/or broker’s agents are money driven and will steer their buyers to the properties where they are compensated at a higher level (as stated in the study).

Consequently, the amount of the commission that is to be paid to the cooperating brokers must be discussed when a seller’s agent initially takes the listing and such percentage should be included within the brokerage contract (i.e., exclusive right to sell agreement).

In Long Island, the local REALTOR© Board, LIBOR, permits the seller’s agent to control the commission percentage offered to cooperating brokers in each individual deal.
To illustrate, if a seller is paying a broker 6% one cannot deduce that the cooperating broker, who procures, will always get 3% for their efforts. Instead, the cooperating broker will get whatever percentage that is listed on the cooperating brokerage listing (i.e., Stratus) agreement by the seller’s agent (each region in New York has a different cooperating brokerage agreement and therefore this blog’s suggestion does not hold true everywhere).

As a result, sellers need to be educated that they have 5 points of negotiating commissions when hiring their real estate agent, as follows:
  1. The commission percentage to pay the seller’s agent for merely listing the property and negotiating for the seller;
  2. The commission percentage to pay the seller’s agent if such agent individually lists and procures the purchaser (i.e., direct deal);
  3. The commission percentage to pay the seller’s agent if such agent lists, and the commission percentage to pay a colleague within the same brokerage if such colleague procures the buyer  (i.e., in-house deal; this will be one total commission number for both the listing and procuring because the brokerage and not the salespersons is paid the commission);
  4. The commission percentage to pay the cooperating broker where the seller’s agent lists only, but another brokerage procures the buyer while such cooperating broker is negotiating for the interests of the seller (i.e., broker’s agent);
  5. The commission percentage to pay the cooperating broker where the seller’s agent lists only, but another brokerage procures the buyer while such cooperating broker is negotiating for the interests of the buyer (i.e., buyer’s agent)

The article’s title attacks an industry (“colluding to rip you off”). Yet, this blogger theorizes that sellers care more about themselves and getting the job done (i.e., selling) than fixing an industry. Without commenting as to whether the authors have a point about collusion, its submitted that simply having our brokerage industry inform and educate our buyers of the statistical effects of their commission offerings will make meaningful change. Let’s give our clients the tools to make smart choices. Let’s educate the vulnerable consumers that we serve. It’s the job of a seller’s agent to explain to their seller the 5 points of negotiating commissions.