More About Austin Discount Realtors and How Commissions Work

Real Estate Commission

Sylvia received a call today from an Austin home owner she met with last week. He called to thank her for coming out to discuss selling his house, and told her he has decided to go with another agent – one who is going to list the home for a 1% commission and offer a 2% commission to Buyer’s agents via the MLS.

For this Seller, a discounted commission was important, and he was up front about that requirement when he met with Sylvia. We don’t offer a discount program, so we did not win the assignment. Are we angry at the Seller or at the Discount Agent? No. Would we discount our commission to this Seller if we had it to do over again and could obtain the listing? No. That isn’t our business model.

We only know full service, full tilt real estate and we are good at that level of service. We don’t know how to give anything less. For example, there is no way I could bring myself to place only 1 photo in an MLS listing and charge extra for additional photos, as many of the Discount Brokers do via their “Unbundled Services” or “Ala Carte” programs. I’d actually be embarrassed to have my listings show only 1 photo. Photos are very important, as are virtual tours, because of the number of out of town buyers who select candidate properties online. We are simply not mentally oriented toward a partial, or limited service approach, and we are willing to leave that segment of the market to those agents who see value in this approach.

Do we think this Seller made a mistake by hiring a Discount Realtor? No. Well, we hope not. We wish for nothing other than a fast sale at top dollar for his home. We are not offended or hurt that he chose a Discount Broker over us. We understand that he wanted a service product that we don’t sell, and that’s ok. Real Estate customers do have choices, regardless of what we read in the news media and hear from consumer groups.

But this scenario provides a perfect opportunity to further discuss how real estate commissions work, and what might happen with this listing when it hits the Austin MLS with a 2% Buyer Agent commission instead of the more commonly seen 3%. Will the 2% Buyer Agent commission make the home harder to sell? Maybe – but not for the reasons most people assume.

How is a Buyer Agent Commission Amount Determined?
Let’s start with the question of who determines how much a Buyer’s Agent is paid. Is the Buyer’s Agent compensation determined by the amount offered in the MLS Listing? Absolutely not. Many people think it is, but the Buyer Agent commission is absolutely not determined by the amount a Seller is willing to contribute toward a Buyer’s Agent commission.

The compensation a Buyer’s Agent receives (at least in Texas) is determined entirely between the Buyer and the agent he hires, as set forth in a Buyer’s Representation Agreement. It is the Buyer who agrees to pay the Buyer’s Agent a certain amount, not the Seller. It is the Buyer Rep Agreement that dictates the Buyer Agent’s compensation amount, not the MLS Listing.

In our Buyer Rep agreement, a Buyer agrees to pay us 3% for our services as Buyer Agent. We will receive that amount regardless of the amount offered in the MLS listing, and this is explained to each buyer we work with. We will seek to obtain payment of the commission first from the Seller, and have always succeeded in doing so, but if the Seller is offering less than 3% to Buyer Agents via the MLS listing, our Buyer will be obligated to make up the difference, or decide to pursue a different home. On the flip side, if the Seller is offering a Buyer Agent bonus, or more than 3%, we rebate that to the Buyer so that our motivations and advice can never be attributed to a commission amount.

So far this year, out of almost 30 closed deals, we’ve encountered only one listing that our Buyer wanted that offered less than a 3% commission to the Buyer Agent. The Seller on that listing offered 2.5% commission. In that instance, we wrote up the offer to include the 0.5% gap in paragraph 12 of the sales contract, where the Seller agrees to pay some of the Buyer’s closing costs, and the Seller agreed. The Buyer was going to pick another home if the Seller had not agreed. So in this case, the Seller provided the other 0.5% commission to the Buyer, who in turned paid us the 0.5% gap at closing. Our buyer was not out of pocket for the difference and the Seller didn’t actually “save” anything by offering a lower commission.

Do Realtors avoid listings that pay less than 3%?
The claim by consumer groups and others that agents will avoid the listings of Discount Brokers is absurd to me. I don’t see how they can. When a Buyer signs up with us, or any other Austin Realtor, we have the ability to set up an internet search portal that notifies the Buyer via email each day of new listings that match that buyer’s criteria. We do this for every buyer. I’m not sure what percentages of other agents in Austin do the same, but it’s an invaluable tool for us and our buyers, and it’s provided as part of our MLS system at no extra cost.

The search portal is ignorant of and unaware of the commission amounts being offered on any particular listing. Buyers will see ALL listings that fit their search parameters. For those who say that Realtors avoid or blacklist listings that pay less than 3%, that’s hogwash. The MLS technology does not allow a way for us to filter out those listings or hide them from the buyer.

The buyer sees all listings that are available and matching their criteria, and they often call us right away when an interesting one pops up new in the system, and we will show buyers any and all listings that they deem to be good candidate properties.

So, Offering a 2% Commission Does NOT Affect the Marketability of the Home?
I’m not saying that. I’m saying it doesn’t affect which properties we show or recommend. This returns us to the listing I discussed above. The 2% Buyer Agent commission could hurt the marketability of that listing, but not because of the Buyer’s Agent. Assuming the Buyer and the Buyer Agent properly executed a Buyer Rep Agreement with a pre-established compensation arrangement, the Buyer Agent is going to be paid the same no matter which listing the Buyer decides to purchase. But the Buyer’s bottom line will be negatively affected if choosing a listing that pays the Buyer Agent only 2%.

The way that the marketability of the listing can be diminished is if the buyer herself penalizes that listing because she doesn’t want to pay the commission gap that exists between the compensation she agreed to pay the Buyer Agent, and the amount of Buyer’s Agent compensation that the Seller has agreed to cover.

Just as “saving” the 1% of commission is a motivating factor on the Seller’s side, the prospect of paying the commission shortage will be a de-motivating factor on the Buyer’s side, and the buyer may be more willing to keep looking instead of forking out 1% on top of the other purchase expenses.

What if the Buyer Agent is only charging 1%, won’t the Buyer still be 1% ahead?
No, and here’s why. Most Discount Agents gain buyers by promising to rebate some of the commission back to the buyer at closing. But if you read the marketing material of these agents, they are counting on a 3% commission to fulfill the promise of a 2% rebate. Ironically, the Discount Brokerage model (on the buyer side) only works when dealing with listings that pay a full commission (I find this to be pretty funny actually). So, even if the buyer is using a Discount Buyer’s agent, the buyer has mentally already put that 2% toward her closing costs and down payment. She may even need it to be able to make the deal happen.

So, in this case, even though the buyer will not be out of pocket anything extra, she is forgoing a cash contribution to her closing costs if she selects a listing that pays less than 3%, and in effect, she is again paying the commission shortage through an unrealized cash-at-close benefit.

Summary
So no matter how you slice it, the real estate market itself puts pressure on Sellers to remain in a very narrow range with regard to the Buyer Agent commissions offered on their listings. It’s hard for any Seller, under ordinary circumstances, to depart from the herd, so to speak, with lower commission offerings. These are market forces at work, driven by Buyer behavior, not greedy Realtors trying to fix prices.

A strong Seller’s market, or a very desirable home in a hot area, may surely erase that market pressure under the right circumstances, and render the Buyer Agent commission less relevant, just as it renders the list price irrelevant in multiple offer situations. We may be in such a market right now in certain parts of Austin, and Sellers like the one mentioned herein are testing the waters to find out. I don’t see any problem with that, so long as the Seller knows and accepts the risks I’ve outlined above. I will know the market’s response for this particular listing after I see it come on the market and observe how the market responds.

Posted by Steve
10 years ago
Steve

Steve is a Real Estate Blogger, Husband and Dad, UT Austin Grad, Runner, Real Estate Broker and owner of Crossland Team and Crossland Real Estate in Austin TX.

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Jim - 10 years ago

Steve,

By advertising a 2% commission, that seller is in effect pricing the listing 1% higher than similar properties in the neighborhood, who advertise 3% commission. They’re trying to be sneaky and get more than market value for their home, and all you do is bring them down to reality by offering 1% less than what you would have offered otherwise. It’s the same way with FSBOs.

The commission is part of the sales price. When you buy a home, the seller paid for it, and it’ll be your turn to pay it when you sell again, just like with title insurance. Some sellers for some reason think they can cheat the system.

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Jim - 10 years ago

I’ve heard many bad stories of discount listing agents not bein there for their seller to take offers and finish the deal. This frustrates the buyer’s agent and is the reason why discount listings may be boycotted. It’s not out of spite, it’s out of the fact that many discounters give crappy service. How can you, when you make pennies.

When you can’t compete based on quality, you compete on price.

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john - 10 years ago

Its amazing the various arguments the real estate industry will pursue that all come to the same conclusion: paying 6% for a real estate transaction is just so ingrained in the market that other biz models simply drive customers back to the standard rate somehow.

The bottom line is there is no reason that real estate commissions should be based on a % at all: how much extra effort does it take to sell a $900K house over a $700K? Maybe some, but $12K more that the seller has to shell out? Likewise, one $300K house may be an easy, quick sell while another may require hours of legwork. What possibly is the reasoning to charge the same amount for both? I’m sure you will argue that the easy sales make up for the difficult ones and it all balances out. That is an economic punishment to sellers who take care of their home, stage it well, or chose wisely a property that is desirable to customers.

You are an agent. That is your business. You are embedded in the culture and the details. You will make excuses to why alternatives just aren’t as effective to convince yourself that you treat all of your customers the same. At the end of the day, it is the largest price fixed industry out there.

Real estate buy/sell services should be based on a fee system that is determined like a consultant does for work: offering a price that matches the effort required or the talents of the agent. But real estate agents will resist that. Why? Because as home prices increase over time, the $$ paid to agents increase accordingly even if the effort or talent brought to the job remain the same.

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Steve - 10 years ago

John,

You bring up many of the same points that the opponents of the current real estate agent compensation system raise. But your arguments leave out a lot of other factors.

One of those many factors is the amount of uncompensated work that Realtors perform. We only get paid if a deal closes, and we therefor perform a lot of work for which we never get paid – especially with buyers who never buy.

If a consultant model were to be brought in, every buyer and seller would need to be willing to pay a retainer up front in exchange for a lower commission. Some Discount Brokers have in fact implemented such an approach. For example, they will list a home for a discounted commission, but the Seller must pay $500 or $1,000 up front. Buyers and Sellers do not seem exited about this approach, and that model has not won any notable market share.
Steve

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john - 10 years ago

Steve, that is exactly the common argument I thought you would give: the easy ones help pay for the hard ones or the time spent earning nothing. Essentially, any industry where people get paid according to their talents or skill or experience raise the quality of the players in the industry.

If you are skilled and experienced, you do indeed get paid more under the current system, but only because you attract more clients. But from the client side, they pay the same whether they learn that they should go with Mr. Experienced or Mr. Newbie. That system is unfair to the customer base as a whole you say you are trying to serve.

You say a flat fee approach hasn’t gained market share? What new entrant model can gain market share when you have entrenched players working together to promote a price-fixed system?

Just to be clear – I am in not in the industry in any way. I decided to build a new house to avoid real estate agent fees. But I will have to sell it one day and will likely have to enter the suckers’ game like everyone else. Because the industry is too stacked against me until the government comes in to break it up and make it an equal playing field from the customers’ point of view.

You are just matchmakers – matching buyer and seller. If this legacy 6% commission world didn’t exist, deals would still get done at a range of costs. And competition, essential to capitalism, would settle into a tiered market.

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bill - 10 years ago

Steve,

I hope you could be a little bit of self-critical rather than being self-defensive. You should at least try to understand the opposite side’s argument.

In the end, it is $$$ that makes sense. For real estate brokers and agents, the idea of doing away the fixed 6% commission is nerve racking. Especially for those successful ones who can make a petty good living (whether they drive a BMW or not is not an issue here) are worried about their livelihood. In my personal opinion, they shouldn’t have to worry whatsoever. If they are really that good, they should charge 7, 8, or even 12 percent if they can get the sweet deals other couldn’t.

On the other hand, almost all consumers want to pay less commission and gain more profit on their sells. If this means that they have to take our their digital camera and shoot half dozen pictures and then post them online as if they are doing it on myspace.com, I say why not. If this means that they need to open up a web program which they can set up a few simple queries so that they can see the CMA themselves, I say why not. Customers will say, don’t you worry about me being screwed. We choose it that way, we will take the responsibility and the consequences.

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Steve - 10 years ago

> I hope you could be a little bit of self-critical rather than being self-defensive.

Not sure what you mean. I’m fairly open minded about Discount Brokers and the ability of customers to choose the level of service they want when embarking on a real estate transaction.

Ultimately, the market will settle this matter through competition. If Realtors like me become obsolete, I’ll figure out some other way to make a living. But technology and the internet can only erase so much of the manual process because, in the end, Buyers are always going to need to be driven to and let into a property, and there will always be Sellers (most I believe) who will not want to deal directly with Buyers, so Realtors are not going away.

I appreciate the comments and feedback.
Steve

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Jim - 10 years ago

People who’ve never worked based on commission, or spent any time doing tons of work without getting paid will never understand.

I have no problem NOT working on commission, but then what would motivate me to even take on a more expensive listing? Why would I work for 1%, which in Austin would mean $1400 after broker splits, when I can make $750 as an apartment locator by signing up one apartment?

It’s all relative. I don’t mind discounting a $1million, but on cheaper ones, NO WAY. And ironically, it’s the people with the cheaper homes who whine the most about commission.

My advice to all you complainers: Don’t like it, don’t use a realtor. THERE IS NO PRICE FIXING. Commissions are negotiable. You can even negotiate a flat fee. However, most people find out that in most cases they get what they pay for, since a realtor simply can’t survive selling run of the mill homes for 1% or flat fees.

How much more clear can that be?

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Jim - 10 years ago

Btw, those who think they can sell through myspace or craigslist: GOOD LUCK. I tried posting properties on there and most responses are just time wasting lookers who don’t know what they want.

Truth is, most buyers go to the agent because they want to be sure they’re not getting screwed and saving time, so sellin on your own will never really work. An MLS-like system will never be setup by random people, because it requires too much organization and ongoing expenses to run.

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bill - 10 years ago

“An MLS-like system will never be setup by random people, because it requires too much organization and ongoing expenses to run.”

Uh, Jim, have you ever heard of Google? It’s the largest search engine and it’s FREE!!! Have you ever search for flights and pricing on Orbitz, Expedia, Travelocity before? I guess, if you use your own analogy, you would trust only travel agent to book all your flights and travel itenary. The chance of your travel screw up is so huge, why should you search for Hotel.com anyways?

Amazing that you live in Austin and don’t believe in talent and technology. Trust me, when the “whineing” FTC lawyers get down on the industry, there are hundreds of thousands “Google” engineers are eger to set something up. To be honest with you, the current MLS doesn’t really impress me that much in terms of technology and searchability. The fact there’s no competition of MLS search engine out there troubles most of us.

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bill - 10 years ago

The last thing we should do in places like these is to set up two camps: realtors vs. everyone else and to have a meaningless mouth water fight. I think Steve and Silvia set up this blog to do two things:
1- attract more potential clients (by showing their expertise in the business and their good attitude)
2- generate a livly discussion about the current affair (about real estate industry and Austin)

So, no matter how different our opinions are, we should at least try to understand each others stand point.

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Steve - 10 years ago

> Have you ever search for flights and pricing on Orbitz, Expedia, Travelocity before?

The travel industry is not a good comparison. There is little distinguishing one plane ride from another, and it’s a one-time fixed, relatively low-cost, low risk event. The transaction is a simple 3 minute process whereas the real estate transaction is much more complex, time consuming and risky.

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Jim - 10 years ago

Exactly, in a real estate transaction, you need to do a thorough market analysis and have access to full information about past sold properties, including the photos of their homes, sales prices, etc. Would you want all your private home sale information paraded in front of the whole world and available to average joes. What if your home is vacant? How are you going to advertise it then without inviting vandals? How is your home going to be show without a lockbox?

You think a full service Realtor is a rip-off? What about the MLS-only realtors who only post your home? They pay $400 a year to be in the MLS, but they charge you $500+ a pop to put your ad in there. They’re reselling a product for much more and providing no service, leaving the buyers agent to deal with both sides.

All those BS websites like zillow or the discount brokers have plenty of opportunity to take over the real estate world, and they haven’t. Consumers vote with their dollars, and judging by the horror stories, I think they’re still voting for full service.

My advice to anyone who thinks being a realtor is easy, why don’t you get a license and try to make a living out of it. You’ll see just how hard it is. I used to think it was easy too until I became an agent.

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bill - 10 years ago

Buying one airline ticket might be a straight forward process, what about buying an entire vacation package that includes air fare, hotel, train, multiple city tours? 20 years ago, most travel agents will tell you that you are going to be screwed if without their help.

My point is not about travel agents’ work being equaly complex. I was making a comment on Jim’s assertion that there’s not a chance that a free MLS type search engine will ever be in place. I disagree wholeheartly. Unfortunately, I don’t think Jim is getting it.

Jim is right about one thing though. Information is valueble. If you keep all these information to yourself (realtors that is) and close them to the buyers, you artificially created a value for your service. Then you can use all kind of excuses to defend that blockage of information. Once we force that information to be free and open, your full service value decreases. Zillow.com is a good example. I can pull up any home’s past information much quicker and much visually representative than MLS’s crappy interface. And it’s free!

By the way, more than half of the realtors I met aren’t particularly technical skilled. I fired two buyer agents who can’t even pull the CMA correctly. They claim that they don’t really rely on data, they rely on customers’ heart: “if you see something you like, data doesn’t matter.”

These agents are truly rip-offs and all of them are getting the 3% commission.

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Jim - 10 years ago

These agents are truly rip-offs and all of them are getting the 3% commission.
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Well Bill, that explains why you are such a passionate crusader for discounters. Like the vast majority of others who share your view, you got screwed by bad realtors. I try to be different. I come from a tech background so I use technology to the max, so my clients are always surprised at just how much useful info I extract for them out of the MLS.

Zillow is garbage. I pulled up my neighbor’s home. The value was 10% off and they used comparable properties from 5 miles away.

MLS is paid for and compiled by Realtors, so I don’t see why it should be given away. It’s NOT public data, it’s OUR data, our system, etc.

Consumer MLS won’t work for several reasons:

1. Cost – MLS costs a lot to run, but with realtors, we get economies of scale. To me $400 a year is OK since I make up for it by doing business. Every public database I’ve seen only has a list of homes currently on the market, and sites like Zillow use outdated data, so their estimates are useless.

2. Quality – Agents are fined for putting in bad data into the MLS, fined for not putting up photos or having misleading photos, etc. If some Joe misrepresents his house to entice buyers to come there and wastes everyone’s time, who’s going to fine him.

3. Security – Have you not heard of cases where people get robbed, raped and killed while showing homes. The lockbox is a wonderful way to let others see your home without you being there, but it realies on the fact that if somethig bad happens, there’s a negligent buyer’s agent who can get sued.

I think it’s you, Bill, who’s being unreasonable and coming up with lame excuses, just because you have a grudge against agents.

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Norman Richards - 10 years ago

I’d love to see a blog posting on the value sites like zillow and trulia. I love what both sites have done, but I’ve been frustrated with the poor data in both.

Zillow is interesting, but the numbers don’t seem very trustworthy to me. I own a central austin duplex which it gives a value of 142k for. The duplex next door is identical in every way – same floor plan, built the same time mine war. Zillow says 185k. Oddly enough, they both only have one comp, a duplex way over near braker/I-35. I think I could list it now for 195k, but I don’t really know for sure. I’m guessing that it is getting confused because the property was split for tax purposes when I was owner occupying one side.

I’m planning on moving out and have been looking at condos in the area. I gave trulia a shot, and I was reasonably impressed with the results. If it could use real MLS data instead of outdated information from realtor websites, it would be great. This is exactly how I want to search for properties. I’m very picky about neighborhoods, and this is the only site I’ve seen that allows me to dig down into neighborhoods that I’m interested in. I ended up finding a nice unit, and I’ve got an appointment with my realtor to take a look at it monday. Assuming it is as good as it looks, I’m sure I’ll make an offer.

I’m sure there are other interesting sites. I’d be curious to know what they are and what their good/bad points are.

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Intelligent home owner - 8 years ago

I stopped reading your argument when you started discussing the number of photographs you show. The marginal cost of listing a digital photograph is a “rounding error” in the scheme of things.

As such, your attempt to present the listing of additional photographs as a reason for a seller to pay full price tips your hand – i.e., you reveal yourself to be intellectually dishonest, ignorant, or both.

I just took another peek at your post and saw that you use a similarly disingenous argument – you set up automatic email notifications for buyers so they see new MLS listings that meet their search criteria. You crow that you do this “at no extra cost.”

WOW – that is so GENEROUS of you!!!!! (Sarcasm…)

Sorry – it’s not that I don’t have any sympathy for agents – I do, for honest, plain-speaking, hard-working agents.

However, your arguments are disingenous, slippery, and deceptive. You present two “services” (listing photographs, sending automated email reminders) that have virtually zero marginal costs as reasons for a homeowner to pay you THOUSANDS of dollars.

I would never hire any agent that argued like you do because your arguments reveal the integrity of a Three Card Monte dealer. It’s agents like you who breed cynisicm in homeowners like me.

I have watched thousands of people lose their jobs in the brokerage industry as commissions head toward zero. It’s time for real estate agents to face the same pain.

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