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March 3, 2008

How-to Monday: Choosing an agent, part II


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Would-be buyers in the market for a Realtor as well as a house should choose just as carefully as a seller looking for a listing agent. You want someone who will help you separate the good deals from the chaff, point out pitfalls and act in your best interests.

Never fear: Read on for tips galore. (Are you selling rather than buying? Then see last week's How-to post.)

Stephen Brobeck, executive director of the Consumer Federation of America, thinks you should consider looking for a real estate broker whose office works exclusively with buyers. Why? Because you might not get good service when a Realtor's loyalty is divided between you and colleagues working with sellers, he says.

Brobeck said he learned that first-hand when he and his wife went looking for properties, and their agent "showed us only his listings." Maryland law prevents an agent from representing both the buyer and the seller in the same deal, but that doesn't stop a Realtor from talking up the houses handled by his or her office.

Definitions for the uninitiated: An "exclusive buyer agent" works in an office that does not take listings. A "buyer agent" works with buyers but is based in an office that also sells. (UPDATE: Some call themselves buyer agents because they SOMETIMES work with buyers, says Jay Reifert, broker and owner of Excel-Exclusive Buyer Agency in Madison, Wis.) Most agents work with buyers and sellers both.

The main thing is to find someone who knows what they're doing and will represent you well. No matter what type of agent you want, Jon Boyd, past president of the National Association of Exclusive Buyer Agents, suggests you interview several and ask them about their skills in these areas:

--Negotiation. What's their level of experience? How will they get you the best deal? What evidence can they show about how they've saved previous clients money, whether on the contract price, the extras (seller help with buyer closing costs, for instance) or the loan terms?

--Property evaluation. How will they help you tell if the house is a steal or a dud?

--Representation. Ask how they intend to deal with potential conflicts of interest (i.e. the listing agent for the house you want is your agent's boss). "'Who's your boss' is a great question," Boyd said.

Brobeck also suggests asking agents if they will search for all properties that meet your specifications, no matter what the commission split. The seller's agent typically splits his or her commission with the buyer's agent, and there's always a danger that a home on the multiple-listing service with a stingier-than-usual split will get ... ah ... overlooked. (See more about splits in last week's How-to post.)

Many agents will let you search the multiple-listing service in their office if you ask, Brobeck added.

John F. Sullivan, an exclusive buyer agent with Buyer's Edge in Bethesda, notes that you'll want to know when -- and how -- you can get out of an agreement with your agent if you're not happy with the service. The standard agreement can be terminated before the expiration date only if both parties OK it, he said, but some are more flexible.

Posted by Jamie Smith Hopkins at 4:00 AM | | Comments (5)
Categories: How-to Mondays


Why? Because you might not get good service when a Realtor's loyalty is divided between you and colleagues working with sellers, he says.
I wouldn't be so strict about their loyalty. Realtor is always somehow connected to both sides, if it is visible or not. In Toronto Royal LePage we are dealing with both sides and I dont have feeling we are unloyal to any of our clients. Customer knows, how both sides are connected, but despite this fact he gives us his confidence. This is bounding for us to make a fair deal!

No matter how much the agent may seem to be in the buyer's corner, unless you are paying the agent a flat fee, the agent has their compensation tied directly to how much the house costs. In that case, why would the agent--even if they are exclusive to the buyer--have any incentive to get the lowest price for the buyer or ensure that the buyer is purchasing a home that is in the buyer's price range? Realtors are a complete racket: what services, exactly, do they provide that can't be had for significantly less? Home appraisal, legal advice on the contract and even access to the MLS can be had for pennies on the agent commission dollar.

Mitch, as a Realtor myself, the incentive for me to get my clients a lower price is future referrals. For example, if I can help you save $10,000 on price, I would lose probably about $250. However, if you are so happy with my service and saving that $10,000, that you tell all your friends about me and in turn they use me for their transactions, I would have gained thousands of dollars in futures commissions.

Matt, while referrals are an important part of the realtor business model and you certainly won't get referrals without excellent service, my point is this:

Suppose I'm in the market for a home between $400k and $450k. At a standard 3% commission, you stand to make $12,000 (obviously this gets split between you and your firm, but I'm simplifying) on the low-end and $13,500 on the high-end. After a thorough search, I'm deciding between 3 houses. One lists for $450, one for $425 and one for $400. Each has its pros and cons, but they are largely identical. Suppose a "fair" price for each house is about $410 (meaning one is significantly overpriced, one just slightly overpriced and one slightly underpriced). Now, for me, the difference in mortgage payments on a $400 and $425 loan is not a major consideration in my purchase; I'm much more worried about getting the right house. If you can convince the seller of the $450 home to sell for $410, then you have "saved" me a lot of money. But that $400 home was actually the better value; what if I perceive that because you were able to get one seller to lower their price you actually did a better job than if you had simply suggested I meet the offer of the lower priced home?

I'm not saying that realtors can't or won't offer tremendous value to their clients. My point is simply that the compensation for realtors is significantly skewed against their clients.

My proposal is two-fold: 1) a flat-fee for buyers. This could be semi-dependent on price range (finding the right million dollar home is obviously much different than finding the right $200k home), but within a price range, the realtor should have zero incentive to talk their buyer into a higher priced home. 2) For sellers, the realtor and seller agree on a "price baseline" and establish a flat fee for the home sold at that price. Above that price, the realtor is compensated on a percentage basis. For instance, suppose I FSBO my townhome tomorrow. I'm confident if I put the house on the market for $200k, it would sell after the first open house. So, the value a realtor provides for the first $200k is contract writing, MLS access, etc. These services are probably worth $1000. Above $200k, we could agree that the Realtor will receive 10% for each $1000 rise in selling price. If the realtor can find a buyer of my home for $250k, then I would pay them $6000 ($1000 flat fee plus $5000 in commissions). If you could sell my house for $300k, I would pay $11,000.

To me, this signficantly changes the compensation equation: a seller agent has the incentive to get the highest price, instead of just selling the house as fast as possible, and a buyer agent has the incentive to find the right house for his/her client, instead of being paid based on the purchase price.

Mitch, I am happy that you said Realtor's can and do offer tremendous value to their clients. While I am full agreement that many agents out there have giving the industry to bad name, I believe I am one who is trying to change bad perceptions with excellent service.

First off, buyer's agency is a fairly new thing in the long run of the real estate world, and there are many talks in real estate publications that one day the system may be that buyer's pay for their agent and seller's pay for theirs.

Currently as you already know, the listing agent negotiates the commission with the seller's and offers a split to a buyer's agent.

Going back to your example, if you pick out those 3 homes that you like, than YOU have picked them out. If I was your Realtor I would lay out all the comparable sales so your are fully informed, help you weigh out the pros and cons and then you pick what house to make the offer on.

As a buyer's agent to my clients I spend zero time puffing up a house. You know what you like about the home, homes sell themselves.

I can't say this for all agents, but you will never hear me say "look how lovely the counter-tops are". In fact I probably spend more time picking out problems in the house and in the end if you still want to buy the house then it was your decision. But in the end, you as the buyer need to figure out what the value of each house is to you, I will help you come to that conclusion based on market data.

As for selling your house for a flat fee, there are companies that do that. I know that with even selling homes faster than the market averages, I go through advertising dollars very quickly. An open house ad in "The Sun" with a picture of the house was just under $300 for one day. So if $200k is fair market price for you home, I would never be able to list your home, market your home properly, and pay my bills for $1000 flat fee if it did not sell at that open house. We would almost have to negotiate an advertising fund.

Mitch, I have enjoyed the debate, I sometimes get a little sensitive about Realtor's being a racket. True I know quite a few Realtor's who I would never sell my house with, but what industry does not have those people, but there are plenty of us out there doing a great service to people.

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About Jamie Smith Hopkins
Jamie Smith Hopkins, a Baltimore Sun reporter since 1999, writes about the regional economy. Her reporting on the housing market has won national and local awards. Hopkins is a Columbia native and has lived in Maryland all her life, save for 10 months spent covering schools in Ames, Iowa.
She trained to become a wonk by spending large chunks of time as a geek and an insufferable know-it-all.
Baltimore Sun articles by Jamie

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