Six Things – The Importance of Being Earnest [in Real Estate]

Earnest is a real estate investor who felt he was involved in too many one-sided engagements. He didn’t see that his interests were being represented, even by some of his own realtors. He looks back to one particularly bad deal, in which he, as the seller, was strong-armed into going through with a sale against his better judgement. One of those strong arms was that of his own realtor, who was contorting herself to accommodate the buyer, as was the buyer’s agent, who coincidentally worked for the same broker. It was his proverbial last straw.

Turning a bad situation into a positive outcome, Earnest decided to become a licensed realtor. Based on his experiences in real estate, he has become a guy who fancies himself the Realtor For the People — people who might be otherwise under-represented in normal circumstances. This might seem distrustful or jaded, but Earnest believes that it’s his bad experiences that have helped him learn to treat people right before, during, and after the transaction. Earnest chooses to be REAL about real estate with his clients. He prides himself on being transparent about all aspects of the deal, and he maintains a plain-dealer style.

In his own cynical words, along with my questions, here are the Six Things that Earnest wants you to know about what he has learned as a real estate agent who’s got your back.

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Number 1: The seller pays. And pays.

I believe that if someone doesn’t know that they pay a commission in a real estate deal, they haven’t been paying attention. Doesn’t everyone know that there are fees in a real estate deal? Can you elaborate?

Ultimately, all of the following things are paid for entirely by the seller in a real estate deal:  

• The broker’s salary and profit
• The broker’s Bentley, Porsche, or Lamborghini
• The broker’s office building, the leather chairs, and they artwork in his elegant corner office inside of his office building
• The brokerage’s signs, the computers, the secretary, the administrative staff
• The big box franchise brands’ luxurious Wall Street headquarters building, advertising and marketing for the brand, conventions, and trade shows
• And, finally, the agent’s commissions  

All of this is paid by the person listing his or her house for sale. The seller signs a one-sided-listing contract and is obligated to pay $30,000 for letting an agent market the $500,000 house for sale (upon completion of the sales transaction).  On the back of the seller rests the entire agent/broker side of the real estate industry.

Number 2: It’s all about the commission. 

I am realistic, but perhaps not as jaded as you. I would think it is “client first, commission second.” What am I missing? I have seen instances where the realtor doesn’t try to push for a higher selling price during negotiations. Am I wrong?

The National Association of Realtors has a Code of Ethics, which states that realtors have a fiduciary obligation to their clients. Per the Code, they are to place their client’s interests first. Let’s be perfectly clear: in reality, the first loyalty is to the commission. The commission comes first. In my personal experience, I can assure you that agents, and their brokers, will do almost anything to make sure a deal does not fall through. 

Typically, the interests of the seller and the buyer will be in line with this goal…so no big deal.  But there are many times when the desire to collect a quick commission check will incentivise the listing agent to go low on the price. Yeah, yeah, I know a higher price will get the agent a little more money. Unfortunately, the greater incentive is to close the deal as quickly as possible, collect the commission, and move on to the next best thing.  We all know the saying about “a bird in the hand.”

Number 3: Flippers suck.

Umm…aren’t YOU a flipper?

I do high-end remodels with a general contractor. He is licensed and he knows what he is doing. Most of these guys (and gals) think that they are Chip and JoJo, and they jump into remodels without knowing what they are doing. They don’t anticipate termites, mechanical issues, slab leaks. They don’t have a contingency fund. It’s “get in/get out ASAP.” And, flippers are are cheap, so they cut corners to “fix” that stuff.

I guess I am naive to think that all flippers are The Property Brothers, and that they use competent subs and quality materials.

Look, to be brutally honest, most flippers are (1) really greedy, and (2) really incompetent. “Putting lipstick on a pig” is a cliché often heard in the flipping industry. Much of the remodel work is purely cosmetic, leaving serious flaws concealed. In my state, our sales contracts have language that requires the seller to disclose problems, existing or fixed, to the buyers. However, most flippers do non-disclosure disclosures and add language comparable to “Seller never lived in property, therefore can provide no disclosures” in their listings, meaning that, because they never lived in the property, they know nothing about the property.  

Some flippers are so clueless or lazy that they can’t or won’t even disclose to you who the utility companies are. And I think, “Really? You paid the bills for this property while you were ‘remodeling’ it, and you don’t even know the name of the electric company you were paying? And you know absolutely nothing about the house even though your listing claims you took it all the way down to the studs?” Come on.

In my state, the buyer is privy to a property’s listing and sales history. If your agent does not offer this to you ASK FOR IT. It will give you an idea as to whether you need to dig for disclosures and preexisting stuff. How long did the seller have the house you want to buy? Did they ever occupy the place? If the answers are “not very long” and “no,” it’s likely you’re dealing with a flip situation.

Number 4: Buyers are liars. 

Agents say that? This is really disappointing. Wow.

This is an unfortunate phrase that many realtors use when out of earshot of a potential buyer. Okay, on this one, I am somewhat sympathetic to my colleagues. Buyers, please refer to thing # 1. The seller is paying the commission, entering into a contract to do so. No negotiations on your part will alter that.

The buyer’s agent is working for you for FREE. He or she drives you around in their car, showing you house after house. You may never put a contract on a house you see. If you do, you may never go through with the sale: you might bail during inspection. You might dump your agent after she’s shown you 60 houses and go with someone else. Don’t buy one of those sixty houses, though, or he might sue you.  

Doesn’t the buyer pay some sort of a commission?

If and when the deal finally closes, the agent normally gets a commission, but the buyer is not a party to it. The commission was a deal between the seller and the listing broker. The buyer has nothing to do with it.  As a matter of fact, neither does the buyer’s agent. 

There are 3 contracts here that get the commission to the buyer’s agent. None of them have anything to do with the buyer or with the purchase contract the buyer put on the home.  Here they are: 

1. Seller has listing contact with listing broker, seller pays listing broker at close of escrow (at this point seller is out of the loop). 
2. Buyer broker agreements between brokers who are members of the same listing service: The selling broker sends the buyer’s broker whatever commission percentage he entered into the listing service database. 
3. Independent contractor agreement between the buyer’s agent and his broker: The broker will pay the buyer’s agent whatever part of the commission was agreed to in his “employment” agreement. So buyer, you have nothing to do with any of this.

Number 5: Think about it: Is a 6% Commission really fair?

An agent has to make a living, right? Aren’t YOU an agent?

In a market where houses sell themselves, a 6% commission seems excessive. It also seems unfair that all of the realtor costs in a transaction are borne by the seller, especially when so much of the effort is spent on the buyer. 

I’ve discounted my commission to 5% when warranted, keeping 2% for the listing side and offering 3% to the brokers representing the buyer. I have purchased home warranties for my clients who are buyers. Regardless of the amount of commission, it is still a commission-based business. Sellers and buyers need to be aware that agents are feeding their families on the commissions they earn, and can never realistically live up to the lofty — yet naive — concept that the client comes first.

Number 6: Surprise! The real estate agent is not the only one getting a commission.

Really who else is commissioned? Who pays those commissions? 

Your mortgage broker most likely is earning commissions far greater than your realtor can even dream of. Your title and escrow agent is also receiving a commission-based compensation. Again, with these professionals, getting the deal closed and collecting the commission is priority #1. In this case, I am sure the lender has some sort of code of ethics that puts the buyer’s interest first, but let’s be real about this. 

My advice is to interview your agent and make sure that he or she knows the entire transaction process. Go into any real estate transaction with your eyes open, realizing that the professionals around you are there to make a living, and you cannot fault them for that. Know that in their eyes, buyers and sellers will come and go, but there will always be another commission check to score.