It is hard to imagine that you could pay nothing for something and still get ripped off. Unless, of course, you are buying a home.
In the US, by custom, the seller of a home is expected to pay for a real estate agent to help a buyer buy the home. Naturally most home buyers jump on the deal. After all, you can’t do much better than free, or can you?
While buyer’s agents may do many things for buyers, buyers really only work with agents for one reason: expertise. In particular, they seek the answers to two very important questions from their agent:
1. Should I buy this home?
2. How much should I offer?
In the US there is another custom when it comes to compensating real estate agents: most of them work for lottery tickets. And as result, the buyer becomes the agent’s lottery ticket. A ticket they hope will pay off some day.
One of the consequences of this lottery-like compensation is that the agent’s true allegiance is NOT to the buyer, but rather to the deal itself. Regardless of how hard they work, to get paid, their buyer has to actually buy a home. And to make sure that happens, the agent may have to talk the buyer into buying a home they probably shouldn’t. Or, worse yet, talk the buyer into paying more than they should for a home, just to ensure the deal gets done and they get paid.
So, buyers work with “free” agents primarily for their advice and ultimately cannot trust it because of the way they are compensated. Nice.
In this circumstance, the rip off comes from taking the advice of an expert who cannot be trusted. An expert offering misguided advice that could easily cost the buyer more money than if they simply paid for their own agent by the hour. An agent who would be loyal to them because they were not working for lottery tickets.
So, why do buyers subject themselves to this potential rip off? Because it is invisible. Paying a real estate agent by the hour, which could cost a couple thousand dollars, is highly visible. It is “real” money the buyer has to pay out. On the other hand, paying ten thousand dollars too much for a home because they took compromised advice is invisible. They may have overpaid for the home, but they will never know it, so all is good.
When it comes to infrequent, big-dollar transactions like buying a home, nothing is more valuable than expert advice. But it only has value if it can be trusted. Advice that cannot be trusted is not worth the price, even when the price is free.
“I don’t like lawyers, but I rarely work with an incompetent one. I like real estate agents more, but there are a large number of incompetent ones.” –D.A.N.G.E.R Report
The real estate industry in America is broken. Do not take my word for it. According to Google Consumer Surveys 67% of Americans do not trust real estate agents. When more than two thirds of your customers do not trust your employees, your industry is broken.
Real estate agents are the only professionals who can work all day long providing a valuable service and not get paid a dime. If your expectation is that your employees will work for free, your industry is broken.
Expecting the seller to pay for the buyer’s agent harms both the buyer AND the seller, and results in commissions rates up to four times higher than in other countries. When you charge much more, but your customers get much less, your industry is broken.
Real estate agents, by custom, get paid a percentage of the sales price of the home. They do not get compensated based on their experience or expertise or credentials or track record. When your best, most experienced employees command the same compensation as your new employees their first day on the job, your industry is broken.
It takes approximately 200,000 real estate agents, working full time, to help all the buyers and sellers buy and sell homes every year in the US. (That is based on 40 hours to help a buyer, 40 hours to help a seller and 2,000 hours/year for a full time job.) The problem is that there are more than one million real estate agents. When you have five times more employees than the market requires, your industry is broken.
The real estate industry is broken (there is even a Facebook group by that name) and the one thing I am certain of is that the industry will not fix itself. I do not believe some new app or web site will fix it. I do not believe some new piece of legislation will fix it. Only one thing will fix the real estate industry: changing buyer and seller behavior. As long as buyers and sellers remain passive, uninformed and intimidated by the home buying and selling process, expect the status quo to continue.
With all of the venture capital being pumped into real estate technology today to supposedly disrupt the industry, very little of it is meant to address the great unaddressed problem: buyer and seller education. It is why I wrote The Intelligent Home Seller. But it is not just a book, it is a crusade. It is my tiny contribution to fixing a broken industry by letting home sellers know that just because the industry is broken, the sale of your home does not have to be. You can learn to hire an agent you trust, you can pay them a fair wage and you can make all of your home selling decisions from strength and knowledge, rather than fear and ignorance.
If you are getting ready to sell your home, check out The Intelligent Home Seller. You will not only help yourself by pocketing more of your hard-earned equity, but you will be helping me fix an industry that is in desperate need of it.
• There are no Multiple Listing Services (MLS)
• There is no buyer agency
• Real estate agents are employees, not independent contractors
• There is no professional licensing for real estate agents
No MLS and no buyer’s agents? How could anyone ever sell a home there? To quote the article Is the U.S. Model Defensible vs. the UK Model?
“England, after all, has been buying and selling homes long before the Massachusetts Bay Colony was established. And in contemporary times, we hear nothing about homes languishing on the market in Ye Olde England because there are no buyer agents to guide buyers to this home or that home.”
No professional licensing? Now you have gone too far. Real estate agents must be professionally licensed, right? Like somehow the four hour test that real estate agents take in the US qualifies as some significant barrier to entry. As things turn out, the UK has that figured too. The really important things in a real estate transaction, like paperwork and the closing process, are handled by lawyers, as they should be.
Oh, there is one other difference in the UK model. Commission rates average about 1.5%, rather than the 5%-6% sellers pay in the US. That equates to a savings of $21,500 on a $500,000 home, which prompts the author of the article to ask the following fantastic question: What is the American homeowner getting for that additional $21,500 in cost?
There is no way to know, but “it feels like a stretch to suggest that comparable homes are selling for $20K more in the US vs. the UK simply because the American REALTOR has access to a database. More importantly, however, there’s preciously little evidence that these employee-agents in the UK are failing to put forth the effort for the homeowner.”
So, in the UK, home owners pocket a lot more money, real estate agents get a salary and home buyers have figured out ways to find homes without the help of a buyer’s agent. (They must have since the average sale price for a single family home in Central London in 2014 was just under $2.4 million). So, what’s the problem?
The problem is that Keller Williams is Getting Ready to Ruin the United Kingdom by trying to convince them that the US model is better. That everyone would be better served with 6% commissions and real estate agents running around working for free all day. But if I were Keller Williams, I would be more worried about the UK model coming to the US.
To quote the article one last time:
“If selling a home in the U.S. costs $20K more than it does in the UK, there has got to be real value being delivered to the seller. As the world gets more and more interconnected, what works in one country is quite likely to migrate over to another. If British homeowners are getting great service from employee agents who do not cooperate with buyer agents, then American homeowners are likely to start asking just what it is that they get for paying a whole lot more.
Enough said. If you do not want to wait for the UK model to come to the US, check out The Intelligent Home Seller.