28
Wed, Feb

The Short-Sighted War on Real Estate

LOS ANGELES

GUEST POV - Real estate is under attack. Realtors are under attack. Buyers and sellers are potential victims. Attorneys are bringing lawsuits against the real estate industry based on anti-trust accusations and the assertion that commissions are too high. They contend that home sellers should not have to pay commission to the buyer representative. They claim there is collusion in the industry, despite what I perceive to be a lack of evidence. They insist brokerage firms and the National Association of Realtors have conspired to inflate prices and they argue that buyers, not sellers, should pay commission to their own agents. These arguments recently prevailed in a class-action casein Missouri called Sitzer/Burnett; the payout could be $1 billion to $5 billion, an amount to be determined later (and pending appeal). Similar lawsuits have popped up in Illinois and Texas

Michael Ketchmark, a class-action attorney for the Missouri case, says that agents should earn as little as a “1%... commission…” He likens them to travel agents who used to make “10% on the cost of a ticket.” He claims they make much less today. (Note: Ketchmark appears to be wrong about travel agents; they make 10% - 22% on international bookings, according to online sources.) But the point is… It takes some nerve for a lawyer to bang on about what other people should make when millions of dollars—if not hundreds of millions—are potentially set to pour into his own bank account. Class-action and contingency attorneys typically make between 25% - 40% of a final award. If the disbursement in the Missouri case is $5 billion, the attorneys’ fee could be a whopping $2 billion. 

Realtor Commissions are Negotiable like Server Tips and Lawyer Contingency Fees

One could call out the traditional 25% - 40% attorney payout (often 25% for a child and 40% for an adult) as price-fixing or a conspiracy by industry insiders to keep fees high. But I am not saying that. I argue that lawyer contingency fees are no different from realtor commissions. They are negotiable and the customary amounts are just that: customary. Both bear a similarity to restaurant server tips which are traditionally 15% - 20% of the invoice. Some eateries have a non-negotiable minimum tip, but a customer can choose not to dine at the establishment if he does not like this requirement just as a client can shop for a new real estate broker or lawyer if he does not like the commission rate proposed by a particular firm.

The Annual Income of the Average Realtor is Already Low

Lawyers earn a median income of $135,740 per year while real estate agents make only $52,030. If agents were to receive one percent per transaction, the median earnings of an agent would plummet to around $20,000 annually. The poverty level in the US for a family of four is $29,960. Some might think it optimal to weed out the lower- and middle-income real estate agents (by inducing them to quit via low or nonexistent commissions) so only the rich, one-percenters in the industry can rake in all the business. But I think it benefits buyers, sellers and the community-at-large when there are more agents to look after the public’s needs. Clients should not be treated like fast food at a drive-through window.

Real Estate Should Not be About One-Percenter Agents

A severe reduction of real estate agents would mean less time devoted to clients and a lower quality of service. A listing agent who has a bunch of multi-million-dollar listings may have no patience or desire to assist a first-time buyer who wants to see 100 properties before making a final decision. The one-percenter agent has no incentive to put time and energy into holding this client’s hand through the cumbersome process. This buyer—who is usually stretched financially—is unlikely to be able to afford his own representative. He may feel cornered into trying to handle everything himself to a potentially disastrous end.     

You might be surprised to learn that most buyers, even somewhat seasoned ones, expect hand-holding and detailed advice on every aspect of the buying process. (The exception is investors and home flippers). I have been a Los Angeles realtor for 35 years; many clients want their representative to be on call 24 hours a day. I have gotten countless phone calls at 2 am. The joke between realtors—which is not really a joke—is that a realtor can never go on vacation because everything will fall out of escrow. This is largely because the agent’s role is one of putting out fires, calming emotions (which are usually high due to the huge price tag) and playing coordinator and mediator to all parties: the lender, the escrow company, title company, other realtor, inspectors and one’s own client. One’s “own client” may involve a warring couple who is divorcing or several business partners who loathe each other. The agent has to keep things smooth and rational. 

We Should Not Bring Back “Buyer Beware”; Buyer Agents Are Critical

A home tends to be the most significant purchase of one’s life. Choosing and closing on a property is a complicated process. My completed files typically run several hundred pages. It is not like it was in 1970s when contracts were one page and the bold print said, “buyer beware.” The subtext back then was: “Dear Mr. Buyer, we do not care about you. You must fend for yourself.” The reckless rhetoric in the Missouri lawsuit is reminiscent of the catastrophic “buyer beware” mentality. The real estate industry has spent decades fine-tuning policies that protect buyers and sellers, tweaking ethics rules that keep agents on track and devising forms that better facilitate transactions. Realtors are required to take continuing education courses in order to stay informed of these upgrades.  

Buyer agents have a crucial role to play; they should not be eliminated from the process or financially under-valuated. They coordinate inspections: from a general inspection to possibly more specialized ones for chimney, mold, termite, sewer, foundation, geological, et al. In addition to inspections, there are numerous disclosures, a title policy, statewide advisories, an environmental report, a market condition advisory, and more. They pull tax assessor records and other reports in order to verify square footage, boundaries and permitted rooms. Buyer agents do not simply find a property for their client and walk away. They are not like travel agents who book an airline ticket and wash their hands of the customer. 

Without a dedicated buyer agent, a purchaser will have to find properties on his own and juggle calls and viewings between his work hours, family obligations and extracurricular activities. (A buyer agent is able to preview the properties, weeding down the inventory to the best choices for the client). There is a high chance a buyer without representation will overlook the best choices and the “hot deals” because zeroing in on optimal listings is time-consuming. It is a full-time job. 

The buyer agent may spend weeks or months—even a year in some cases—showing property to a client and then write a half-dozen ultimately unaccepted offers because the particular client cannot or does not want to spend more. Perhaps it is a challenging, multiple-offer market in which ordinary buyers must compete with all-cash investors. Unlike the travel agent, the eventual acceptance of a purchase contract is only the first step. The 30-day, 45-day or 60-day escrow begins and it can be a beast in itself. Keep in mind: a client may give up looking at some point or cancel escrow and decide not to buy, meaning the agent has spent time and money without compensation. But it is okay because that is what working on contingency means. It is baked into the job. 

Why the Buyer Agent is Important for a Seller

Now let’s turn to why eliminating the buyer agent is bad for a seller. After all, the property owner would, at the outset, seem to save money. He could more easily negotiate a lower overall commission with his broker because there would not be a buyer side to pay. 

There are two reasons why the seller should want buyer agents to exist and the first relates to profit. To be blunt, buyer agents get clients through the door. Without them, there would likely be fewer showings and in most cases, fewer showings will lead to a lower sales price. Evidence for this can be extrapolated from for-sale-by-owner properties which close escrow for 20% less than broker-represented ones.    

The second and very important reason involves lawsuits. According to statistics compiled by Fuller Home Options, “71% of all real estate litigation stems from one party not being represented in a real estate transaction…. For sale by owner (FSBO) sellers get sued more than any other group in real estate and that could end up costing far more than hiring a real estate professional in the first place.” 

As stated earlier, most buyers will not have the extra funds to pay for their own representation so they will most likely “go it alone” or turn to the listing agent for help while praying he will defend their interests. You had better believe that without representation, buyers will more likely feel like they were cheated or proclaim they were not sufficiently informed of property defects. Many real estate firms (such as mine) have in-house lawyers who help their agents (and buyers and sellers by extension) with transactional disputes and complications at no charge. This is a huge boon to clients and, in my opinion, alone justifies the cost of an agent. 

As a property owner myself, I have been approached by buyers who want to purchase my home without an agent in order to save me the commission. I have always said “No! Get an agent!” I only sell to people with proper representation who thoroughly understand the ins and outs of the transaction. This is not because I am altruistic. It is because I do not want to get sued. 

Is It True That Most Listings Today Offer 2.5% - 3% to the Buyer Side?

Lastly, I would like to address the claim of price-fixing in real estate and the Missouri class-action attorney’s insinuation that buyer agents routinely receive a 3% commission. A premise in the Missouri case is that the norm in the industry is a customary 2.5% - 3% to the buyer side. Maybe this assertion had validity 20 years ago and perhaps it is still true in some parts of the country, but my unofficial study in Los Angeles revealed otherwise. I was curious about this issue because in recent years, I have stumbled upon a huge variation in buyer agent commissions, including one listing which offered a mere $150 flat fee and another at $1500. The second property was located in ritzy Hollywood Hills.  

Last week, I did MLS searches to determine buyer side commissions. I reviewed approximately 300 listings in my neighborhood over the past two years and found immense variation. The lowest commission offered was one dollar. There were offerings at 1%, 1.5% and 1.75%. The highest was 3%. Most of the commissions were 2% or 2.5%. Then I searched a second LA neighborhood. I found the lowest offering was a $1000 flat fee and the highest was a generous 10%. It is hard to see how these results would qualify as price-fixing or a “rigged system.” 

In conclusion, I would like to offer some advice to the class-action lawyers who are creating confusion and chaos while recklessly destroying a tried-and-true process. End the short-sighted war on real estate. Save your bullets for a worthy cause. 

 

(Charlotte Laws, Ph.D. is an author, Realtor, former Los Angeles commissioner and the star of the Netflix show, “The Most Hated Man on the Internet.” You can find her on Twitter @CharlotteLaws)