I have written plenty about the Realtor cartel in the past. Here I want to give actionable advice to people shopping for a home.
TL;DR: Don’t use a “Buyer Agent.” Instead contact the listing agent directly and ask their broker to agree to close without charging a Buyer’s Broker commission.
The Realtor cartel continues to extract exorbitant fees from people buying and selling houses – on average 5% of the price of the sale.1 While sellers have had some success negotiating lower commissions to Listing Agents (a.k.a., Seller’s Agents), sellers are still subject to extortion by “Buyer’s Agents:” Want to sell your house? If you don’t offer a Buyer’s Agent commission of 2-3% then your house probably won’t be seen by prospective buyers who are using an agent.2
If you’re looking to buy a home, you will find any number of Realtors eager to lock you into a Buyer Agent contract. (Seriously: almost one in every 100 U.S. adults is a licensed Realtor!3) Realtors claim that when acting as a Buyer Agent they work on your behalf, and that their services to you are free since they are paid by the seller of any home you buy. These statements are misleading if not entirely false.
The economic incentive for Buyer’s Agents is not to find the best home for their clients. It’s to find the most expensive home their clients will be willing to buy, with the highest Buyer Agent commission. The faster you buy a house, the sooner your Realtor gets paid and the less work they do. The more you pay for a house the more they earn.
What do Buyer Agents do these days?
They set up an automated search on MLS that emails you potential listings.
They may drive you around to look at houses.
They call Listing Agents to schedule viewings.
What are these services worth to you?
You can set up the same automated search on RedFin or any other of the many web sites that show houses for sale. And, better: you can make sure that you see houses with low or no commissions offered to Realtors.
Do you have a car and a navigation app? You can chauffer yourself to any address.
Do you have a phone? You can call Listing Agents directly to schedule viewings.
Buyer Agents may suggest that they do all sorts of other things to help you get into a house, and that other work deserves compensation. Maybe they sometimes do, but they don’t have to: The Listing Agent has as much of an incentive to close a sale, and the reality in every sale I have seen is that the Listing Agent does any and all necessary work to make that happen.
Ah, but the sellers are the ones who pay the Buyer’s Agent, right? Wrong! Broker fees are traditionally deducted from the seller’s side of the HUD-1 (block #700) at settlement, but that money isn’t conjured from thin air. Yes, the Realtor cartel extorted a Buyer’s Agent fee from the seller at the time the house was listed for sale, so it is coming out of the seller’s pocket. But that fee doesn’t have to end up in the Buyer Agent’s pocket. You can control where the Buyer Agent fee goes!4
Let’s look at a hypothetical transaction to see how you can prevent the cartel from taking an unfair cut: We’ll suppose that a Seller lists a house for $1MM. As explained earlier, in order to get Realtors to show the house to buyers, Seller offers a 2.5% Buyer’s Agent commission.
Conventional Scenario: Buyer offers, and Seller accepts, $1MM for house. Buyer pays $1MM for the house. Of that sum, Seller has to give $25,000 to the Buyer’s Agent.
Better Scenario: Buyer arranges with a Broker to collect 2% of the Buyer’s Agent commission. Buyer offers, and Seller accepts, $1MM for house. Buyer pays $1MM for the house minus the 2% Buyer’s Agent commission, which is $20,000. In this case the Buyer only pays $980k for the house, and the Seller gets the same amount of money as in the Conventional Scenario.
You as the Buyer are the one who can make the Better Scenario happen!
So what should you do as a buyer? Ask the Listing Agent if their Broker will agree to not charge a Buyer Agent commission if you buy the home without your own agent. I did this on a purchase this year and it closed without a hitch.
What if that doesn’t work? Approach other Brokers directly and offer them a fixed fee to claim the Buyer Agent commission on any house you purchase in exchange for returning the difference to you. Why a Broker? A typical Realtor is nothing more than a sales agent working for a licensed Broker. The Broker is the entity who actually gets to claim the commission on a sale. The Broker then shares that commission with any involved agent according to the terms of their relationship. If you don’t involve a sales agent then the Broker doesn’t have to split that commission with his salesman.
What’s a reasonable fee to offer a Broker? If you’re contacting Listing Agents directly to view the houses then your Broker doesn’t have to do anything more than provide his Realtor number to claim the Buyer Agent fee on your eventual purchase. What’s that worth? A few thousand dollars?
How does it actually happen? Look at the HUD-1: Section 700 (“Real Estate Broker Fees”) is the commission that gets credited to each Broker upon settlement. Now go back to Section 200 (“Amount Paid by or in Behalf of Borrower”) and enter the amount that the Broker agreed to return to you. In the hypothetical transaction shown above, there would be a line in Section 700 allocating $25,000 to your Broker, and then a line in Section 200 in which your Broker contributes $20,000 on your behalf towards the purchase.
A promising legal challenge to this is under way: Moehrl v. National Association of Realtors, et al. was just granted class-action status. At one point the judge handling the case pointed out the glaring antitrust concerns raised by the current practice that, when listing on the MLS, a seller has to make a blanket offer to the buyer’s broker, without regard to the buyer-broker’s experience or the value of services the buyer-broker provides the client.
And when you take control of that money, then if you wish you can in effect split it with the seller in the form of a higher transaction price.