Home Purchase Realtor's Commission Refund Possibilities?

[fiveomar]

I'm sure some of you have heard of RedFin, a company who has successfully fought the National Association of Realtors regarding their monopoly over the Multiple Listing Service (MLS).

RedFin acts as your buyer's agent, but the great part is they refund you half of the commission. Also, you get better service as the incentives for them do not create a conflict of interest as they do with traditional realtors.

More info here:

Share the Commission | Redfin

They haven't made their way to Philly yet, but I'm wondering if anyone knows of a similar company operating in Philly, or other ways to get a buyer's commission refund?

Has anyone self-represented themselves when buying a home in Philly and figured out how to get the 3% buyer's agent commission?

[OldCityTans]

Just curious, what's the problem with paying a realtor to do that work for you? Buyers' agents have a TON of responsibilities, and I personally wouldn't want to cut corners on possibly the biggest purchase of your life. Is the 3% savings really worth the headaches and future issues that might arise?

Again, I'm only asking out of curiosity.

[ShoshTrvls]

I'm sure some of you have heard of RedFin, a company who has successfully fought the National Association of Realtors regarding their monopoly over the Multiple Listing Service (MLS).

RedFin acts as your buyer's agent, but the great part is they refund you half of the commission. Also, you get better service as the incentives for them do not create a conflict of interest as they do with traditional realtors.

More info here:

Share the Commission | Redfin

They haven't made their way to Philly yet, but I'm wondering if anyone knows of a similar company operating in Philly, or other ways to get a buyer's commission refund?

Has anyone self-represented themselves when buying a home in Philly and figured out how to get the 3% buyer's agent commission?

I've bought 2 houses without a "buyer's agent" and both times was able to get an additional 3% reduction in the price by making the case that the seller's agent wouldn't have to split a commission. (I left it up to the seller and the seller's agent to work out between them whether the agent gave up half the commission or the buyer took the hit -- in one case, the agent gave up the 3% and in the other, the agent reduced to 4%, so the seller took a little bit of a hit).

That being said, as a real estate attorney, I know what I'm doing when I buy a property -- I draft my own offers/contracts, arrange for inspection and title, negotiate any contingencies, etc. If you don't have experience buying property, I wouldn't recommend it. (Then again, I have to say, many of the agents I've worked with know/do very little -- they don't really understand many of the provisions in the form contract and couldn't write up an addendum or negotiate when the inspection turns up problems if their lives depended on it).

[Value4Realty]

First the term you are referring to is a rebate not a refund. The seller pays the commission so the buyer is being rebated. This is legal in PA but illegal in NJ though not for long. I am told a firm with deep pockets (maybe Redfin-who knows) paid a lobbiest to get a bill introduced into the legislature. It passed the house but not the senate yet. Here is a map of states that allow and ban rebates.

I am the broker of Continental Real Estate Group, Inc.. We are licensed in 14 states and offer flat fee mls listing services under 30± URLs that you will find all over hte web. Our main one is mls2u.com.

We thought about the buy side and do it locally in North Jersey but there are some issues with it. From a procuring cause standpoint, firms like Redfin have an issue when they allow the seller's broker to show the house to the buyer. The seller's broker could take the buyer's broker to arbitration over the commission for not maintaining a continuous chain of service from beginning to end.

Also, in a bad market like now, seller's agents are desperate to make sales but in a good market, buyers working with a Redfin type model may lose houses when listing agents show preference to brokers that do not force them to show the house for the buyer's broker for free. Buyer's broker's naturally feel used when an internet firm calls them up and asks them to show the house to the buyer because they feel that job is the buyer's broker's responsibility. Redfin's model might be more palatable to seller's agents if Redfin paid them a $25-$50 showing fee and charged that to the buyer.

There are also conflicts with agency law because the buyer might spill their guts to the seller's agent and not get proper protection from their agent to keep their mouth shut and put on their best poker face. Nobody could appreciate that better than a lawyer like ShoshTrvls. Do you put your clients in the hands of your adversary? Negotiating on your own works fine for a lawyer like you but is it right for most laypeople?

A similar model is the one employed by Zip Realty which also gives rebates but smaller ones because Zip actually has agents on the ground that show the homes. Zip does operate in Philadelphia.

[HomeGirl]

I never heard of Redfin but just checked out their website. If the commission is less than $5,500, they keep it all so anyone looking at homes at or under $185k wouldn’t receive anything. Also, if the Buyer doesn’t use one of Redfin’s direct agents, the Buyer is only entitled to a 15% rebate (vs 50%) of the Buyers Broker 3% so the average rebate figures may be skewed.

As a Realtor, I am (of course) biased toward using a full service real estate brokerage but I agree that this type of service might be beneficial for an experienced Buyer (or someone familiar with Real Estate / contract law).

Fiveomar, can you explain what you mean by the conflict of interest?

Also, you get better service as the incentives for them do not create a conflict of interest as they do with traditional realtors.

[Value4Realty]

HomeGirl, I will take a guess at the conflict of interest Fiveomar refers to but I am not sure why it does not apply to redfin.

First and foremost seller's subagency is a conflict in some markets where buyer's agency has not taken over. In metro NYC, most agents work as seller's sub-agents instead of buyer's agents. In PA and NJ, agents can work as transaction brokers that have no loyalty anyone. Interestingly NY does not have transaction brokerage.

Buyers should only work with buyer's agents and when they don't a disclosed and strangely legal conflict of interest can exist.

Also, the way buyer's brokers are paid in the US is a conflict in and of itself. A buyer's broker's job is to get the buyer the lowest price. However to get the buyer a lower price, their commission which is usually a percentage of the sale price goes down. For this reason, buyers brokers should be paid a percentage of the asking price (which is not variable with the deal), hourly, or a flat fee.

[Sharkfood]

When is Redfin going to start operating in Philadelphia? It's not one of the cities listed on their website.

[peetah]

Although RedFin isn't in the Philly market there seem to be at least some other firms/brokers/lead generations available:
hungryagents.com - seeks to match agents who are willing to offer a rebate to buyers/sellers
lendingtree.com - offers a tiered incentive returned as a Visa gift card after the transaction is complete

[fiveomar]

I do all research on my own via Trulia.com and similar sites, and am an experienced homebuyer so know the steps involved in the process (inspection, etc.). Plus a lawyer would still be involved in the closing process. Frankly, I don't believe a buyer's agent deserves his/her commission in my situation, given the little value they would provide me. I would like to keep the commission since I'm doing the work.

The conflict of interest I was referring to was a typical buyer's agent who gets compensated based on the home sale commission (and thus there is motivation to push the buyer into a home as quickly as possible instead of waiting to suit their real needs). RedFin agents get compensated based on customer satisfaction.

[theWatusi]

hungryagents.com - seeks to match agents who are willing to offer a rebate to buyers/sellers
lendingtree.com - offers a tiered incentive returned as a Visa gift card after the transaction is complete

Great idea...use an agent that is so horrible at their job that they can't find their own business so they have to pay a 3rd party company for leads.

[Brooke]

Great idea...use an agent that is so horrible at their job that they can't find their own business so they have to pay a 3rd party company for leads.

Ha. Agreed.

[AaronKW]

Great idea...use an agent that is so horrible at their job that they can't find their own business so they have to pay a 3rd party company for leads.

Haha, i couldn't agree more. The best agents in the business rarely if ever discount their services, and there is a reason for this. They are worth it!

This market is very tricky and constantly changing, one mistake could cost greatly.

As far as Lending Tree goes, stay away if all possible! I have worked with few buyers who decided they were getting a "good deal" with lending tree. In each occasion the buyer ended up being disappointed. When looking for a lender, make sure they are local! Especially when dealing in Philadelphia, a lender in Ohio is going to have no clue about Philadelphia especially if you are purchasing a condo. Also you want to make sure the lender is going to show up to settlement to explain the mortgage docs to you.

[fiveomar]

Although RedFin isn't in the Philly market there seem to be at least some other firms/brokers/lead generations available:
hungryagents.com - seeks to match agents who are willing to offer a rebate to buyers/sellers
lendingtree.com - offers a tiered incentive returned as a Visa gift card after the transaction is complete

Thanks - I gave hungryagents.com a shot- we'll see what happens. Of course I will do research on each agent before I commit to anything.

I couldn't find any rebate commission info on the LendingTree site, do you know where it is exactly?

[fiveomar]

A similar model is the one employed by Zip Realty which also gives rebates but smaller ones because Zip actually has agents on the ground that show the homes. Zip does operate in Philadelphia.

This is very helpful, and zip realty offers 20% of the commission as a rebate. Not as much as RedFin, but better than nothing.

Thanks!

[Value4Realty]

Fiveomar,

Redfin has a combined compensation. Part salary, part commission and part customer satisfaction bonus. It actually makes sense for an employer to reward employees that make their clients happy. There is still a conflict any time a buyer's agent is paid a higher commission to get a buyer a higher price when their job is to get the buyer a lower price.

You said "The conflict of interest [you were] referring to was a typical buyer's agent who gets compensated based on the home sale commission (and thus there is motivation to push the buyer into a home as quickly as possible instead of waiting to suit their real needs). RedFin agents get compensated based on customer satisfaction. "

You are referring to the point made in Steve Levitt's Freakonomics. That contingent payments create a conflict putting a quick sale above concerned representation. That applies to seller's agents too. It's one reason I believe that upfront flat fees or hourly fees are really the only forms of compensation that have no conflict. I am kind of surprised that contingent payments are not illegal. Appraisers cannot work on contingent payments or percentage payments because they put pressure on appraisers to alter their estimated value.

What is an appraiser's estimated value? It's the quality of their work. What is a buyer's agent trying to get a buyer the lowest agreed upon price? What is a seller's agent trying to get a seller the highest agreed upon price? It's the quality of their work. When do these agents typically get paid? After they do their job. Per Freakonomics, the incentive is to close the deal fast. As such, their motivation is to make the buyer go up in price or the seller come down in price to close the deal fast and get themselves paid. It's kind of amazing that the law permits this. So where does it come from?

Long ago, Realtors realized that the seller wants to sell and at the end of the deal the seller has all the cash. So a market driven system was created whereby the seller pays the commission and if the price is higher, the seller pays more because he/she gets more. The motivation for buyers is that they walk into a Real Estate office and for what they perceive to be free, they can see houses. The system has worked for a long time. Seller's get their house sold and buyers get what they think is a free consultant, concierge and chauffeur. It goes right over their head that the people performing these services for them 1) only get paid if the deal closes and 2) get paid faster if the deal closes faster.

Some people may not care. Faced with the thought of paying a broker as he goes, a seller may prefer a contingent payment even with the conflicts. Buyers certainly like a personal consultant that they think they pay no money to, that has a nice car to drive them around and that makes their appointments for them. It's the one time that the common buyer lives like the rich with chauffer and personal secretary. It's kind of funny if you think about it. People throw common sense out the window for deferred payments and perceived freebies.

Fiveomar, if you are selling to buy, please visit my site. Flat Fee MLS

Derek

[Brooke]

Upfront fees or hourly fees can have no conflict, you argue. You point to appraisers that are always paid flat fees. I don't know how anyone having any experience in real estate no less living under a rock in the past 3 years can not understand how appraisers have conflicts.

Isn't it true that appraisers received their assignments with their flat fees up until recently directly from banks? Isn't it true that in order to keep and attract more flat fees, the appraisals always came out incredibly as the value requested?

The system started to change around 2006 and I remember explaining to Kristi Fox from Elfant Wisshickon when I sold her house (when she wasn't in the real estate business) that we had to worry about what it might appraise for if we sold it above X. Because of the scrutiny placed upon the mortgage brokers, banks, bankers, appraisers, etc., it really WAS the first time sellers and sellers' agents had to worry.

As much as I love "Freakenomics" and (as an aside, I think one of the authors spoke about his new book at the Free Library yesterday around lunchtime), it is clear from the lazy logic in the real estate agent portion of the book that A) the authors really had a bad experience with real estate agents and B) the emotional reaction was clouding their logic.

Why? A few thoughts. First off, the authors speak about how there is an inherent conflict in a system based upon a sales price. As I demonstrated above, there's inherent conflict in flat fees as well. In fact, try as I may, I can't think of how there isn't inherent conflict in any type of pay.

Or is there really inherent conflict? Sellers, yes, benefit from keeping prices high. And buyers lose. Or do they? As we've seen in this current crisis, buyers become sellers, usually 3-5 years after they buy. Buyers when they are sellers are very happy that prices stayed so high and usually in a normal economy, rose. People who own property are happy that home prices are high. Renters are not.

Few buyers, when they are buyers, want to pay the price for keeping the prices high and this is understandable. Why wouldn't buyers choose to pay a flat or hourly fee for a buyer's agent? (They exist, by the way...it's just that few people use them.) It's because buyers are facing a 5-6% closing cost as it stands MINUS any potential flat fee to buy a home. Imagine adding an undetermined about of hourly salary onto that or let's say a flat fee of $2000, whether or not one buys a home (because remember, that's a current "conflict of internet" with contingent payment at settlement).

I think very few people would buy homes if they had to finance or come up with that cost. That too would drive values down.

Back to appraisers: now we are faced with a system of rotating appraisers that cannot have communication with banks. Anyone with experience in the real estate profession can tell you while the potential bias is gone, so is the knowledge and expertise of the appraiser. I spoke with an appraiser recently that asked ME as seller's agent to provide comps because FHA was asking for two more. He argued with one suggestion I had for 10 minutes and almost hung up on me until I shouted, "I am an intelligent person! I think we are having a misunderstanding if you'll just hear me out." Turns out he had already used the comparable sale he just spent 10 minutes arguing against. He was then analyzing the neighborhood value incorrectly ("I'm not using the Southern part of Fishtown where values are lower...").

So the rotating, conflict of interest-free system, designed by folks that clearly didn't understand the real estate industry, has bigger problems of its own. One of the favorite problems of the media in pointing to appraisal issues previously was drive-by appraisals. But imagine if an appraiser who does an appraisal 10 times of year steps into South Philly and appraises a home at 7th and McKean, using Pennsport as comps? All of a sudden, a 3 bedroom, 1 bath home could appraise at $250K. That is happening as we speak!

Buyer's agents get paid not only for the house that they sell but the knowledge they bring to the table about a neighborhood, comps (ie. what you should pay for a house--Trulia is far from complete and that's why we pay for MLS access), how to analyze comps, be available on nights, weekends, etc,...showing 60 houses to a buyer, putting 5 rejected offers in on houses, interfacing with mortgage companies, working through financing issues, navigating appraisal issues, inspection problems, reviewing and resolving title issues and yes, finally the house price of the home they eventually buy.

And of course there will be buyers who buy the first house they see but they are few and far between. The current pay system allows great agents who are successful to be compensated for their hard work. But I know if I were to be paid hourly, I'd make A LOT more money.

You'll notice that real estate agents who stay in the business a long time usually have more listings and have agents who work with them working with buyers. The reason is that sellers take far less time, energy, etc., and essentially the job of a seller's agent in a normal market can be more or less 9-5. Of course with the bust, the job of a seller's agent has increased dramatically and I'd estimate I'm actually spending more time with my sellers now than I do with many of my buyers.

If anyone CAN come up with a conflict-free system that buyers would actually use, I'd love to hear it.

The interesting thing about the value of a great real estate agent is that you don't actually know the value until you've had one. Most people assume that the job of a real estate agent is opening up the door. In fact, the real work comes in during valuation of a home and negotiation and getting a home through the myriad of financing and appraisal hurdles.

You could actually save or get so much more by having a knowledgeable, experienced real estate agent negotiating on your behalf. Sometimes it can be penny wise, pound foolish.

So I would ask, when you go to check out these rebate places, what the agents are going to do for you, how much experience they have, examples of homes they've sold and how much under "market value" or if you're a seller, over "market value" they're getting for their clients.

[AaronKW]

interfacing with mortgage companies, working through financing issues, navigating appraisal issues, inspection problems, reviewing and resolving title issues

There is at least one of these issues in 80% of all transactions right now. This where a good buyer's agent really earns their commission in this kind of market.

I agree that anyone who is internet saving can hop on the internet and find out what properties are on the market, but finding the right property is only 20% of the job that buyer's agent does. The real work comes into play after the agent brings you to the property you want.

[Value4Realty]

Brooke, I made a slight reference to appraisers and you side step the debate discussing appraiser conflicts but since you did I will reply. I am a Certified General Appraiser licensed in 7 states although I mainly own the firm and work just my immediate home market (before you jump on me for appraising all over the planet). Yes we used to get the owner's estimate of value or the permitted loan to value ratio on appraisals and it was a terrible conflict. Yes you used to be as good as your last appraisal and if you killed one deal you got no more work many sleazy mortgage brokers. Yes the Home Valuation Code of Conduct with 3rd party ordering, and rotations has helped eliminate that ugly side of the business.

However, none of this addresses the point I raised. Please tell me how a buyer's agent can ethically be paid more when his/her buyer pays a higher price if his/her ethical duty is to get the buyer a lower price?

Lastly, FNMA, FHLMC and FHA all allow buyer paid broker fees to be added to purchase price like the seller paid them. They do not affect the down payment or closing cost ratios. So your point that very few people would buy homes under such a scenario and it would drive values down is faulty. Few people would buy a home under such a scenario because an otherwise perceived free service would then be viewed as costly. It's the overtness of what the buyer is paying that keeps such a scenario at a minimum; either way the buyer pays it. Remember that even if the seller pays the commission the buyer takes the loan and brings funds to the closing so the buyer pays no matter what. However I find it interesting that you say "That too would drive values down." Isn't that what the buyer's agent is supposed to do? Keep values down? Isn't that their fiduciary duty?

[Brooke]

You simply provided a great example of why flat fees can still not be the ideal way to get paid. There isn't a perfect system of commission for agents--that's why you should choose an agent with lots of experience that comes with high accolades from past clients.

I did answer your point about how ethically an agent can be paid on the house sale of a price: that's the system we have. There isn't one that I know of that's better. And while the house price is what the pay is based upon, the work involved doesn't reflect that.

I am not here to defend all real estate agents. I deal with agents that are terrible, unknowledgable and not acting in the best interest of their clients everyday. There are good appraisers and terrible appraisers, as you know. Happens in every profession. I do try and get the house for the lowest price for my clients however I am CERTAINLY not going to argue my colleagues do. I can't speak to what they do.

Lastly, my point about buyer paying commission is not where it can be legally on a settlement sheet. If I tell my buyers "here's your 6% closing costs and now here's my 3% buyers' fee in this location!" they're not going to say okay just because it can be done legally. In our current system, sellers face 7-8% in closing costs. Buyers STILL bring the bulk of 5-6% plus whatever the downpayment on the house is.

So of course the buyer pays either way. It's figured into the cost of the house just like transfer tax. But it's easier for the seller to front the bill at settlement to equalize the cost between buyer/seller to make sure buyers buy and sellers can sell. The higher the closing costs for a buyer, the less buyers will be in the marketplace. The $8K tax credit is a perfect example--imagine what the city waiving the 3% of its transfer tax would do to transactions!

Buyers have the option of paying agents by the hour. There is a buyer's agent that I know of in the city, Malcolm Antell, who charges a flat fee up to looking at I think around 20 houses, 3.5% of $400K if the house is less than $400K, etc. These are rates buyers of mine in Graduate Hospital told me when they met with me so I could be wrong. It seemed like a lot but if I were to value my time with buyers as opposed to sellers it's probably about right.

I have to think also that agents who work for these services who so discount their services have to be new agents thus with little negotiating experience and provide limited brokerage services. I work so much harder for every transaction these days I question the real estate agent's credentials that is willing to work for less money, especially on buyer's side where all the time, gasoline, etc., is spent.

[Value4Realty]

Brooke, you're an attorney also. Many buyers see the obvious conflict and ask their brokers how a broker can represent the buyer and be paid more to increase the buyer's price. Don't you see something ethically wrong as a lawyer? I believe change just has not caught on. It was only 15 years ago that buyer's agency took hold. Before that all agents worked for the seller. That's where the conflict started and it will take time to evolve.

As you said, payments don't always reflect the workload. A percentage is not always fair because a $200K condo might be way more work than a $2 million estate. This applies to both Realtors and the parties paying the commission. However, the conflict is not the percentage. It's what it's based off of when working with a buyer. If it was based on the asking price or a fixed amount, it would not be an issue.

Also, you are applying the term limited to all discount brokers. You may be on to something there; that many take away service to offer what they deem a discount; the implication being that a true discount is the same service for less with no take away. We are unbundlers. We offer à la carte services. We do offer negotiation as well by skilled negotiators. We play the game of poker well and get our clients the best deal but we also give consumers choices. We don't force unwanted services upon them but instead offer services a la carte and let our clients elect what services they want.

http://www.mls2u.com