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Myth Buster Truths about Real Estate Agency
Agency Questions Changes In Real Estate Agency and Why For Sale By Owner No Longer Makes Sense ~ Part I As regular readers know, I'm often a critic of our industry, after all, I came into the business later in life as a victorious For Sale By Owner Seller (FSBOS) myself, knowing quite a bit about Agent's conflict of interests-possibly being a victim of it- and other sordid details... In the last 6 months I've written about the scams at Realty Place, the 2 awful deliberately bad numbers routinely put out by the MLS, and I even wrote that it was better "to have no Agent than a bad Agent." Recently I've been running headlong in to the ultimate "For Sale By Owner King," an "Uncle Charlie" of a first time home buyer here in Charlotte, NC. If you've been in this business any length of time, you have met "Uncle Charlie." Uncle Charlie is generally an "expert" in everything. He always has a very high opinion of himself - a low opinion of the real estate industry in general, and an even lower opinion of us real estate Agents. Most importantly, he knows what's "best" for his "client." Sometimes they take money for their service, when this happens they are in fact breaking the law acting as unlicensed real estate agents, not unlike some "doctors" who "practice" in some of the ethnic communities where trust is low. More often, they are a relative, a close friend, or family "adviser" who are providing their "advice" for free, and you know they'll have a stake in Being # 1- their ego demands it. A long time friend and attorney once told me about free legal advice- it would be worth what you paid for it. A popular juicy critique making the rounds in the 1980's was that to be a real estate Agent you had to be a "prostitute and a liar" Like a legend, there is a grain of truth, but only a grain. I was disdainful of the industry in the 1980's, thankfully, the Real Estate industry today is not what it was 30 years ago, no offense intended to my older veteran colleagues. Three remarkable changes have occurred, I'll briefly look at each, then, in my next post, dismantle the entire argument over For Sale By Owners in this complex legal, environmental, and dynamic industry we call Real Estate. Fair Housing Act- 1968- these laws, with very stiff penalties, corporate death penalties for Brokers if you will, took Agents out of the business of being their own "Uncle Charlie's." At the time, the industry was dominated by Agents who "recommended" where their buyers should or should not live (near minorities), of course they told every client it was "their" decision, but only "a fool who didn't care about his money would look there." They were a key segregation instrument of the day, defining where the "good" people lived, and where everyone else lived. Fair Housing Laws introduced agent "Objectivity" to the industry, with enforcement, so that today, it is a rare (highly illegal too) thing to find an Agent recommending an area based on race. It also introduced this new concept to Realty- "Objectivity" -perhaps being Objective and letting clients learn and make decisions on their own, was a good thing when representing clients, maybe that is because the Buyer has to live with the consequence of the decision, and we do not. The Rise of Real Buyer Agency-the default setting is that Agents Always represent the seller, the person who pays them, unless their is an agreement to the contrary. In North Carolina, we agents can work as Buyer Agents with a verbal agreement, but it must be reduced to writing prior to an offer being submitted. These laws came into being in the early 90's as state after state recognized a major conflict of interest when one Agent represents both a seller and a buyer in the same transaction. Why the conflict? It starts with how commissions are split- the most common arrangement is the commission is split in two equal sides, the "buying" side, and the "listing- seller-agent side," and since Agents work for Brokers (Allen Tate, Wilkinson and Associates etc) commissions are divided between the two Brokers, who then split with their respective Agents. It didn't take long under this system of pay for creative Brokers to start encouraging, and even giving Agent bonuses for their agents to Sell company listings- Why? Because the Broker made out on both ends. But then, Agents noticed too that they could make money on both ends by doing what? By representing the seller and the buyer. Now it gets really tricky... if an Agent wants both ends, could it be he tells one story to buyers from a different agency and another to Agents from his own firm? Yes! If a Broker learns that a seller is desperate, might he not tell his other Agents, there is a desperate seller willing to take much less, so go sell that house ( and let him earn both sides?) at a discount without giving it a chance on the open market? Yes. And if a buyer came to him directly and asked a question that he should reveal the truth to, might he not he be "incentivized" by the pay plan, to lie? Well yes, that is exactly what the bad old days of real estate did-- it created conflicts of interest by the nature of the compensation plans. There were many good Agents who did their best within these crazy rules, but there were also many who clearly represented neither the buyer or the seller, they only represented themselves. Here is a simple illustration, there are many variations of this. Seller tells his listing Agent, who works for Broker A, he needs to get $300,000 for his house, but thinks it is worth $350,000, so he'd like to List at $350,000. The Agent advertises the house at $350,000 and a potential buyer calls, and after seeing the house asks the Seller Agent if the Seller would take $300,000 for the house. Hmm- what does Listing Agent say? Now imagine, same scenario, another Agent, a Buyer Agent from Broker B then shows the house, and his buyer wants to make an offer at $340,000, what does this listing Agent, Broker A do? Do you see the conflict? Can you see the "prostitute and liar" argument? Listing- Seller Agent and Broker A, make MORE MONEY, by selling the house to "their buyer" at $300,000-If the commission is 6%, considerably more. Of course the Seller loses the $40 k- so maybe the Selling Agent doesn't tell the seller of the 340k offer, or, when they come to present the offer, tells Agent-Broker B, "Sorry, its been sold." These kinds of conflicts were fairly common in the bad old days of real estate, and why changes were needed. Today,the majority of states have Buyer agency laws - that allow Buyer Represention, and require a Buyer Agent to always act in the buyer interest, a fiduciary capacity not unlike a lawyer, and that Agents can only represent both sides if you explain these conflicts of interest and the buyer and seller sign a "Dual Agency" agreement. Please don't do that. I do not practice dual agency, because I do not believe it possible to represent both the buyer and seller aggressively in a fiduciary capacity in a zero sum negotiation. It doesn't work in any other industry, and doesn't work here either. I don't want to play in a game that "pays to cheat." I don't do business that way, never have. I would guess that I hold a minority view still in the industry. Uncle Charlie and many clients do not understand how the Buyer Agent role has evolved. In the bad old days, the Agent's only real role was to find the buyer a house, because the Agent had all the listing information- you either had to just drive around or have an Agent who knew the market well. But there was no real buyer representation because in the final analysis all agents represented the Seller. Today, the Buyer Agent's role, especially since the advent of the Internet, is only to assist in the search - 2/3s of my buyers find their own homes online, why? Because they can search 24/7, and they know exactly what they are looking for, including the "I'll know it when I see it."
But that is where real buyer representation begins- Helping the buyer sort out their many choices, based on their wants, needs and desires, in an objective-knowledgeable and competent way, gathering data on Community A and Community B, house vs. house, always looking out for their best interest. A good Agent has a basic understanding of real estate law, the contracts, the Rights of his Buyers, the Rights of Sellers, basic construction, basic mortgage advice, and knows when and what to answer, and when to refer a question to an expert to answer. I'll talk more about what "good to great" Buyer Agents do for their clients in my next post. The Digital Revolution Another titanic shift is re-shaping the real estate industry: the growth of the Internet used by buyers to buy homes, online video, and cable shows have given buyers more opportunity than ever to find their home, or home's of interest online. For the past 100 years, the industry has been controlled by large Brokers, those who listed the most homes, because they held all the information, and they were the source of many of the industry's conflicts of interest. Just like everywhere else, information is power, and that power, so long controlled by the Seller side, is moving to its rightful location, the buyer side. As this shift gains momentum, we sort out more and more of the old conflicts, the clients gets better choices about representation, and consumer's are happier with their buyer decisions. (NAR 45,000 Purchaser Survey, 2004) Uncle Charlie has never known me, or any of the top Agents I know, and because he has never tried the process, never used a good agent, he has no clue what he has missed. About 2/3's of the Uncle Charlies are engineers or attorney's- what is it in their education that persuades them of the superiority of their views? Who knows? My most recent Uncle Charlie is an engineer, even worse a European born and trained engineer, where stone and the castle are still king. He has about convinced one in the couple that every home in Charlotte (by extension the US) is about to fall down, because it doesn't meet his standards, and only his wisdom can protect them. That makes the other 99.999% of us fools, and gives Uncle Charlie 100% control over the decision. Of course, it defies common sense- America is in debt, but not from paying house repairs! It's with such certainty that Europeans have fought so many wars-they are right and nothing else matters. Sigh. Next post, I'll review the For Sale by Owner's biggest complaints-grievance against Agents- Listing fees and their conflict of interest(I was a FSBO, several times, remember?) I'll bust the myth that good "Buyer Agency" costs the buyer anything- even though Sellers pays us a nice commission when we get to a successful closing, the FSBO King believes that he is paying for it- and if he didn't pay for it he'd get a better deal from the seller-never mind there is no evidence to support it. Details will be in my next post, as well as a look at what an advanced Buyer Agent can provide. I'll also summarize the findings of the massive consumer research project undertaken in 2004--that concluded the home buyers who used the Internet and an Agent, were two times more satisfied with their purchase, than those who just used an Agent, or just used the Internet alone. I'll look at some of the continuing bothersome conflicts on the Listing side, and how to get around most of those as well. Looking for a great Charlotte Buyer Agent? Or just great homes? You can Search Charlotte NC Real Estate, or Call me direct at 704-351-1519 Related posts Why You Always Need a Buyer Agent Choosing A Buyer Agent- What to Look for 10 Essential Tips When Buying a New Home
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Contributor's Note
Real Estate Agency, the role of Agents, is changing rapidly. This post attempts to cover three major changes of the last 30 year. Comments, thoughts or emails are always appreciated
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