To Be or Not To Be Represented - That Is The Question

Lori and I feel that if we, as REALTORS®, share the kind of Intel we offer below, with the public, they will think twice about giving any logical thought about engaging a real estate agent who is willing to work for less than poverty wages.

From time to time, Lori and I come across buyers and sellers who believe that real estate agents... simply make way too much money for the job that they do. That may be true in some instances. We also know of real estate agents who promise to give a good part of their earnings back to the buyer or seller when a transaction closes. We have heard of practices where real estate agents offer as much as 1/2 of their earnings and as much as 2/3s of the agent's earnings back to the buyer or seller at the close of escrow. Could such an altruistic position be putting the buyer or seller in harms way?

To that end, we thought it appropriate to offer our thoughts on this practice.

Lori & I do not believe that any agent who is giving up 1/2 to 2/3s or more, of his or her income can consistently keep a frame of mind that puts his/her client top of mind and above the real estate agent's need to keep the agent's car payments current, a roof over his/her families head and food on the table.

Keep in mind too, that the real estate markets of 2006, 2007 did not produce an abundance of closed transactions in the entire country, Arizona or the ARMLS (Arizona Regional Multiple Listing Service) region. 2008, 2009 and perhaps as far out as 2011 could ring in similar years of productivity.

FACT:

In August 2008 ARMLS recorded a total of 3930 residential resale and/or new home transaction closed.
In September 2008 ARMLS recorded a total of 3171 residential resale and/or new home transaction closed.
In October 2008 ARMLS recorded a total of 2824 residential resale and/or new home transaction closed.
In November 2008 ARMLS recorded a total of 2629 residential resale and/or new home transaction closed.
In December 2008 ARMLS recorded a total of 2591 residential resale and/or new home transaction closed.

You can review a complete seven year tracking of the real estate market's activity by CLICKING THIS LINK.

In the first 20 days of January 2008, ARMLS recorded 1,201 single family residential listings closed escrow. Now.. Keep in mind that the National Association of REALTORS® study sited that the average real estate agent closes 10 transactions per year (**SOURCE: Realtor.org). If we subscribe to the belief that, as of December 2007, Arizona now hosts over 110,000 licensees and that, perhaps 1/2 of them or more, practice right here in the ARMLS area, how may transactions do you think the average ARMLS real estate agent is closing each month? Contrast the first 20 days of January 2008's figure of 1,201 single family residential listings closing escrow with the first 20 days of January 2007 when 2482 single family residential listings closed escrow. The industry is 100% off target from the preceding 12 months.

However... Do not be disheartened. Even though these numbers look pretty dismal, the number of closed transactions are not too far off from January 2000 when the first 20 days of January 2000 produced 1642 of closed transactions. The two biggest variables are the increase of licensees by nearly 115% since December 2000 and the staggering number of failing mortgages which now helps sponsor nearly 60,000 properties that remain, on the market and UNSOLD!

NOW... DO THE MATH! The average sales price for homes in the valley, priced between $100,000 and $800,000, in 2007 was $286,000. Assume an average commission paid to the buyer or seller agent of 3% or $8,580. Let's also assume that our REALTOR® works for a 100% office, wherein the agent receives 100% of the compensation, less a usual franchise fee payment to his/her broker of 6% of the earned commission. (franchise fees vary but 6% is a good number to use as an average) In our example, the agent will receive a Gross Commission Check of $8,065.20. If our agent gives his/her client 2/3s of his/her commission, he/she earns a total Net Commission, before taxes, of $2,685.71. Now... Let's assume that our agent is in a 30% tax bracket. That means that our agent's take-home pay for this transaction is $1,879.99. Remember, the National Association of REALTORS® sites that the average real estate agent closes 10 transactions per year, from 7.7 in 2000 (**SOURCE: Realtor.org). If our agent is 1/2 again more efficient than the average real estate agent and closes 15 transactions per year, our agent will earn a total, Take-Home income of $28,951.84 which is just $4,800 above the 2007 USA National Poverty level for a family of 5 in 48 states and. **SOURCE: Federal Register, Vol. 72, No. 15, January 24, 2007, pp. 3147–3148

Now... What if our real estate agent worked for a traditional real estate company where the agent's commission is shared with his/her brokerage on a SPLIT. The majority of the REALTOR® population work for traditional real estate firms and even the most senior agents capture only 80% to 90% of the commission dollars, after their traditional franchise fee SPLIT.
Let

s move our benevolent agent into a traditional real estate firm, such as ERA, Century 21, Coldwell Banker, Better Homes and Gardens or any number of other companies that host traditional real estate commission SPLITS. Let's assume that he/she has achieved an 80% SPLIT agreement with his/her company, less his/her 6% franchise fee. That means that the 80% SPLIT is really 74%.

Now... Let's assume the same transaction with a total earned commission of $8,580. The agent's total Gross Commission, at a 74% SPLIT (after the 6% franchise fee) is $6,349. Now let's assume that our altruistic agent gives his/her buyer or seller 2/3s of his/her income netting our agent a grand total, before taxes, of $2,147.52. Remember, our agent is also in a 30% tax bracket, which in realty nets our agent a grand Take-Home income of $1,503. If our agent performs better than the NARs average REALTOR® and closes 15 transactions in one year, he/she will earn a grand total of $22,545 or $1,550 below the National Poverty level for a family of 5 in 48 states, Hawaii and Alaska's poverty level have a bit higher income ceiling. **SOURCE: Federal Register, Vol. 72, No. 15, January 24, 2007, pp. 3147–3148.

Lori and I believe that human nature will prevail and the client, on some unfortunate day... may pay a very heavy price because the real estate agent may not be able to conduct too many transactions with the altruistic contributions described in our scenarios. It is simple economics and human nature. This does not make REALTORS® bad people, it makes them human and as humans, we believe that REALTORS® should earn a fare price for performing their duties to protect the public. Remember, as Arizona licensees that is our charter, as defined by the ARS Title 33, to protect the public's interests.

How in the world can a real estate agent hope to assist a buyer or seller if the real estate agent is going to put himself or herself in financial harms way. Lori and I feel that if we, as REALTORS®, share this kind of Intel with the public, the public will think twice about giving any logical thought to engaging a real estate agent who is willing to work for less than poverty wages. Would you be willing to work for less than Poverty Wages? Do you believe that you would be able to put your client's needs ahead of the needs of you or your family if you were working for Poverty Wages or less?

It simply makes no sense to us... How about you? Think about it.

Builders and New Construction - Why Are Realtors Needed?

By G-II Varrato II
Coldwell Banker Residential Brokerage
Phoenix, Arizona


I’m often asked by new agents, “Why do buyers even need a real estate agent if the builder isn’t going to negotiate their contract?”

The answer is somewhat complex and yet, equally, quite simple really. Buyers, for the most part, will truly understand very little of the massive amount of paper they are going to review, agree to and sign. My comment is, by no means, intended to impugn the integrity of the builder or their site sales staff. By and large, the builder community is populated with very wise and reputable real estate licensees. However, all too often unrepresented buyers are presented with documents for review and subsequent acceptance that they really do not fully understand. And… more to the point, our inherent nature, as humans, often will let our pride get in the way of asking for more detailed and clear explanations of what we are reading. We simply don’t want to sound dumb.

Understanding the loan process can add additional challenges for the buyer. Buyers are often given a crash course in industry jargon. GFE, LTV, APR, TIL, 1003, HUD-1 and the list goes on. By the time the buyer has made it through the loan package, the mounds of paper and jargon has stunned many to the point that they are much like the deer, standing in the street, looking at the oncoming truck with that “Deer In The Headlight” look.

The simple truth of the matter is that we, as industry experts, are needed to help guide the buyer through that swamp of inked up manufactured pulp. And while we are not expected to have the understanding or knowledge of inspectors, landscapers, lawyers, roofing contractors or any number of hats that buyers want to toss on our heads, we do have an obligation to offer our expert opinion of what all those words on all that paper really means. And… if we don’t know the answer, we had better be able to direct our clients to the appropriate resource for the answers they crave.

We have an obligation to be able to understand the content of the Commissioners Public Report (CPR) and point out items within the report of particular importance. All too often buyers either simply gloss over the CPR or even worse, don’t even read it, subsequently signing the document only to learn later that the content of the CPR or the CC&Rs contained information that they would have found objectionable had they known the exact content before they closed on their new home.

A case in point follows: A buyer purchased a home in a community that met all of the requirements set forth by state statute, in terms of disclosures and content within the CPR. Several months after the buyers had closed on their home, the buyers found their house developing cracks in nearly every wall in nearly every direction, inside, outside and across the ceiling. The builder was called to the property and has paid regular visits to the property for the past three years to make repairs to the home. (By the way, this subdivision may be involved in a law suite in the not too distant future).

The buyers made their purchase, (the couple was not represented by a real estate agent), signed all of the disclosures required under state law and statute, conducted their inspections and closed on the property. What they did not realize was that the CPR contained a potential red flag, a notice of potential risk, for homes built in this particular subdivision. The CPR contained words such as earth fissures, ground subsidence, and a line that read “…This risk of this earth fissure to Unit 2A… …is very low.” Oh yes, the parcel the buyer’s house is located on is in Unit 2A.

If the buyers had been represented by a competent real estate agent, these disclosures would have been pointed out to the buyer and… again under the tutelage of the competent real estate agent… the buyer would have been directed to the appropriate resources for further explanation of this information. The buyer would then have been able to make, not only a decision based on the required disclosures, but also would have had the opportunity to make a decision to move forward, or not, with their purchase based on a more knowledgeable understanding of the potential risk in owning a home in Unit 2A.

Again, it is important to point out that it does not appear that the builder or their employees have conducted themselves in any inappropriate manner. My point however is that, in this instance with this buyer, the buyer might have decided against the dice roll when making this purchase if they had fully understood that their purchase was, in fact, a dice roll with regard to the soil stability.

Beyond the scope of being, “really GREAT transaction guides” is our ability to offer competent council in terms of the loan platforms being digested by the buyer.

Another case in point: One of our buyers made a purchase from a particular builder who, at the time, offered a certain amount of money in the way of a purchasing incentive. As usual, the incentive was tied to a requirement that the buyer use the builder’s preferred lender if the buyer wanted to take advantage of the generous incentive. The builder also had designated what title company would close the transaction.

About three weeks prior to closing day, the buyer received the Good Faith Estimate (GFE) and, after reviewing the document, felt that the figures were fair but, just to be certain of their assumption, forwarded the GFE to us, their Realtor®, for review. The buyer’s profiled loan was set up as an 80% first loan with a 20% second loan. The buyer also shared their FICO score, well over 780, with us.

After reviewing the GFE, we counseled with the buyer and advised them that we felt the proposed closing costs were high by about $1,000 to $1,200 both in terms of escrow fees and lender origination fees. Our clients agreed to allow us to speak with the escrow company and with the lender about the fee structure. At the conclusion of our conversation with each entity, the total closing costs had been reduced over $1,100.

Our next call was to the builder. The builder had recently increased the buyer incentive package from what our client was offered, when we went to contract several months earlier, to a considerably larger incentive package offered to today's buyers. We placed a call to the builder, and after several conversations with the builder, we successfully negotiated an increase of the incentive package for our client that was exactly equal to that being offered to today's buyers. This scenario is a prime example of the negotiating power a professional Realtor brings to the transaction. Remember, negotiating is not all about getting the lowest price, negotiating is involved in every facet of a transaction, including helping the buyer negotiate title fees, loan costs and, in this case, an increase of $5,000 to our client's incentive package.

The bottom line is just this folks. Realtors® know how to read contracts. We know how to read Good Faith Estimates (GFE’s). We know what all those really weird words are and what they all mean, and if we don’t, we know how to get the answers. Most consumers do not have these skills! They need us and we owe it to them to truly represent them when they make their purchase of new construction.

What buyers don’t need is to be car-pooled to a builder’s showroom by a real estate agent who acts as nothing more than a door man/woman only to leave after the buyer walks through the door way and then return for his/her commission check when the new home closes escrow. Such actions are not indicative of buyer representation. Such actions should be unthinkable by any real estate professional.

If you would like to know more about Buyer Representation please drop us a post at Lori.and.G-II@RealEstateInPhoenix.net.

Here are a few useful links for Buyers and Realtors alike:

CLICK THIS LINK to read some Really Scary Inspection Stories
CLICK THIS LINK to read, What Builders Hope Buyers Never Learn
CLICK THIS LINK to download a copy of the Arizona Registrar of Contractors Workmanship Handbook