IPayone finally made a good sale

[powayseller]

I’ve been given the “I must charge 6% to cover the high cost of errors and omissions insurance” line. My agent told me her broker said she could not lower her commission, because the E&O insurance was too high and they must charge enough money to cover that fee. Sounds convincing, right? But it’s not true.

When an environmental consulting firm (very high legal and professional risk) can buy a $10 mil E&O policy for a few grand a year, I am sure a realtor pays less than that. When my husband heard her claim that they need thousands of dollars per house to pay the insurance, he said he wouldn’t list his house with a liar. So we didn’t use ReMax, and listed with HelpUSell. The HelpUSell broker confirmed that the true cost of E&O is a few hundred bucks a year, and they’ve never been sued.

[sdrealtor]

I agree that an agent that tries to justify their value because of the high cost of E&O insurance is a liar or uninformed. They are also incompetent and not worth what you pay them. I never made this claim and never have made this claim. This was something that was fabricated by PC and JES as an argument against me. The funny thing is that I still see 6% thrown around when it is not commonplace nor has it been common place for at least 3 years. It is something from the past that discount brokers like Help U Sell (and yes even SD Realtor on his website) use to claim they are saving people a specific amount of money. It turns my stomach every time I see a HelpUSell ad with a client claiming they saved $10,000 by not paying 6%. Virtually no one pays 6% and it is downright misleading and bordering on fraud for them to claim that people are saving this. They cover themselves by putting in fine print that the savings are based on a 6% commission rate.

My value is protecting my clients best interest and helping them to beat the market. If you looked at my track record it would be pretty clear that I have no problem justifying my earnings. Based upon what I see and have seen people pay for garbage I know this is not what you get from all agents.

BTW, good E&O insurance cost about $1300/year. I have seen numerous high quality agents that have been in the business over 10 years with the highest level of skills and ethics get pulled into mediation and arbitration every month.

[powayseller]

I think a good realtor will help a client get a better house, and probably a better price. I spoke with the realtor who sold a house listed for 270 days on Iron Mountain Road in Poway, where the client overpaid IMO, and she didn’t even know about any of the comps or recent sales, saying, “I’m not familiar with the area”.

Another story: my realtor friend checks the tax assessor records to see the seller’s loan and purchase info that is not on the MLS. This helps to see how motivated the seller is. This info is available to the realtors, but not to the general public I think.

The HelpUSell model is working just fine. I don’t know what iPayOne did wrong…

However, I think the realtor commission system is highly inefficient. The realtor expects to make a living off the 5-10% of his time that is actually serving customers. The 95% of his time that he is marketing for new customers is completely paid for by the few clients he actually gets. If the average sale takes 20 hours, and the avg realtor has 10 sales, then he is working 200 hours per year. He has to bill at a high commission rate, because he must earn his annual salary in those 200 hours. The other 2200 hours each year are “free” work, spent marketing. For this reason, a fee-for-service is what I prefer. Let a realtor charge me hourly or by the job, just like my CPA.

Also, health insurance is not a business expense. The Target cashier doesn’t subtract health insurance from his salary, and say that “Well, I make $10K a year and after health insurance and taxes I make $0 per year, so I basically work for nothing”.

[sdrealtor]

You got it backwards, the Target cashier should ADD the value of the benefits they recieve not subtract them. As an independent contractor I pay for everything that employees receive as part of the compensation and genereally dont value.

The average realtor does not have 10 sales they have 2 to 4 which is part of the problem. With very low barriers to entry, agent productivity is very low. I would gladly work for less per transaction if the volume was there. To say 90% of my time is spent marketing is not accurate. Alot of my time is spend learning and identifying opportunities for clients to beat the market. That is what I get paid for. To say 05 should be spent marketing is very naive. All business require a significant marketing effort, at least all successful businesses.

[powayseller]

I doubt part-time cashiers get health insurance. If you think they do, then substitute any of the other millions of employed who work without health insurance into my example.

[FutureSDguy]

sdrealtor: “The problem is that you dont know which kind of transaction you are involved in until it is too late. Seemingly simple transactions end up in arbitration every day. I’m not arguing that this is brain surgery, it isnt. However, it is not as simple and NOT as profitable as you think.”

In all his posts, I think he does an excellent job of making the case for the value of a realtor. The main counter I would make is: “What if the deal was clean and easy? Do I get a refund for the potential expenses that were never made?”

sdrealtor: “I would venture to guess that there are considerably more engineers, stock brokers, car salesman, plumbers etc. earning 6 figure salaries than Realtors. Furthermore, if you took the average after tax earning of realtors that get no benefits, pay both sides of SS tax, all their expenses and only get paid if escrow closes you would be very underwhelmed by the figure the saw. The vast majority (80%+) would make more money working at Target.”

I totally believe the salary disrecpancy, but I would attribute it to the overpopulation of realtors competing for the same (or fewer) sales. Still, there’s one of me paying a too-high price, and many realtors that have to average out what I have to pay.

sdrealtor: “One $100,000 judgement against him that is not his fault in any way but for which he is held liable and he is wiped out.”

Isn’t there insurance for this? $200/mo for E&O is what I’ve read.

In general, sdrealtor seems to be saying that being an agent is very difficult and not very profitable. I believe this. But should high commissions be used to subsidize this inefficient business?

[PerryChase]

That’s why I say that consumer pay too much already. It’s up to the RE industry to sort out their problems. It’s not the public’s responsibility to subsidize them.

Let the consumers have REAL choices and the problems will get sorted out by themselves.

[JES]

IMO sdrealtor makes very good points regarding the value of a realtor, but I also believe that the answer to futuresdguy’s question is a resounding ‘no’. I have yet to hear any convincing arguments as to why commissions are so high, other than tradition; liability and meager realtor earnings just aren’t cutting it for me. I paid a non- college educated realtor the equivelant of $1000/hour in 2001 to sell my house – a ridicules fee that would have bought me the services of 2 x Yale educated lawyers.

Can someone tell me why realtors – unlike accountants and lawyers – are paid on a percentage basis to begin with? Shouldn’t we be paying for the amount of work done, or the time involved and not just some arbitrary percent?

Also, technology and pay-for-service models will not make realtors obsolete, but they will surely reduce the number of people who need realtor services. We can only hope that these new technologies and business models will help to break down the barriers that this industry has set up to protect itself and provide consumers with fairly priced choices.

[sdrealtor]

Lawyers do work on a percentage basis and it is a much higher percentage. Contingency fees on lawsuits run around 33% so Realtors taking your listing for 4 to 5% is a bargain in comparison. I also think you comment about paying a “non-college educated” realtor $X was out of line. I know plenty of Ivy league educated individuals that are complete failures and plenty of high school educated individuals that are stunningly successful in all types of business endeavors (i.e I’m not referencing RE).

I think the answer is that you are paying for the relatively efficient system of buying and selling homes that Realtors have created. If there were no Realtors the selling of homes would be far less efficient and prices would be substantially lower. Many would argue that this is a good thing until the time comes to sell their home. I am prepared for whatever comes down the pike and just have a hard time seeing the demise of this system because I have seen how it operates and how efficient it is. Believe it or not JES, I have a dormant CPA credential from about 20 years ago among many other things as well as two Master degrees in Business. I have and will continue to shift my focus toward entrepreneurial endeavors and currently have two business ready to launch outside of RE. I have no agenda to protect and no axe to grind

I would love for houses to be cheaper and for honest hardworking people to be able to afford to live in the types of neighborhoods they deserve to. However, i think too much emphasis is on how much Realtors are paid in my opinion as most of you perceive its alot higher than it really is. If the pay were lower you wouldnt attract the calibur of individual that do it well and will only attract the low level that is so prevalent right now because there are no barriers to entry.

[FutureSDguy]

JES: “Can someone tell me why realtors – unlike accountants and lawyers – are paid on a percentage basis to begin with? Shouldn’t we be paying for the amount of work done, or the time involved and not just some arbitrary percent?”

My understanding is that the more expensive the house, the more you want to instill reward for the agent to find the special buyer. The risk of not selling an expensive home is greater than not selling a cheap home.

That justfication holds more strongly for the sellers agent; the buyer’s agent’s work is still roughly the same (sure there’s extra due diligence in the paperwork on a million dollar home, but the paperwork is still the same.)

But the problem is that it still takes the same effort to find a buyer for a home in a $200k-median-price city as it is in a $600k-median-price city.

And all this legal stuff seems like bull to me. More than half of the contracts that clients sign are there to protect the brokers and to lock in their fees. Any breach of contract in any kind of business relationship can be taken to court–why should the client pre-pay for the agents defense in the context of real estate?

sdrealtor has a couple times told us we are naive and we shouldn’t be trivilizing all this. Perhaps so, but I think there’s still kool-aid being served, and it’s healthy to get this out in the open. If I haven’t been following sdrealtor as long as I have, I would have considered him patronizing and trying to scare us into relying on them.

It’s disappointing that the 33% vs. 6% comparison is made. that analogy has more holes than swiss cheese. A lawyer works on relatively unique cases and is competing against the wits and knowledge of the opposing lawyer. A lawsuit can take months or years involving many people and experts. An RE agent is someone is trained to do the same paperwork over and over and to give non-legal advice (which the client pre-pays for whether they want it or not, or whether that information is public anyway.) The bar exam that admits lawyers is very very stringent (going to Ivy league schools is not the requirement to be a successful lawyer), so a client can have some expectation of quality in service. RE agents can get licensed in far less time and schooling (I don’t need to tell you how much), and even after that they STILL don’t know what the hell they’re doing on average.

[sdrealtor]

You sound like a lawyer. The point is missed if you are focusing on the percentages. lawyers work for contingency fees based upon performance just like Realtors contrary to JES’s point.

I’m not here to protect the system or scare anyone into anything. Its a system that has been in place for a long time and has worked pretty well IMHO. Understanding what really goes on in this business on a daily basis I just have a hard seeing it go away.

[FutureSDguy]

You’re right. (And I’m not a lawyer… I’m an engineer of sorts.:) )

I think the RE industry and culture has trained itself on commissions. There’s so much special paperwork and jargon that I think anyone who’s embroiled in it would truly not see anyway to continue doing that without the commission cash flow.

I agree with PC: once you give customers more choice and the services are broken down then the industry will correct itself towards a more efficient and fair model. Right now you have MLS requiring the seller to commit to commission percentages (which shields agents from having to perform better to an extent), and the dirty politics of boycotts when agents won’t bring their buyers to houses with discount commissions. This all needs overhauling with the help of the government.

[PerryChase]

I have done real estate transactions with no brokers involved. All you need is an escrow (plenty of companies to choose from), and lawyers on each side to review the paperwork (if desired), and title insurance. Even with attorneys’ fees it works out much less than 5%-6% of the transaction value.

What we need in real estate is a better, more effecient system of matching buyers and sellers. Once that happens, you can hire professionals to do the paperwork on a fee-for-service basis. Those professionals would get paid even if the transactions falls through.

All the better if property prices are lower. We can put our money to more productive uses… , or even enjoy ourselves by spending it in on frivolous things. Why feed the beast?

[Chrispy]

Not all lawyers work on contigency fees. Many work for a set rate per hour, regardless of how the case turns out for their client.

[JES]

Wow, I just opened another window just to keep all of this straight in my head while I respond. A few points to clarify and respond:

-Lawyers work on a billable hours basis, or a flat fee. Want a will, pay $500 to get it. Even with a trial, they account for their hours and are paid accordingly, right? I guess some pay contingency fees though.

-My comment about non-college educated realtors was not out of line. I was describing a transaction where I paid $1000/hour for exactly that.

-Looking at the bigger picture, many realtors have degrees, CPAs and even JDs, but the vast majority don’t. If we compare the fees charged by realtors to those charged by professionals who have earned advanced degrees in everything from accounting to law we see a huge discrepency. We can point to the few realtors who have CPAs to make our points, or we can look to the majority who have no education whatsoever, but are supported by a system that allows and encourages them to charge ridicules fees that would have bought me the services of 2 full time lawyers and a personal trainer and cook for a month:)

-Efficient systems do not justify current fees. I can transfer $500,000 (if I had it to transfer!) from one account to another tonight very efficiently and be charged nothing. I can buy $500,000 in stock tomorrow very efficiently and pay reasonable fees. Efficient systems save the RE industry money that should be passed on to consumers.

-sdrealtor: From what I can tell you seem to be the kind of realtor that everybody should want to use. Educated, experienced etc. Do you feel that the current system is really helping you? Seems like it would be the equivelant of me getting a law degree and then having the state bar turn around and allow anyone to practice law. Can you imagine the jokers we would see trying to charge $300/hour for legal advice?

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