This story could save you thousands of dollars in real estate commissions.

By: Diy maven Jun 11, 2007

Once upon a time...a handsome young man went to an open house. The real estate salesman, Hank, welcomed the man in.

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"It’s a fixer upper," said Hank of the one hundred and eighty nine thousand dollar property.

"Just what I’m looking for," said the handsome young man. And indeed, it was just what he was looking for. The home’s exterior was in perfect condition while its interior was uninhabitable. As this would be a fun rehab project, every dollar mattered. Could the handsome young man be able to complete the remodel, pay the real estate commission on the sell side and still make a profit? Maybe, but pennies had to be pinched.

Hank, meanwhile, saw the promising gleam in the young man’s eyes. "Are you working with an agent?" he asked.

"No," said the young man.

Ho ho ho, thought Hank, a hogger! If he could represent this customer on the buy side as well as his customer on the sell side, he would keep the entire commission, not having it to share with any other realtor.

Of course, the young man was not only handsome but clever too. He knew all about hoggers. "I’d like to make an offer on the house," he told Hank.

Hank held back a little jig.

"And this is what I’d like to do," continued the young man. "Assuming the sellers are offering 5 % commission, and your take would be 2.3 % of that, I’ll offer full price less 2 %."

Hank furrowed his brow. "How’s that a full price offer?" he asked.

"Well," continued the savvy young man, "you re-write your listing agreement with the sellers, changing the commission to 3%."

"But then I’ll only make 3 % commission," said Hank.

"Exactly," said the young man, "which is more than you would have made if I came here with a realtor."

"Yes, but…" sputtered Hank.

"And the sellers will make exactly as they would have if I’d have offered 189K."

Hank grumbled. He ground his teeth.

"Well?" asked the young man, "do we have a deal? Because if we don’t, I can find a real estate agent in about two seconds."

Hank chewed his lip. If the young man came back with another realtor and made an offer, even a full price one, Hank’s take would only be 2.3. And although the difference might not seem like much .7% is .7%. Hank took a deep breath. "Alright," he said.

The end…almost.

Think the above story is farfetched? It’s based upon an actual real estate transaction that occurred several years ago—when you could still find fixer-uppers for 189K. First time home buyers, especially those people who hit open houses just to ‘see what’s out there’ are particularly vulnerable to stepping into a hogger situation. The realtor asks if they have representation. If they don’t, they’ll be courted by the listing agent, bent on bogarting the entire commission himself. Or herself.

You might be asking, "But isn’t it a conflict of interest when the same agent represents the seller and buyer?" The answer is, absolutely. Dual agency, as it’s called in the real estate biz, restricts the agent’s capacity to represent each party in the transaction fully as each party has opposing objectives. So conflicting are hoggers, in fact, that they have been prohibited in Colorado, Florida and Kansas.

So why even bother entering into such a partnership? For the same reason the handsome young man did in the story: to save bucks. In this case 3,780 dollars, which buys a lot of drywall. Also, agents might tell you that having one realtor representing both parties makes for quicker negotiations, as there is one less person involved. Even these two factors might not help assuage any trepidations you have entering into such a transaction. If so, part of your savings might be used to retain an attorney that will see you through the process to ease your worries.

"Okay, this is great if you stumble upon the home of your dreams when touring an open house, but what if you’re trying to sell your home?" might be your next question.

The answer: When you fill out your listing agreement with the agent representing you, tell her, or him, to stipulate in the contract that if they personally bring in the buyer (meaning they personally represent the buyer) they will charge less commission. In this case, if they buyer is not as savvy as our handsome young man is, the sellers will actually clear more than originally anticipated because they will pay less in commission. To put it in numbers, say you’re selling your 300K home and the agent writes up a contract for 5% commission (common around here in the Minneapolis/St. Paul metropolitan area) that will come directly out of your profit. If another agent brings in the buyer willing to pay full price, you’ll have to fork over 15K. Ouch. If, however, your agent brings in the buyer and charges only 3% per the agreement in your contract, it means you’ll only have to part with 9K of your hard earned money.

Ultimately, the decision to enter into a dual agency where your agent represents the other party in a transaction is completely up to you and the other party involved–and the laws in your state and the agent’s broker’s policies. If such representation is not prohibited and all parties agree to it, then we in the other 47 states in the union might as well take advantage of dual agency if we can and feel so inclined.

Note: When two different agents from the same brokerage firm represent opposing parties in a transaction, the transaction is also considered a dual agency relationship. However, no agent will agree to take less commission if another agent from their firm brings in a buyer. At least, I haven’t met one.

 

 

 

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Comments

Yeah, the difference in housing costs between the Midwest and Northwest is startling. Well, ALL the west. It's crazy.
Ooo this will be helpful when Mr. Bacon and I finally find our dream home! $189k... If only! We live in an older apartment complex, but just a block down the road is a residential area with homes (and not mansions, just regular two-story, detached homes with yards) in the mid-$300k to upper $400k... Prolly more the location than anything else (it really is a super location). And about five minutes down the road are homes in the neighborhood of $600k to $1 million... My dream neighborhood!!! You can get a view of downtown Portland from there, it's up in the hills and really peaceful! There are even a few deer because there's a natural park right smack in the middle. But anyway.
If you think negotiating is good, you should look at the Redfin model.  $3,000 flat commission period.  Doesn't matter what the sales price of the home is.  It has really taken off in Washington, the Bay Area, and out East.  People in the real estate industry really need to watch for a paradigm shift. 

I'm a Realtor, and often will write listing contracts with a two-tiered commission structure as outlined below.  I figure it like this -

If I personally represent the buyer, I expect to make a higher percentage than I would if a cooperating agency brought the buyer because it's basically twice the work for me, dealing with both sides of the transaction.  That fact should not preclude the seller from getting a break on the commission, however. 

I will generally knock about 1-1.2% off the commission - I'm already pretty cheap to begin with, so this amounts to a ~20-25% discount (you do the math).  That makes everyone happy. 

This is all fine and good.  But I make it quite clear to sellers that the chance of me actually bringing the buyer are fairly slim.  In my area, most agents don't sell more than 10-15% of their own listings.  But I still want to do right by my sellers, so I try to cut them the best deal possible. 

 And quite frankly, if a buyer came into my open house with the approach expressed in the original posting, I might encourage him to get his own representation, depending on the situation.  In my area at least, people who approach the transaction this way are often a real PITA, and the additional hassle isn't worth the extra cash.

Jason

Brilliant!  I was put in that situation as a buyer.  My agent is sister in law to her boss, who represented the original home owner.  It was yucky.
What an excellent nuts and bolts post! Thank you. I personally got burned on this one. Too bad I didn't know about this 9 years ago. Well written and very helpfull.
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