Take that

Take that!

No, I’m not talking about the British boy band.

In a complete in-your-face move, Bend agent Kip Lohr, came out with his “3 Beats 6″ business model.    What is that?  He is no longer offering buyer agent compensation to buyer’s agents.  He strictly charges his sellers a listing fee, and buyer’s need to pay their agents directly for representation.  Got that?  He will no longer charger a higher listing fee and then share a part of that fee with buyer agents.

Bold move.

Sure to get serious pushback, I have no doubt that he is in for a bumpy future and probably some nasty emails.  So is this a smart business decision?  Is this what consumers are wanting?  You tell me.

The reason listing agents pay buyer agents is a relic from the past.   A long time ago, all agents worked for the seller.  There was the listing agent, and then the “buyer agent” was a sub-agent who represented the seller.  As the industry shifted, and consumers demanded, the concept of strict buyer agency came into play in the 1990’s.  The problem is that the MLS system of cooperation wasn’t designed for independent representation like that, but that is the system that we had.  So agents worked around it and the current system, where for the most part, listing agents pay buyer agents, stayed.

I think most agents would prefer that buyers pay their agents directly and sellers pay their agents directly.  Really, when you think about it, it makes little sense for a seller to pay for a buyer agent to write a low offer against their property, dicker with them on repairs, and then pay a buyer agent a large sum for the privilege of hammering them in negotiations.   I am sure you can see why sellers are upset with this system.  Some buyers question their buyer agent’s loyalties since they are being paid by the dark seller side.

So in an effort to stop the nonsense, Kip decided to take action himself.  While I admire Kip for throwing this out there, he has some significant issues that will make this model difficult.   First, lenders like VA  won’t allow buyer’s to pay buyer agent fees.  They have “allowable” closing costs that our military men and women can pay, and agent fees isn’t one of them.  So for agents that represent a lot of military, it means always having to negotiate the fee into the seller side of closing.  Those fees cannot appear on the buyer side on the HUD-1 statement.   As we do not negotiate real estate fees in our purchase and sale agreements, this means a separate side agreement between the buyer agent and the seller.

Second, lenders have a cap on closing costs.  So looking at FHA for example, the maximum allowable closing costs to be paid by the buyer is 6%.  Closing costs without buyer agent fees run around 4.5%.  That would only leave around 1.5% to cover any buyer agent fees.  That will be problematic for most agents as FHA homes tend to be first time home buyers that often just have their downpayment plus a little bit more for closing costs.  I can’t think of a single FHA buyer, in my 9 years as an agent, that could have paid a full 6% in closing costs, plus the 3.5% down payment.  So this means, once again, that in order to make the transaction work, the buyer agent would have to have a side agreement with the seller for any shortfalls.  Considering 19% of our local market is FHA buyers, it makes little sense to eliminate this pool of buyers as prospects to buy your home.

Third, most buyers would prefer to wrap the costs of representation into their mortgage.  Buying a home is expensive with packing, moving, and if you are a first timer, buying things like a lawn mower.  Having to spend a lot of money on representation out of pocket isn’t doable for many home buyers.    With the cap of 6% in closing costs for almost all loans,  it just isn’t a realistic financial model for most home buyers.

Fourth, real estate agents aren’t bold enough.  Good buyer agents are already in the industry.  Good buyer agents are advisors, guides, consultants, whatever you want to call them.  Door openers and paperwork pushers aren’t good buyer agents but they get the job done.  Most buyers spend more time deciding what type of toothpaste they want to buy than they spend interviewing and picking a buyer agent.   Right now, the system allows for buyers to just go with a nice agent because the service is “free.”  They don’t have huge expectations.  When agents are forced to sit down and explain their monetary value to clients, they have to convince people that they are more than nice.  They have to convince buyers that they are good at what they do and that they are worth it.  Maybe L’Oreal could offer bulk rates for their hair products for real estate agents.  Most agents aren’t confident enough to sit down and say “because I’m worth it.”  It will be easier to trash Kip’s business model, than it will be to sit down and decide what they are worth, and then PROVE IT to consumers.

Despite the ire that this will stir in the real estate industry, I think it is short lived.  I appreciate Kip’s philosophical stance, but the reality is that the real estate system with lenders is based on the antiquated methods of paying for representation via the seller.  Because of this, his idea, while bold, will fail over the course of time unless the lenders agree to change their policies and structure to allow for independent representation.

Thesa Chambers, a Bend real estate agent wrote her opinion as well.

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