How to Fill the Real Estate Competence Gap and Not Pay a Commission
1. Real Estate Agents are Invaluable to Most (But not All) Real Estate Transactions
Don’t get me wrong. Real estate agents are extremely valuable participants to the vast majority of real estate transactions in California. For first time buyers and sellers, I say an experienced and reputable real estate agent is absolutely essential.
2. The Selling and Listing Agents Truly Earn Their Commissions
The agent representing the Seller is called the “listing agent” in the real estate business. The listing agent will market the property and show the property to prospective Buyers and their agents. The listing agent will advise the Seller what can and should be done to prepare the property to maximize the chances of the top selling price. The listing agent will advise as to the listing or initial “offering” price. And, after the offers are made, the listing agent will help the Seller negotiate the best contract with the best Buyer. Once a Buyer’s offer (after negotiations are concluded) has been accepted and escrow is opened, the listing agent with help the Seller navigate the escrow process to a successful close of escrow.
The agent representing the Buyer, somewhat counter intuitively called the “selling agent” in the real estate business, assists the Buyer locate properties for the Buyer to consider, tours properties with the Buyer, helps the Buyer spot issues, discusses pros and cons of the properties toured by the Buyer. The selling agent prepares the purchase offer for the Buyer and “presents” that offer to the listing agent. When the negotiating is over, and the “offer and counter offer” process is over, the Buyer’s agent will shepherd the Buyer through the inspections process and financing process, all culminating in a successful close of escrow.
3. Commissions are Contingent Fees. No Sale, No money.
Real estate agents only get paid their commissions when the transaction closes escrow. That is in part why they get the “big money”. While commission rates are negotiable, commission rates typically vary between 5 and 6 percent for improved property, that is properties with homes on the property, depending on the anticipated purchase price, and 10% for unimproved property. And these commissions are shared by the agents and their employing real estate brokers, each side (Buyer and Seller) typically sharing the total commission 50/50.
4. Are Commissions Always Necessary?
But, if the Buyer and Seller are experienced and have found each other, so no marketing by a listing agent is required and no looking forever with the Buyer is required by the selling agent, is the full commission warranted? A lot of Buyers and Sellers don’t think so and come looking for the transaction to be documented properly. Also, most of these Buyers and Sellers have already negotiated the price and payment terms if the Seller is going to finance part of the purchase price.
Most real estate brokers do not want to participate in a transaction that doesn’t carry a commission very close their normal, full commission rate, even if the Buyer or Seller is friends with the sales agent. This doesn’t make financial sense to most brokers, at least that is my experience.
5. If Services of Agents are Not Required, What is the Best Option?
So what are these experienced Buyers and Sellers to do? The answer is to retain an experienced real estate attorney who pays the annual (hefty) software license fees to license the same contract forms as are used by the real estate professionals—the California Association of Real Estate Forms, the CAR Forms.
In Northern California these forms are used by virtually all State of California Bureau of Real Estate Licensed sales agents. They are used for Buyers and Sellers—they are “balanced”, not one-sided. These forms are up to date and for the most part free of ambiguity.
And they are “check the box” forms. What does this mean in terms of advantages to all parties? It means that if the parties are familiar with the forms, they don’t have to read all of the fine print! Huge savings and time and money! Sure, if you want to read these forms, you can, or you can skim read and ask questions of a lawyer when you are in doubt.
6. Title Insurance Exception Guidance
Beyond properly documenting the transaction, the experienced real estate lawyer can help their clients understand the significance of preliminary title policy report “exceptions” to coverage, which to accept and which to watch out for—the latter being easements that may be lurking menaces to the further development or even use (quiet enjoyment) of the parcel.
7. The Dreaded Custom Drafted Addendum to the Standard Forms
Problems can and typically do arise when eager sales agents, Buyers and Sellers collaborate to invent custom-drafted Addendum or Addenda to the standard CAR Purchase Agreement. Being able to understand, articulate and explain the issues to Buyers and Sellers, gain mutual understanding of both sides to the transaction and agreement among parties and then craft legally enforceable, unambiguous written agreements (also known as custom Addenda), very often are beyond the scope, licensing and training of sales agents—unless they also hold California law licenses. Many lawyers make a good portion of their living crafting legally enforceable unambiguous written agreements. “It’s what they do” as the famous tag line goes.
Bottom Line: Save Everyone Time, Heartburn and Future Money
The legal, monetary and emotional future consequences of an ambiguous deal are huge. When there is some complicated aspect of an otherwise standard transaction that is totally well-handled by the standard CAR forms, none of the regular team of agents and principals should be bashful. Buyers and Sellers are well advised to hire an experienced real estate lawyer to draft the needed Addenda to deal with the deal’s wrinkles.
The Frog Knows, aka Chuck Farrar. Contact Chuck with questions.
Excellent blog! Simple, well-structured insights on FSBO and agent-free transactions. Helped me understand risks, benefits, and right timing.
Thank you. I’m happy that this information was helpful to you.
This blog clearly explains when buying or selling property without an agent makes sense, saving money and increasing confidence greatly.