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Buyer Agreement Fees: The Future of Real Estate?

by Peter Thomas Ricci

When news broke on a rainy, overcast Wednesday in March that Koenig & Strey would be requiring its buyer clients to sign an exclusive buyer-broker agreement – and that a $250 fee would be attached to the document, upon a successful closing – the Chicagoland real estate community reacted with ridicule and praise in equal parts.

Some agents questioned Koenig’s new business plan, seeing it as a revenue-booster that could ultimately cost it valuable clients and agents, but others were complimentary, if not congratulatory, for its actions, applauding the company for its bold initiative and business savvy in these trying economic times.

For the naysayers, it did not matter that mandatory buyer-broker agreements and fees had existed in other real estate markets in the U.S. for decades. In Florida, for instance, non-negotiable fees are commonplace for buyers and sellers, and often at rates that exceed Koenig’s. What mattered was that such a business policy rarely exists in the Chicagoland market, and with its announcement, Koenig & Strey simultaneously forced brokerages and agents to reconsider how they did business in the modern real estate climate.

Real estate has been a remarkably consistent industry, and that is largely by design. Though mortgages have existed in one form or another since the 15th century, modern real estate in the U.S. did not really take shape until the 20th century, when Realtor associations began forming and adopting uniform policies that were eventually implemented on a national level, from forms and contracts and standard commissions (which, by 1950, were already set at 5 percent), to a national, unilateral MLS system in the early ‘60s, which, by 1977, would claim 93 percent of real estate firms as members.

At every stage in real estate’s evolution, from the creation of the National Association of Real Estate Exchanges in Chicago in 1908 (NAR’s predecessor) to its first Code of Ethics in 1913, a consistent business model was always the emphasis of the industry, and excluding several blips on the radar, such as Century 21’s popularization of the franchising model in 1971 and RE/MAX’s 100 percent commission model in 1973, its central focus on networking, leads, client acquisition and the ultimate payoff of a commission has been unaltered, especially in Chicagoland’s marketplace.

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Comments

  • Michael Sims says:

    Kudos to K&S for taking a step in the right direction for Illinois Realtors. Too often realtors get stepped on by the general public and are not always seen as professionals with standards. Personally I have maintained a minimum fee for all transactions which averts myself and my agents working at minimum (or less than minimum) wage on a transaction. Some clients turn their back on the proposition, but most understand that our time is worth money too.

  • Wayne says:

    Agree wholeheartedly with this. It should end up becoming state law that it is published in each office. Too many lookee-loos think we get paid a salary to be in the office.

    How often do people call us or stop by an office and want to know about buying a home? They then go to another and another office. They seem to think that if they ‘work with’ more than one agent they will get more information than the MLS has.

    If they want to pay $250. up front to each of us, they can work with as many agents as they want!

  • Barry Newman says:

    I can appreciate Koenig & Strey’s approach to buyers. I believe that the State of Illinois needs a new law requiring buyers contracts as they do listing agreements. Some buyers do not understand that their agent typically works hard and only gets paid if something is purchased.

  • Ron Brampton says:

    Listen to a salaried tenure guy like Hsieh and you’d think Realtors are Romney. Making a lot of money for doing nothing. He misses the point like trying to catch a bullet with a net.

    It’s an extremely personal, nuanced and skilled service with risk/reward that can result in a transaction where a lot of money is exchanged. For instance, does Hsieh have any idea where all the data on an MLS comes from and who pays to aggregate it? Agents, maybe? But the data doesn’t get a transaction done. Does he understand why commercial real estate information is so splintered?

    Pro agents know how many well-tended deals fall out. It makes you wonder if any residential real estate would ever get sold without us.

    Maybe a lot of college professors are lousy teachers because they’re disincentivized by tenure. Are agents getting a salary complacent like them? A commission agent has less incentive to service a client? If that last fallacy has to be refuted on an agent web site, we’re all wasting our time.

  • Robert Nowak says:

    The old commission model doesn’t work when some properties are selling for $40,000 or less. Buyer’s that are serious and want to work with an experienced agent will pay the fee.

  • Gary Lucido says:

    Interesting to see Chang-Tai Hsieh heavily quoted here. It was a 2002 paper of his that led me to my current business model, similar to Redfin but with true full service. As he says the biggest inefficiency in real estate is the prospecting. Agents spend a disproportionate amount of time prospecting, which is why I give my agents the leads I generate in order to improve their productivity.

    The other problem is the clients that waste our time, which is why I recently introduced an hourly model for buyers with a 100% commission rebate as well. At first agents don’t know what to make of it but once they try it they really like it. And serious buyers like it also.

  • Laura Mostardo says:

    Excellent article. Well researched.

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