Real Estate Agents OVERCHARGING Homebuyers?

October 3, 2022

Real Estate Agents OVERCHARGING Homebuyers?

I saw this crazy article on Business Insider that says real estate agents are overcharging homebuyers. I’ve been in the industry for 20 years as an owner, investor, and license holder, so I took a look at what the article had to say, and it sounds like someone in Business Insider is very angry.

The article is titled “Meet the overlooked monopoly that’s overcharging homebuyers $72 billion a year” written by Mattathias Schwartz.

He starts with a story of his experience buying real estate, and based on his story, his agent earned her “commission”—"$26,250, the full 3% that remains customary among agents, especially in major cities,” he writes—by kicking down the asking price on the home and offering comfort and advice during the stressful process.

Which, to me, sounds like the agent did a pretty good job for him, and he’s just angry for some reason.

The article continues, and he said, “Both agents were paid out of the seller’s account, which created the appearance that Linda’s services didn’t cost me anything. But of course, all of that money had been generated by our down payment, and by the mortgage we took out on the place.”

That’s interesting to note, because the way we look at it, both the seller and the buyer are paying for the services of their agents—the buyer is paying for the house and the seller is not getting that portion of the money.

He compares real estate agents to doctors. According to him, we are the “friendly, knowledgeable face of a bewildering, price-gouging system” and that the real estate industry is effectively a monopoly which, in Mattathias’s words, “works to keep the fees high, stifle competition, and control access to the best listings.”

He continues and says, “In some cases, real-estate agents even drive up the cost of homes by pushing for all-cash offers and ‘escalation clauses’ that trigger automatic bidding wars—moves that, in turn, drive up their commissions.” This, he says, results in Americans paying more for agent commissions than homebuyers in other nations.

Look, when you look at it from the seller’s side, the agent representing the seller has the fiduciary duty to the seller to do their best job for the seller—paperwork, contracts, negotiations—as well as to get them the best price possible. That is the whole purpose of the all-cash offers and “escalation clauses”—to get the seller the most money possible.

That is how it is in a free country. That’s how capitalism works.

He says, “If Americans paid the same rate as the British, they would save more than $72 billion a year in real-estate commissions.”

There’s also a graph that shows the US has far higher rates than other developed nations, second only to Japan.

The article is quite lengthy, so, if you want you can read the whole thing on the website in your own time. I’m just going to break down some of his key points as to why real estate is a “monopoly” and how we real estate agents are overcharging people.

Key points from the article

Here are some of the points he brought up in the article:

Why “agents are not our friends”

Mattathias says that American agents keep the inflation high on properties at two levels:

I think it is actually the opposite. Because we live in a free country and sales are one of the great things we do, real estate does spur competition, which he himself glided over when he wrote about automatic bidding wars due to all-cash offers and “escalation clauses.”

He also says that real estate consumers “are at a disadvantage because they have little information about how real-estate transactions actually work.” 

But whose fault is that? The internet is readily available to all of us, and you can find information on Google, and even on social media sites like Facebook, TikTok, and YouTube.

If I am going into surgery, I’m going to find out as much as possible about the procedure that I’m about to have. I have Google for that. So do you. So do all of us.

He quotes Max Besbris, a Sociologist at the University of Wisconsin, and author of Upsold:

“When you’re a buyer and you ask, ‘How do I pay you?’ they say, ‘Oh, I split 6% commission with the seller’s agent.’ They don’t tell you that it’s negotiable. I don’t think consumers understand that it’s a norm, not a law.”

And look, if your agent says that, they are doing a crappy job. It is negotiable. They are supposed to say it is negotiable. That’s how I say it, and how a lot of agents I know say it. We say “It is negotiable and we usually split it with the seller’s agent.”

If that is what your agent said to you, I’m sorry you had a bad agent. But this is an example of irresponsible journalism, and it reads more like a bad review because of one bad experience from a lousy agent.

He also mentions that getting licensed to be a real estate agent is not difficult, which I agree with. I have no qualms with this. “…all it takes is a two-week course and passing a state exam,” he says.

“But because both commissions and the stock of available housing are fixed, the market isn’t able to correct for the sudden glut of brokers by regulating supply or demand,” Mattathias continues.

The commission isn’t fixed. The amount of housing isn’t fixed either, so I am not sure what he is referring to.

Monopoly rules

He also likens the real estate industry to a cartel, “a group of independent firms that collude to fix prices and stifle competition,” he says. How do we do that? Apparently, according to him, through the MLS (Multiple Listing Service).

Regarding stifling competition and fixing prices, I would argue that we do the opposite because if you are working for the sellers, the idea is to get as many offers as possible, therefore encouraging competition, all to get the best price or the best terms for the seller.

As for the MLS, Redfin and Zillow also have the same information.

He argues that listing agents, on most systems, post properties for sale on the MLS (under the category “Coming Soon”) which is only accessible to other agents who pay to subscribe. This, he says, leaves buyers who want to compete for those “fastest selling and desirable properties” to use an agent with MLS access.

Mattathias cites two studies that “prove” getting an agent to represent you doesn’t necessarily mean getting a better deal. He says that:

As an agent, I don’t necessarily “steer away” from deals with lower commissions. I’ve sold many homes for less than 2% and if my buyer wants the home, I will go for that home. Commission is negotiable. I’ll do it.

He also cites “conflicts of interests” in states that allow dual agency, where agents from the same brokerage are allowed to represent both the seller and buyer in one transaction. Not all states allow this, but that’s how it is in the US—you are allowed to make more money in a free, capitalist country.

According to him, “When Zillow and Redfin launched two decades ago, part of their promise was to disrupt the existing model at a lower price. In its early years, Redfin listed properties for a flat fee of $2,000 and rewarded buyers with lavish rebates. But over time, the rebates have gotten smaller, and the company’s business model drifted closer to that of a conventional brokerage, albeit one that charges sellers a discounted commission of 1%. Zillow, meanwhile, is mainly an advertising platform, enticing prospective buyers with listings and then encouraging them to sign with agents and lenders who pay Zillow to generate leads.”

We all know that Redfin and Zillow came into it, not to offer consumers lower prices, but to create a business and generate profit from it. They want a piece of the commission. That’s the real reason. Not to “disrupt the existing model” and certainly not for the consumers.

And with Zillow and Redfin, and other companies in the picture, where’s the cartel?

The fact is, they do a crappy job, and agents are there who, for the most part, do a better job at getting the consumers what they want and need.

How to beat the system

Mattathias offers how buyers and sellers can “fight against this monopoly.”

His advice for sellers includes:

The thing is, most sellers do not have time to do the agent’s job, and those solutions don’t simplify things for sellers, in fact, it complicates the process for them more.

It is simpler, and most of the time safer, to sit down with agents and interview the best agents out there. Ask them questions like:

Call the people who’ve worked with those agents before and ask them about their experience.

That’s how you, whether as a buyer or seller, can make sure that you can get somebody who’s going to negotiate for you and do a good job.

For buyers, he says you can opt to pay for a lawyer for a few hours of work to handle all the documents, which can save you around $10,000 for a $500,000 home. “The tricky part is getting past the seller’s agent, who may badmouth your offer to the seller if they feel as if you’re skirting established industry practices,” he says.

Here’s the truth: If we see someone with no experience, bringing in an attorney, we ask ourselves, or the lawyers, “How many transactions have you done?” Of course, it is going to raise a red flag, because we know that chances are high that that transaction’s going to be crappy as hell.

Not all lawyers are well-versed in the real estate process. They might forget to fill in some documents, and they sure as hell can’t negotiate properly for you. This kind of setup can end with you getting sued.

Now, check this out, he continues to say, “Finally, don’t listen if the seller’s agent tells you not to worry about the commission because you’re not the one paying for it. Every dollar that is paid out in a real-estate transaction—to sellers, agents, inspectors, insurers, and the IRS—comes from you, the buyer.

No, that is not true. There is also a lot on the seller’s side. Both the buyer and seller shoulder the fees, this isn’t a one-sided type thing.

He adds, “If a savvy agent has control of a particular house, neighborhood, or network of buyers, the benefits of paying full commission can easily outweigh the costs of trying to hack your way to a better deal. What’s needed ultimately, is better regulation.”

Apparently, to him, this market is out of control and we need to regulate it. This person’s mindset does not belong in a free and capitalist country like the US.

He also says that regulation is necessary to protect real estate startups like Zillow and Redfin who offer discounted commissions from being pushed out of the marketplace by us real estate agents.

My main takeaway

Reading this article three or four times, the words that were used are used to make people reading this feel angry. That is irresponsible of this journalist. I think this is the first article he’s written about real estate, but the fact is this is the crap that people are reading.

I am showing you this because this is a real article on a website, Business Insider, that has clout. I am flabbergasted that they have a garbage journalist for this. 

At the end of the article, it turns out that these are one-sided opinions from him, backed by “research” that supports his stance on his bad experience with one or two real estate agents, maybe.

He says towards the end, “I don’t regret having used Linda as my agent when we bought our home, even though the system was clearly rigged against me as a consumer.” He also relates the story of how, after the deal closed, he received gifts from his agent, which is an act of customer service on our end, but he viewed it as a “tool” and a “smart business move” that gets the agent more referrals and expands her network.

That’s what we call marketing.

So, be careful what you read out there. There will always be irresponsible journalists even on platforms with a good reputation and clout like Business Insider, who will write careless articles based on one-sided opinions.

Always look at the information you consume with a critical mind and open eyes, and remember to look at it from different angles–because anyone can frame the same scenario with different lenses, and the frame of reference makes all the difference.