2008 May 29th

One Hoboken Realtor May Be More Than Enough

With a Multiple Listing Service for Hoboken Real Estate, Everybody Wins

I had an interesting phone conversation this morning with a potential buyer of a Hoboken condo. He wanted to see condo properties in both Hoboken and Manhattan. I was explaining the difference between how real estate brokerages work in Hoboken (and New Jersey in general), where there is a multiple listing service (MLS), vs. Manhattan, where there is not.

If you are a Hoboken condo buyer and find a nice property on-line, say at trulia.com or notice a “for sale” sign on a building while walking down the street, chances are pretty good that the property is listed on the MLS. The agency that listed the condo has agreed to cooperate with every other agency in town to allow all agents to show that property. The more times a condo is shown to buyers, the more likely it is to be sold and at a higher price which is better for the seller. The sales commission agreed upon by the seller and the listing agent, typically 5% in Hoboken, is divided 50/50 between the listing agent and the agent that finds a buyer for the condo. If you’re a buyer and have developed a good working relationship with a particular agent, he or she can show you the place you found on line as well as any other property on the MLS. The buyer wins because the agent gets to know the buyer’s likes and dislikes, doesn’t waste the buyer’s time showing inappropriate properties, and by being loyal to that agent, he or she works that much harder to find the perfect property. After all, agents don’t make a penny working with the buyer unless the buyer actually buys a condo.

Agents Don’t “Compete” For the Buyer

At this point my caller objected. He said he would not work with a single agent because that would not be in his best interest. If all the different agents are competing with one another, he explained to me, he would pay less for his condo. Huh? I pointed out that if he were to buy a condo directly from the listing agent he would still pay the full commission. The entire commission would go to the listing agency. Listing agents don’t give up half the commission when they sell their own listings! Furthermore, I explained, the listing agent represents the seller. It is often debated whether it is a conflict of interest for a listing agent to also represent a buyer (called dual agency). How can a seller’s agent work for the buyer and act as a fiduciary of the seller with an obligation to obtain the highest possible price for the seller’s property? He still didn’t get it. If he didn’t want to work with a single agent and instead went to every agent in town telling them he wants them “to compete for him.” Outstanding agents with knowledge and skill are in high demand and don’t have the time or patience to deal with a “high maintenance” buyer who thinks he’s going to outsmart the world. This buyer may only outsmart himself winding up with an novice agent, and will end up paying the same commission anyway. The really good Hoboken agents often have more business than they can handle.

The Commission is Just “Wrapped Up” in The Sales Price

My caller may have thought that, as a buyer, he had some ability to change the commission to be paid. Maybe he erroneously thought that the seller pays the listing agent only half the agreed upon fee for selling the condo herself or that the fee varies depending on which agent he uses to find the condo – wrong again. The commission is set no matter who sells the home. Sometimes, a seller and listing agent do agree when listing the property that if it is sold “in-house” that is, by the listing agency, the fee might be 4% instead of 5%. That has to be disclosed in the listing information which every agent can see. Which agent finds the property for you has no effect on the sales price. With one exception.

An Agent’s Negotiating Skills Do Matter

When a buyer finds the condo of his dreams and makes an offer, it is the realtor who presents the offer to the seller’s agent. Although the offer is made in writing, hopefully in contract form, there is usually some verbal back and forth over the price until the offer is accepted. It is during this very important stage of offer and counter-offer that your agent’s negotiating skills are crucial. Who do you want working with you when you are a buyer – an excellent negotiator who has worked exclusively for you and know your financial constraints or the inexperienced novice agent who you just tried to scam out of a half a point? Of course, having an agent who communicates well, can express the buyer’s intentions accurately and clearly, avoids emotional entanglements like anger and disappointment, doesn’t make empty threats, and is smart and professional is in the buyer’s best interest. Negotiations can become complicated and heated, especially when there is more than one potential buyer involved. Having a good agent working for you when you find the condo of your dreams may be a great payback for having been loyal to that agent while house hunting. As for my caller, I wish him luck but I have no time for games.

  1. r

    If you think about it, the economic incentives of the buyer’s agent are not aligned with those of the buyer. The buyer’s agent yields a higher commission if the transaction occurs at a higher price rather than a lower price.

    A preferable commission structure for the buyer entails paying a flat fee to the agent plus a bonus per dollar saved from the ask price.

  2. Lori

    True. So if the sale price is $500,000 with a 5% commission, the buyer’s agent & agency receive half – 2.5% or $12,500 less a $200 listing fee paid to the listing agency. The agent gets anywhere from 50% to maybe 70% of that. Let’s say 60% just to keep the numbers simple. In this scenario, the buyer’s agent would receive $7,380.

    Lets say the same property were to sell significantly below the asking price – at a 10% discount, which is way over the average, or $450,000. Under the same commission structure, the buyers agent would earn $6,750. Total difference = $630.

    Do you really think a $630 differential is going to affect the behavior of an agent who is probably earning $100,000 a year?

  3. r

    Realtors aren’t in the business to do one transaction per year. Using your numbers they do 13.55 per year, which when multiplied by the savings differential of $630 is the not too minuscule amount $8536 or 8.5% of gross income; that’s a decent sized disincentive.

  4. Lori

    And realtors who live and work in Hoboken have ongoing relationships with the buyers who become their neighbors and friends. These buyers often have babies, move into bigger units and buy brownstones or sell and leave town. Fostering a good relationship with these people leads to way more repeat business and higher earnings than trying to get an extra few bucks on a commission.

    Plus your numbers assume a 10% difference in sales price which is entirely unrealistic in our market.

  5. r

    They are your numbers.

    I’m not accusing any Realtor in Hoboken or elsewhere of not acting in the best interest of the buyer. I’m just pointing out that the economic incentives between the buyer and buyer’s agent are not aligned. It’s a pretty inefficient model, like the retail Stockbroker model before Schwab and E*Trade.

  6. Lori

    I do agree with that. It’s an imperfect model and hopefully, it will have to change or evolve eventually due to the transparency provided by the free exchange of information on the internet.
    – Lori

  7. Ben

    To add to r’s point, a buyer’s agent has many more incentives to do a good job if the buyer is paying the commission. In the current system, the buyer has no legitimate recourse for poor service once a property is picked out (of course, one can switch agents prior to finding the perfect property).

    In the system r describes, the buyer can withhold payment or even forgo an agent all together. The later is certainly a very attractive option to motivated buyers, especially with the amount of information and number of listings found on the internet.

    Poor argument, Lori. I don’t think I want you negotiating on my behalf…

  8. Lori Turoff

    Interesting. Maybe you didn’t read my last comment. I happen to agree with r and partially with you, too. There is no question that there are many problems with the current state of affairs and that disincentives and conflicts do arise. The current system was not my design. It’s forced on realtors by the NJ Real Estate Commission. They limit the business models that brokerages in NJ are allowed to follow. You might say they are not the most progressive bunch. As a result, the consumer in NJ has limited choices. Other states, especially out west, have other models. See redfin.com for a great example.

    Personally, I would welcome redfin to NJ with open arms. I believe a merit based compensation system would help the competent agents to do even better and eventually the others would have to think about a different line of work. Maybe if all the homeowners, potential home buyers and home sellers in the state wrote their state congressional reps the commission would be forced to change. Until then, we’re all stuck with what they decree.

    Thanks for your comments

  9. Rick Belben

    A good buyers agent is going to get the best deal for the client. They surely are not going to try to make the sales price higher to earn more. Some buyers want to believe waht they want to believe. No amount of reason is going to change them.

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