For as long as people have been having to work through agents to buy properties, there have been people looking to change that workflow. Trust me. As someone who buys properties and had to go through agents to do so, I get it. Most people know I’m a real estate broker in California. Not everyone knows the whole reason I got my license is because I was sick of the agents I used knowing less about real estate than me. At a certain point, I just decided to go for it, get my own license, and work with my friends and family.
That was about five years ago. Today, my team is doing great. We are helping people sell their homes for ridiculously good prices. More than my competitors get for their clients. We are also helping buyers get properties under contract—often when there are 10-15 other buyers going after the same properties. In addition to that, we’re doing everything I wanted agents to do for me when I was buying. That includes analyzing deals, running numbers, helping with rehabs, explaining the loans, and more.
I’m also still buying properties. That means I’m relying on agents to do a lot of these same tasks, and I’m often disappointed. I’m one of the few people I know who experiences this frustrating situation from both sides. I’m an investor who wants an agent to help me, and also an agent who sees how often we are dismissed, discredited, and disregarded. There’s clearly a problem in understanding each side’s position, and this blog post is written to hopefully help address that.
But first, let’s lay out where most of the problems arise when working with real estate agents.
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One of my favorite quotes is “Blessed is he who expects nothing, for he shall never be disappointed,” by Alexander Pope.
My oh my, isn’t this true? Just about every form of conflict we experience in this life comes down to unmet expectations. Consider you buy a ticket for a flight to Hawaii. You are warned there may be massive turbulence. You’ll likely be nauseous. There will be screaming babies on the flight, no food served, and no alcohol available. Your legs will be cramped and it will be a constant stream of getting up and sitting down to let others use the lavatory. In spite of all this, you buy the ticket anyway. Why? Because it’s Hawaii. It’s worth it.
Now consider you buy the same ticket, but you are oversold. The airline does not tell you there will be no food or drink. You assume there will be because there was the last time you took the flight. The airline shows you marketing photos of relaxed people, lying back and sleeping soundly with plenty of foot room. Basically, you’re sold that the flight itself will feel like Hawaii. This is what you have in mind when you buy your ticket.
Now, assuming both scenarios end up with the exact same flight, in which circumstance do you enjoy yourself with a more positive attitude. Only the first. Why? You had appropriate expectations going in.
It’s important to be given realistic expectations up front—especially if those expectations are lower than we would have previously thought. This works for a simple reason. When we know what we are getting into and we decide to move forward anyway, we are willingly buying into the process. In essence, we are becoming a partner in the experience. A willing one.
Consider one more example to clarify. Imagine going into a restaurant. You ask about the wait time. They tell you one hour. You decide that is worth it, and put your name in. Fifty minutes later they call your name. You’re thrilled it was 10 minutes early. You love this place.
Now imagine they tell you ten minutes to wait. You agree. Fifty minutes later they call your name. Same exact outcome, but you’re furious. You hate this restaurant. You’re fantasizing about negative Yelp reviews the entire time. You chose to wait, but during the waiting, you ruined your experience. It probably doesn’t matter how great the waiter was. It’s never going to be enough. They’ve got an impossible hurdle to climb. What’s the difference between the two scenarios?
In the first, you willingly agreed to wait for the hour. You maintained a sense of control in your outcome. In the second, you never agreed to wait for an hour. Because of that, you had no control over the outcome. (You felt powerless to make an open table appear faster.) When we don’t feel we willingly agreed to partner in an experience, we’ll be resentful when something different is imposed on us.
Put simply, most agents are absolutely terrible at setting proper expectations. This happens for so many reasons. A few of the most notable:
Why agents struggle
The best agents are high “I” on the DISC profile—which stands for the “influence” sector of their personality. This makes them personable, but concerned with not being liked or disappointing people. They don’t like to share information that may upset you. A recipe for unmet expectations.
Agents are also given notoriously poor training. There is no “right way” to represent a client. Almost no agents give formal presentations or consultations with clients to set purposeful expectations. If you’re one of the few who do, kudos to you. (My latest book, “SOLD: Every Real Estate Agent’s Guide to Building a Profitable Business,” covers this topic.) Even so, you’ve got to admit it’s the exception, not the rule.
Agents know if they tell you what you don’t want to hear, you may go find a different agent who tells you what you want. This disincentivizes them to be more direct. The listing agent who shoots straight on list price may lose to the agent who’s much more liberal with it. The buyer’s agent who highlights how stressed you may feel loses to the agent who paints the prettier picture. It’s a foolish way to construct a fiduciary system, but still. It is what it is.
This may come as a surprise, but according to the numbers, there are too many real estate agents out there. The barrier to entry is low, and lots of agents get into the industry who never should. Because of this, most agents don’t sell many houses. This makes them somewhat desperate to land clients. This desperation temps many of them to close the deal at the expense of their clients. A big no-no, but still, it happens.
This same overabundance of agents causes many of them to try their best, but just lack the experience to know what to do. This isn’t meant as a brag, but I routinely out-negotiate or outmaneuver the other agents in the escrow. My team does the same. It’s not because I’m smarter than everyone else. It’s because I have more experience. I’ve seen more deals play out, understand more of the nuance of the situation, and have more resources at my disposal. I’ve just seen more hands of poker than my competition.
For context, if you sell six houses a year at my brokerage, you’re one of the upper tier agents in our roster of 100. For context, I’m averaging about 30–40 a month. I see five times the amount of deals a good agent does in one year in one month. For other top-producing agents, they can put you in a position to win so much easier than those trying to break into the business. As with any industry, more experience equals better results.
When you consider the cutthroat nature of the business, it’s easier to understand why realtors fail to correctly set expectations with their clients. Please understand that I’m not justifying this. We work hard to be intentional with the clients on my team about what to expect.
The commission structure
Now, let’s talk about why agents may set unrealistic expectations. The primary answer comes down to the way agents are compensated—commissions.
Commissions are one of the most unpopular components of the way real estate sales work. Most clients don’t like them, brokers want more of them, agents need them, and people don’t understand how many ways they are split up. I’m not here to defend the commission structure system (that would probably enrage over half the community), but I would like to present what it would look like if we didn’t operate by commissions. Hopefully I can help shine some light on why agent’s behave the way they do, so you can be in a position to maneuver through these relationships more deftly.
In real estate sales, commissions are typically paid by the seller to both agents. The listing agent negotiates the commissions for both parties. While buyers agents are legally allowed to charge their clients a pre-agreed on commission, it rarely happens. This means buyers agents are at the mercy of whatever the listing agent negotiated for them. Yes, the same listing agent they will be going head to head with, on your behalf, decides how much they get paid. (Unless you want to pay them more—how many times have you offered that?)
It used to be common for each agent to make 3% of the commission. This 3% was split up among the brokers, office fees, errors and omission insurance, transaction coordination fees, desk fees, MLS fees, supra key fees, marketing expenses, gas, and any employees the agents employ to make your experience better. Agents don’t keep the full 3%.
Now, that 3% has become a bit of an anomaly. In my market, I see a 3% commission being paid to the buyers agent maybe one time out of 100 deals. When we see it, we call it the “unicorn.” (Side note: if you’re listing your house, consider offering this. Every buyers agent in town will be pushing your property over the competition.) To sum up, agents’ commissions are compressing.
This all happens while more and more agents are getting licensed— creating more and more competition. See how that could create problems for getting the straight and direct feedback you need right from the beginning?
The “discount” model
Many brokerages are trying to win new business and break into the market by offering back parts of the commission to the buyers themselves if they buy with that company. This always sounds great to the person receiving the credit, but let me ask you this question: If you were a good agent—who knew what you could do to save your clients money—would you ever work with that company? It’s not popular to say this, but it’s common industry knowledge that the worst agents tend to be drawn to the “discount” model.
Many bad experiences come from the buyer who chose the Walmart agent but expected the Hilton experience. So if commissions are causing this much drama, can’t we just erase them? We can! Let’s talk about what that would look like.
A world without commissions
First off, many agents would be thrilled with this. Investors are often irritated with agents. But trust me, agents are warned just as frequently about investors, or, buyer clients in general. We don’t always think about it, but try to imagine how much time agents spend:
- Driving clients to show houses
- Researching tax records
- Analyzing deals
- Getting rehab estimates from contractors
- Trying to get clients pre-approved with a lender
- Scheduling showings
- Writing offers
- Getting info from listing agents
- Speaking to new leads and answering their questions
- Taking late night phone calls
- Answering copious emails
Now, consider how often this happens and the client never buys the house. Or worse, they go to another agent to buy the house. It’s not really looked down upon in the real estate community to use an agent when it’s convenient then leave them for someone else. When this does occur, agents make nothing. That’s because they are only paid when a house closes, aka through a commission.
If we get rid of commissions, you’d have to pay an agent for their time. Much like a lawyer. You would pay them hourly, or pay them a retainer to be available to answer your questions. Brokerages would become like law firms. Every time you wanted a question answered, help with your lender, something explained to you, or a form filled out, there would be a fee attached to that. If you really think about it, this would become extremely costly. What’s worse, you wouldn’t be able to finance it.
When the seller pays your agent’s commission, you don’t have to include that commission as part of your closing costs. This saves you a ton of cash. In a sense, the commission is built into the price. The seller doesn’t get the $800,000 you paid. They get the $800,000 minus the $48,000 they pay in commissions—minus all the other closing costs they have to pay. Because the seller is paying for all this out of the purchase price, it’s actually more accurate to say it’s being paid with the lender’s money. Not the buyers.
Your ability to finance your agent’s pay at very low interest rates makes the entire real estate sales world easier to accomplish for the buyers. If you had to pay your agent’s 2%–3% commission, plus your 3%–10% down payment, plus your lender’s closing costs, how much longer would it take to save to buy a house?
Who really benefits from no commissions?
Not only would this benefit the already wealthy, but it would make it extremely difficult for the first-time home buyer to afford anything. That’s some serious cash to have to save! If this is the way things were done, and only the wealthy could afford homes, would that be better for you?
Now consider another advantage the wealthy would have. Because they are likely more experienced buying homes than you, they would have fewer questions to ask of their realtor, need less hand holding, and therefore, pay less money in fees for the agent’s time. For the person buying a home for the first time, or who doesn’t do it very often, this would be another disadvantage. They would be paying more for the same result than the person who needs less of the agent’s time. As it stands now under the current model both sides pay the same amount.
Furthermore, if you’re the newbie and have to pay for the time you need, you’re less likely to ask the questions you need answered to feel comfortable. This means more problems being overlooked, more money lost, more bad experiences, and, yes, more unmet expectations. It also means less people would eventually learn real estate investing, or real estate ownership in general. As the easiest and least risky way for the average American to build wealth and establish financial freedom, that would be tragic.
More on real estate agents from BiggerPockets
So, what can be done to fix the relationship between agents and homeowners/buyers?
First off, understand that just because an agent isn’t telling you what they are doing, that doesn’t mean they aren’t doing a lot. If you had to do all the work that’s required, you’d probably run right out and find an agent to help you.
Second, understand that just like all attorneys are not the same, and all mechanics are not the same, not all agents are the same. Having a license does not make you good at what you do. You’re better off looking for experience, directness, and an agent who has a firm understanding of what you’re trying to do than whichever agent is most convenient to contact or willing to discount their commission.
In today’s market, it’s extremely hard to find a good deal. What I mean by that is there is a ton of demand for housing and not enough supply. Sometimes, just getting the deal at all is a win. Every market is different, but if rents are continually increasing where you live, paying more than you thought you should for a house can still be a win for you if you lock a mortgage in place while rents around you continue to skyrocket. Having an agent who is aggressive, smart, and knows which properties to pursue (and which to avoid) is more important than ever.
The same comes with selling your house. Consider my market. My average price point is probably $900,000 or so. It’s not uncommon for sellers to want to sell their house for 5% instead of 6%. That 1% commission is a total of $9,000 to them.
How agents pre-negotiate
Consider that I frequently negotiate deals for $50,000–$150,000 over “fair market value” (based on comps). Here’s what you may not know: Before I ever bring an offer to my client, I’ve already contacted the listing agent and negotiated it much higher. Before I advise my client to accept the highest offer we received, I go back to the other agents and push them even higher on price and terms.
I call the lenders of the buyers to make sure they are approved to go as high as the buyer agrees to. I make several rounds of calls to squeeze every dollar I can out of the other side. This is the standard our clients can expect from us.
Now my point is does it make sense to argue with me over that $9,000 in commission if I can make you an extra $50,000 just by pouring more effort into your deal? People hate commissions so much they forget how small a part they play in the whole deal. It’s simply foolish to worry more about such a small number when your agent can make such a big difference in your net outcome.
I know saying this will be unpopular. Many agents who discount their commissions will reply, “I would still try my very best!” Many sellers would say, “I expect my agent to do their very best job regardless of the commission!” That’s all well and good. What I’m saying is, we routinely out-negotiate these same agents you’re speaking of.
There is actually some skill involved in this. And as the person choosing the agent to represent you in a home sale, this really matters, especially in a hot market where homes “sell themselves.” You’re not paying an agent to sell your home. You’re paying them to maximize your profit.
How the best real estate agents think
The best listing agents do this by anticipating problems, removing them, taking leverage away from the other side early, marketing your property incredibly, putting it in the best position possible to sell, and then negotiating for every dollar.
When a market is this hot and challenging, the stakes are higher. It’s more important you choose an experienced, knowledgeable, and skilled agent, especially now. Don’t believe the hype that the agent doesn’t matter. The right one can get you amazing results, whether on the buyer side or the seller side.
My anticipation is we are going to see a lot of changes in the real estate sales market. I expect to see a massive amount of marketing aimed at you—the consumer and potential clients—to convince you that this company, brokerage, system, or product is better than all the others. It’s a tough spot to be in and difficult to know how to interpret everything that’s coming at you.
My hope with this post is to pull back the curtain and give you a look behind the scenes of buying and selling real estate. I’m an agent, investor, and I make my living through owning real estate as well as helping others do the same. I talk about it every week, and I obsess over understanding this industry at a high level. When it comes to how I purchase my own real estate, I put a lot of thought into choosing who represents me. I hope you do the same.