The Limits of Sales Incentives

Overpriced + Fat Payout = Overpriced

Can a whopper of an agent bonus move what appears to be an overpriced listing?

This South Minneapolis duplex (pictured above) would certainly seem to be an excellent test case.

Listed Friday for $430,000, what jumped about the listing -- besides the modest curb appeal and aggressive asking price -- was the $7,500 agent bonus being dangled in the "Agent Remarks" field.

Agent to Client: 'Buy THIS One!?!'

Unbeknownst to many prospective Buyers, MLS actually has two fields with descriptive information: the "Public Remarks" field, viewable to everyone; and the "Agent Remarks" field, intended only for agents.

Given that the standard, 2.7% payout being offered to the Buyer's Agent comes to $11,610 on a $430,000 property, a $7,500 bonus is certainly eye-catching.

Will that bonus goose showings?

Probably.

But when prospective Buyers arrive, they'll see a modestly-sized (2,400 square foot) property with an asking price that's almost $200,000 above the tax assessed value of $231,500.

That's a helluva premium, even for a duplex that's been completely updated, as this one is supposed to be.

Which is likely to prompt the prospective Buyer to ask, "what on earth are they thinking??" -- followed in quick order by this one, addressed to their Realtor, "exactly why did you want me to see this one so badly??"

That's why I make a practice of always providing my clients with the (unabridged) "Property Full" report from MLS.

In other words, they see what I see.

Standing Out From the Crowd

None of which is to say that I'm a critic of Realtor sales incentives.

Far from it (see, "4%!").

In fact, prospective Sellers who face scads of competition from other, near-identical homes would be well-advised to consider hiking the Buyer Agent payout from the standard 2.7%, to 3.15%.

Money motivates, and nobody (that I know) is selling real estate for the sheer thrill of it.

And yet . . . .

Sales incentives work best in conjunction with an otherwise well-priced, well-marketed home -- not as a substitute for those things.

Going back to the duplex discussed above, if the Seller were really serious about selling, they'd price at something like $299,900 and offer a 3-point-something payout.

4%!!

Realtor Pay-Out's Rise with Inventory

No, mortgage rates didn't hit 4% over the weekend.

Rather, that was the pay-out being offered on not one but two of the homes I showed over the weekend.

In fact, out of 8 homes I showed, fully half offered above the standard 2.7%.

Commission Primer

For those who don't know, "pay-out" refers to the commission offered to the Buyer's Realtor. By contrast, the listing commission is what the agent representing the seller gets.

In both cases, the Realtor further splits their half of the commission with their broker.

In fact, the convention -- at least in the Twin Cities -- is to split the commission 55-45 between the Listing Agent and Buyer's agent.

On a "full service" 6% commission, that works out to 2.7% for the "buy" side.

Fatter Carrots

So offering 4% instead of 2.7% is certainly attention-getting.

Why do that?

Most frequently, it is Sellers whose homes have lots of competition.

If your home is one of dozens that prospective Buyers are considering seeing, offering a fatter carrot to the Buyer's agent is one way to ensure that the Realtor shows your home instead of a competing home.

Does it work?

It can't hurt.

However, a scrupulous Realtor takes care to show the homes that offer the most to their clients -- not the ones they stand to make the most selling.

Just so my clients know that I'm "putting my money where my mouth is," my policy is to always provide them with what's called the MLS "Property/Agent Full" report.

Unlike the more abridged reports, the "Property/Agent Full" version shows everything that the agents see -- including the payout commission being offered to Buyers' Agents.

Foreclosure Headache #7 (and #9, #17, #22, etc.)

Lack of Standardized Contracts
Creates Foreclosure Can of Worms

From a realtor's perspective, representing a Buyer trying to purchase a foreclosure can present an endless can of worms.

For starters, there's the issue of the house's condition. What is it?

Unlike a typical owner-occupied home, there are no disclosures, and the Buyer usually must agree to purchase "as-is." Since no one's home, literally, anything can -- and does -- go wrong. Because foreclosed homes in Minnesota are frequently winterized, one of the first issues to negotiate is how -- and sometimes even if -- the prospective Buyer can test the plumbing, heating, and other major mechanical systems.

A second hurdle is response time. Unlike a typical deal, where a sale negotiation can be consummated in 24-48 hours, with many banks the equivalent timetable is weeks (I've even heard of months, in a few cases).

However, undoubtedly the biggest headache associated with foreclosures is, shall we say, the "variety" of bank-required contracts (suffice to say, there are as many bank-required legal forms circulating as there are bank-owned properties). That lack of standardization not only creates a great deal of uncertainty, but can be time-consuming, and can present novel traps and pitfalls for Buyers (and their realtors) each transaction.

Not Just "Boilerplate"

One of the biggest advances in residential real estate the last few decades, at least in Minnesota, is the adoption of standardized purchase agreements and addenda. While the 20-odd page, single-spaced contract you signed when you purchased your home last year may have said "Edina Realty," "Coldwell Banker Burnet," or "ReMAX," the underlying document is the same in virtually every deal.

As Martha Stewart might say, "that's a good thing."

Unbeknownst to most consumers (and unfortunately, not a few realtors), the standard real estate contract is a dynamic, constantly evolving document.

In fact, each year, the purchase forms undergo a series of tweaks and adjustments to address new market conditions (like the prevalence of short sales now); conform with any new state or federal law; and to refine earlier language that has proved problematic.

That combination of standardization and constant updating greatly streamlines the deal process, by creating conventions for handling the complications and ambiguities that can be part of any transaction.

To pick just one example, consider the Financing Addendum.

The standard Minnesota form balances the Buyer's need for time to firm up their financing with the Seller's need for certainty. The compromise is to set a specific date by which the Buyer's lender is to provide a "Written Statement" to the Seller indicating that the Buyer has secured their financing.

What happens if the Buyer's lender doesn't do that? The Addendum explicitly addresses what happens to the Buyer's earnest money, the effect on the transaction, each party's relative rights, etc.

Custom Contracts

Now throw all that out and start over with the bank's required forms.

How much time is the Buyer allowed to line up their financing? How are they to communicate lender approval? What happens if they can't get it? Under what circumstances does the Seller get to keep the Buyer's earnest money -- and when do they have to give it back?

As they say, "read the fine print." And if the fine print happens to be ambiguous . . . prepare for some friction and (more) delay, at the very least. (As a general proposition, you can assume that banks are inserting/deleting language to increase their rights and limit their liabilities relative to Buyers.)

Similar issues can arise regarding the Inspection timing and the Buyer's ability to back out; the scope of Seller disclosures (usually, just disclaimers); and responsibility for any third-party claims on the property (delinquent taxes, contractor liens, etc.).

After navigating all these issues, and investing a few months of their time, Buyers (and their realtors) are as likely as not to discover that the Buyer's offer has been knocked out by another, higher one.

For all this aggravation, you'd think realtors would get a bonus, right? No way.

Not only is the typical foreclosure steeply discounted from the average market price (about $180,000 now), but the "payout" (the commission offered to the Buyer's realtor) is heavily discounted, too.