Our mobile site is optimized for smaller screens.

TRY IT NO THANKS

Blog :: 11-2010

Selling In the Internet Age

Selling In the Internet Age

The internet has dramatically changed the way buyers of real estate search for property.

No longer do buyers spend hours on a weekend attending multiple houses. Gone too are the days when buyers read the paperto findreal estate listings. Buyers no longer even rely upon real estate agents to send them listings. Instead, buyers now do the majority of their own legwork and they do that legwork almost exclusively online.

Buyers typically start their search at a well known website like Realtor.com. They enter their general search criteria. They then begin to weed out the listings based upon the content they find online. Buyers tend to be attracted towards listings with more online content. For instance a buyer is more likely to click on a listing if there is a link to a video tour because it helps give them a better sense of the property. In a similar vein, buyers are less likely to click on a listing if it has very little content such as only one exterior picture of the building.

Once the buyers narrow down their list to 2-5 properties based upon their internet search, they will call their real estate agent and tell their agent which listings they want to see. The agent schedules the showings and helps the buyers in analyzing the property, buthas little to do with the actual selection of listings.

Because of the changes in the search process, Sellers need to adapt their marketing efforts to distinguish their listing online. It is important that sellers try to provide as much online content as possible. For instance, sellers should not only have pictures posted online but if possible should also have a video tour produced that can be viewed online by buyers. Sellers should also consider creating a separate website for their property so that there is simply more interaction for a buyer to experience online.

At Flat Fee Real Estate, we have adapted our marketing efforts to the new reality of the property search process. Since our inception we have created separate websites for our clients to help their listings standout online. We have also had videos produced for most of our listings. We have anecdotal evidence that buyershave beenmore attracted to our clients' listings as a result of the content provided online.

In addition to changing the way buyers search, the internet has made real estate agents much more efficient. Buyers are doing most of their own searching so the total number of hours required of a buyer's agent has been greatly reduced. For listing agents, the information and online tools help greatly reduce the time it takes to perform a market analysis and communicate this information to prospective sellers.

Because the interent has reduced the overall time commitment of each transaction, it stands to reason that the fees charged for the service should be reduced. That is why we have been able to offer a service that has historicallybeen charged at a 6% commisionfor a flat fee of $3,500 per transaction.

UNDERSTANDING TRANSACTIONAL COSTS IN A REAL ESTATE TRANSACTION

UNDERSTANDING TRANSACTIONAL COSTS IN A REAL ESTATE TRANSACTION

This article is geared towards buyers of real estate but may provide sellers some insight into the costs of the services being provided to them and the impact those costs have on the sale of their property.

When asked who pays the commission in a real estate transaction, nearly 100% of buyers unequivocally say "the seller". Even buyers who hire buyer buyer agents believe wholeheartedly that it is the seller that incurs the cost of the buyer's agent.

While most buyers believe that it is the seller who pays the commission, it is ultimately the buyer, and not the seller, that pays for the commission in a real estate transaction.

Every real estate transaction has "transactional costs". Transactional costs are those costs that are incurred in connection with the purchase of the home but that are not directly paid to the seller of the home. Transactional costs in a real estate transaction include but are not limited to inspection fees, bank fees, legal fees, taxes, town recording fees and wiring fees. Buyers must add these transactional costs to their budget when deciding how much they can afford to pay for a home.

Rarely if ever do buyers consider fees to real estate agents as a "transactional cost". However, just like the fees to the bank, lawyers, town, etc..., the fees to the real estate agents are a transactional cost. Like these other fees, it is a cost paid to a party other than the seller in connection with the purchase of the property.

The only difference between "traditional transactional costs", such as fees for an inspection, and agent fees is that "traditional transactional costs" are paid directly to the party providing the service. In the context of the real estate agents, the buyer pays the seller and the seller turns around and pays the agents.

If you think about, the buyer could just as easily pay the agents directly and simply pay less for the property. The seller and both agents would be left with the same amount of money in their hands at the end of the transaction, but it would just be paid in a different manner. Thus, the money in the agents hand at the end of the transaction is really the buyer's money and a cost to the buyer.

The easiest way to see that real estate agent fees are a cost to the buyer is to look at the sale of a home with 2 agents that charge commissions versus 2 agents that charge a flat fee for their service.

COMMISSION BASED TRANSACTION: Seller will only sell their home if they can walk away with $325,000. The seller has agreed to pay real estate agents a 6% commission (3% to listing agent and 3% to buyer's agent) as part of the sale. Buyer agrees to pay $346,000 so that seller can walk away with $325,000.

FLAT FEE BASED TRANSACTION: Seller will only sell their home if they can walk away with $325,000. The seller agrees to pay listing agent a flat fee of $3,500 and buyer's agent a flat fee of $3,500. Buyer agrees to pay $332,000 so that the seller can walk away with $325,000.

As you can see, when the real estate agents work for a flat fee, the buyer pays $14,000 less for the property and the seller recognizes the same profit for the home.

While there are few full service brokerage firms that are willing to work for a flat fee at this time, Flat Fee Real Estate of Burlington does. We even work as a buyer's agent for a flat fee.

When we represent a buyer as a buyer's agent, we refund the amount of our commission that is above our flat fee of $3,500. In the "Commission Based Transaction" above, we would have received $10,380 as a commission. We would have then refunded $6,880 to the buyer. Thus, the buyer would have paid $339,120 rather than $346,000.

Even though we are not able to save our clients the entire $14,000 from the two examples above, we are able to help save them a significant portion of that amount. Thus, our clients end up paying less and in some cases are able to afford more house than they otherwise could have thanks to the savings we provide.

Below is a more detailed example of a typical transaction to help illustrate the points above.

Example

Jane and John Doe are interested in purchasing a home. They hire a buyer's agent to help assist them in their search and purchase. They are looking for a home priced between $325,000 and $365,000. They would like to be on the lower end of the price range but are willing to spend a little more if the value is there.

Paul and Mary Smith would like to sell their home. They hire a real estate agent to assist them in the sale. Before listing their property, Paul and Mary review their finance and discuss their needs with the real estate agent. They tell the agent that they need to walk away from the closing table with $325,000. They estimate that the closing costs (before any real estate commissions) will be approximately $1,000. They have no mortgage on the property and so they need $326,000 to walk away with $325,000 after closing costs.

The agent tells Paul and Mary that he believes that their property is worth between $325,000 and $350,000. The real estate agent's contract with Paul and Mary says the agent will receive 6% of the sales price as a commission for selling their home. He says that in order for them to walk away with $325,000 as they desire, they will need to factor the 6% commission into their sales price. Thus, they will need to sell their home for approximately $347,000 in order to walk away with $325,00.

Paul and Mary put their house on the market for $349,00. Jane and John view many houses over a 2 month period, including Paul and Mary's home. Jane and John decide that of all the houses that have seen, they like Paul and Mary's home the most. It has everything that they have been looking for in a house.

After consulting with their agent, Jane and John decide that the Paul and Mary's home should sell for $335,000. They make an offer of $335,000 to purchase the home. Paul and Mary review Jane and John's offer and determine that they must reject it because after they pay the closing costs and real estate commission of 6%, they will be left with $313,900 which is $11,100 short of their desired amount.

Paul and Mary make a counteroffer to Jane and John of $347,000. While Jane and John believe they are overpaying for the home, they decide to purchase the home for $347,000. Paul and Mary are pleased because they will now be able to walk away with $325,000.

At the closing, Jane and John are given a statement which shows all of the costs that they owe. In addition to the $347,000 to purchase the home, they also have legal fees, title insurance fees, taxes and bank fees. Their total costs for purchasing the home are $355,000. They receive a mortgage of $200,000 and pay $155,000 out of their pocket.

After Jane and John deliver their check, the closing attorney disburses checks to the various parties around the table. The attorney delivers a check to each real estate agent in the amount of $10,410 (total $20,820). While the fund may have come at the closing, these funds actually came from the money provided to the closing attorney by Jane and John. Therefore, it was the buyer and not the seller that paid the commissions.

Comments

  1. Next Day Flyers discount on

    Hey! Thanks for the nice post, very informative.
    • Samy on

      There may be no benefits at all. Estate agtens get a lot of criticism but good ones can be very useful at all stages of the transaction. They will keep a purchase moving. Private deals often fail through poor communication with lenders and solicitors. Agents will chivvy were needed having secured the best offer in the first instance.References : Was this answer helpful?

      THE INESCAPABLE CONFLICT: BUYER AGENT COMPENSATION

      THE INESCAPABLE CONFLICT: BUYER AGENT COMPENSATION

      In the majority of real estate transactions in Vermont, buyer agents get compensated by the seller of the property. They normally receive 3% of the purchase price as a commission.

      There is an inherent conflict in this system.

      The role of an agent is to look out for the best interest of their client. In the case of a buyer of real estate, the agent is supposed to try to get the buyer the property they want at a price they can afford.

      A serious problem arises however when the buyer and seller are close to agreeing to a price but because of the fees to the buyer's agent the two parties cannot finalize the transaction.

      Assume for a moment that a buyer finds a home that he would like to purchase and that it is listed for sale at a price of $275,000. The buyer informs his agent that his budget does not allow him to spend more than $265,000 for this home.

      Based upon his client's budget, the buyer's agent presents an offer of $265,000 to the seller. The seller informs the buyer's agent that the seller needs to net at least $259,000 from this transaction to cover all of their costs. The seller decides to reject the offer because after paying the buyer's agent a 3% commission, the seller will only be left with $257,050, which is not enough to cover their costs.

      The seller suggests to the buyer's agent that the agent reduce his commission from $7,950 (3% of $265,000) to $6,000 so that the seller can realize a return of $259,000 and cover their costs.

      What should the agent do in this scenario? If he adheres to his promise to look out for the best interest of his client, he will reduce his commission so that he fulfills his role of helping his client get the property he wants at a price he can afford.

      However, there are very few, if any, agents in Vermont that currently believe that they should reduce their commission to help finalize the transaction. Most agents view their compensation as distinct from the transaction between their client and the seller and this is where the root of the problem lies.

      The only way to eliminate this inherent conflict is for buyer agents to work for a flat fee. To our knowledge, we are the only brokerage firm in the State of Vermont representing buyers for a flat fee.

      When we represent buyers, we receive $3,500 for our services. If our commission is more than $3,500, we refund the balance of the commission to our client.

      For instance, if our client purchases a $300,000 home, we only keep $3,500 from the seller's commission and give the balance to our client. Thus, our client receives a $5,500 check from us at the time of closing.

      Unlike most agents who receive higher compensation when their client purchases a more expensive home, our clients actually save more money when they purchase a more expensive home. This removes the inherent conflict and allows our clients to know that we are acting in their best interest and not our own.

      Comments

      1. Gaby on

        The beginning of the pesorcs is to see how much of a mortgage you can qualify for. Once you know this you can look at areas in your price range. This is a good time to get a real estate agent to get you a list of homes in the area of your choice and price. Real estate agents can sort through the hundreds of homes for sale and narrow it down to what you what to see. Agents will schedual times to view homes. Agents will give you detailed full features sheets of each home you view. Agents will do market valuations of homes to verify the market value. This will give you an atvantage when putting in your offer. Agents will write up the purchase agreement and present it to the owner/owners agent and negoitiate . Agents will followup on the conditions and make sure they are complete and removed on time. Agents will make arrnagements to have all documents delivered to laywer. Agents will make arrangements to get keys on possession day. And much more,

        • Read More