Earlier this week the Tribune reported that Koenig & Strey will begin charging home buyers a fee for the privilege of working with one of their real estate agents. According to the article here are the key elements of the new program, which the Tribune claims has been common in other parts of the country for more than 10 years but not in Chicago:
- Whether or not the buyer is charged the fee and how high the fee is is at the realtor's discretion
- The fee will be paid up front but will be refunded to the buyer at closing from the proceeds of the realtor's commission
- Obviously if the buyer never buys a home there will be no refund
- Regardless of the fee charged the buyer is obligated to ensure that at closing Koenig & Strey gets paid 2.5% of the purchase price + $250. If the commission is at least 2.5% then the buyer is not on the hook for that amount.
Interesting. Let me point out a few things, starting with the fact that this is at the realtor's discretion. So it will be interesting to see how many Koenig & Strey realtors actually embrace this policy. This whole concept may just prove to be a non-event except for the $250 fee at closing - and I bet the realtors will eat that fee on behalf of their clients.
Also, it turns out that most of what Koenig & Strey is proposing is already included in the Chicago Association of Realtor's buyer's agreement that is often (but not always) used today. It reads in part as follows:
In the event that the seller or listing broker does not pay Broker a commission, then Buyer shall pay Broker at the time of closing, compensation equal to _______% [percent] of the purchase price of the Property which Buyer acquires during the Term of this Agreement (“Acquisition Commission”), whether or not the Property has been identified by Broker to Buyer......If Buyer enters into an agreement to acquire Property and the closing does not occur because of any fault on the part of Buyer, then Broker shall still be entitled to the Compensation set forth above.... Buyer shall pay Broker’s Designated Agent a non-refundable retainer fee of $______________ which shall be due and payable to, and shall be considered earned by, Broker upon signing this Agreement.
Basically it has been assumed for a while that buyer's should pay realtors for their services and why not? Of course, I have no idea how many buyers agree to these terms today. But it's interesting to note that in the comments section of the Tribune article the reaction from people is pretty negative. But people who comment on an article like this are probably part of a biased sample.
Why is Koenig & Strey charging buyers?
We've actually had this discussion a few times on Cribchatter. One of the reasons real estate commissions are so high is that clients that actually close deals are subsidizing clients that don't close deals and the large dollar transactions are subsidizing small dollar transactions. The way the more successful agents become "top producers" is that, rather than just being good realtors, they are exceptionally good at figuring out how to allocate their time in the most profitable way possible. They actually interview potential clients to find out if they are worth working with. Only the most desperate realtors will take on a buyer looking for a $65,000 short sale that will effectively pay less than $10/hour.
So what Koenig & Strey is doing here is trying to level the playing field and mitigate some of the subsidies that exist. In fact, just the imposition of the fee itself will probably self select the more serious buyers.
We've struggled with this same problem - especially since we share the real estate commission with our buyers. First, we do assess the commission potential of each buyer before agreeing to take them on as clients but referrals and acquaintances get added consideration. Second, we use a sliding scale for calculating our rebates. Below a certain threshold there is no rebate and the rebate percentage is smaller at the lower price points than at the higher price points.
However, lately we've had a number of buyers interested in exploring an alternative arrangement with us. They pay us an hourly fee and we rebate them 100% of the commission. We like it because we are guaranteed that we will receive fair compensation for our time and the clients like it because they think they will get more money back this way. We're not so sure the clients are right because we think buyers underestimate how much of our time they need but one thing is for sure...clients who agree to this arrangement are much more careful about how they use our time, thus ensuring that our time is used as effectively as possible. I am convinced that if all buyers worked under this arrangement we could get rid of half the real estate agents in Chicago. Actually, we should probably do that anyway.