This is part V of the Adventures in Real Estate series which covers the options you have when you choose to use a non-traditional realtor to buy a house. Previous posts in the series chronicled our experience selling our house For Sale by Owner and include reasons to use choose a traditional realtor versus a modern reinvention, listing a house For Sale by Owner, getting a contract and closing the deal. Future installments will cover purchasing a tear down lot, choosing a builder and building a new home.
Why not just use a buyer’s agent?
Why would you not just use a traditional realtor as a buyer? You don’t have to pay them; they do it for free!
The buyer doesn’t pay their agent directly. They absolutely do pay them indirectly. One reader sent me a private email after reading one of the previous Adventures posts boasting that when she bought her house she “negotiated it so that the seller paid [her] realtor fees!” Hate to break it to you my dear, but not only is that standard practice, it also means YOU still paid your realtor’s fees. Here’s how the money goes.
Buyer –> Seller –> Seller’s Agent –> Buyer’s Agent
There are some middlemen, but you’re definitely paying your buyer’s agent. Technically, the seller does pay your buyer’s agent fees–with your money. Let’s say you buy a house for $100,000. (I wish!) You pay the $100,000 to the Seller, who gives $6,000 (6% commission) to his Agent. The Seller Agent then splits this with your agent giving them $3,000. Show me again how your Agent is free?
Still seems like it’s free? Hm. How about this. You’re buying something online. One place is selling your item for $15 with $5 shipping. Another place is selling it for $20 with free shipping. How “free” is that shipping actually? The fact that the second scenario includes the shipping in the price of the item instead of as a separate charge does not make shipping free. And just because you don’t see the actual numbers of what you’re paying your realtor until you’re sitting at the closing table in the title company’s office looking at the line items, doesn’t mean you’re getting your realtor’s service free.
Despite the fact that a buyer incontrovertibly pays his agent indirectly, the above quote is the response that everyone gets when they ask a question on the forums about buying a home without a realtor. Usually it is a realtor who responds with this opening followed by a horror movie plot of what might happen to you if you try to fly solo or use a rebate realtor.
What is a rebate realtor?
Because your agent doesn’t get the money until the seller’s agent gives her her share of the commission, she can’t just give you a discount upfront. Instead, a new wave of realtors will take their 3% commission from the seller’s agent and give you some portion of it as a rebate.
Often these realtors and real estate agencies are technologically sophisticated and expect you to do a lot of the leg work. If you’ve been tooling around Zillow and Redfin during your house search, you’re already doing that.
Can’t you just buy a house without a realtor at all?
The good news is because the financial transaction is structured as a rebate, it is a non-taxable event! The bad news is because of the way real estate commissions are structured, you will probably have to use a realtor if you want to save any portion of that 3% commission.
The only other option is to try to negotiate with the seller’s agent to a) give you, a buyer, half of his 6% commission or to b) rebate it to the seller and explain to them what is happening. In that instance, you would have to write your own offer and cover all the issues through closing on your own. You can order a full set of standard forms online for about $40.
I was curious to see whether it would even be possible to buy a house without an agent, so as I was looking at houses, I started calling the selling agents for info on the houses and to feel out whether anyone would work with me. The short answer is NO!!!
During one such phone call when I asked whether the agent would be willing to give that 3% directly to me or give it back to the buyer, he hit the roof and literally started yelling at me through the phone.
In my 20 years doing real estate, no one has ever tried to renegotiate my commission! You would have two options. I could either represent you both [meaning he would take the full 6% commission for himself], or I would just represent them and keep the full comission. And I’ll tell you right now, MY SELLERS WOULD RATHER THAT MONEY GO TO ME THAN TO YOU!!
I’m not a mind-reader, but I would be willing to bet his seller’s would have been appalled if they understood that their representative was screaming like a 3 year-old at a potential buyer willing to offer full price on their lot. I’m certain he had a douche-bag’s “ahah” moment later because he called me that afternoon and left a message which a) blamed his behavior on multitasking, b) apologized for not understanding, c) intimated he would rebate the 3% to his buyer if I were still interested, and d) repeatedly said “We’re easy-going, very easy-going.”
Honestly, at this point my intrepid spirit became a wee tad trepid, not only because D-bag hurt my tender feelings, but because D-bag made me question whether I could enforce such a financial relationship even if I were able to negotiate it. I pictured D-bag realtor batting his wide eyes at the closing table saying, “Oh no, no, no. I never agreed to any such of a thing!” Slippery.
Above all else, however, I simply wanted a realtor to write the offer and see me through the closing just like I had when I sold the house FSBO. I was happy to do almost all the finding myself, but I know enough to know I don’t know enough, if you know what I mean.
Warning!!: If you view a property or a new construction model home without your realtor for the first time (other than at an open house), most seller’s agents and builders will consider you to have forfeited any right to part of their 6% commission. If you hire an agent later after the seller’s agent has shown you the house, for example, your agent probably will not be paid if you buy the house–and there will be nothing to rebate. If you plan to use a rebate realtor, make sure when you have any communication with the seller’s agent, that they understand you are using a realtor as well.
photo by of Classic Homes
Rebate Realtor Options
a. Flat fee realtor. You’ll recall I used one of these to sell my home For Sale by Owner. Unfortunately, The Stever doesn’t do home purchases for a flat fee, and I couldn’t find someone around here who did. Some friends of ours found one in Charlottesville, VA, though, so it’s worth looking into. A flat fee realtor will rebate the full 3% buyer’s agent commission to you and charge you a flat fee for his services.
b. Fee for service realtors. As I said before, two good friends of ours had excellent experiences using Smith Adams to sell their house. Unfortunately, Smith Adams has raised their prices considerably in the past year and a half. As far as I can tell, Smith Adams is a VA/MD referral service that takes a finders fee to refer you to a local fee-for-service realtor. I looked into this option very seriously. On the buyers’ side they offer full realtor service for a 3% commision, or a couple of different package or a la carte items. I called them and set up a meeting with one of their realtors to draft an offer on a teardown we had found. Unfortunately, she was going to rebate only 2% and then charge $2500 for the first offer, $1250 for each additional offer, $150 dollars per showing and a minimum of $1500 for negotiations. In my case, that already made Smith Adams more expensive than services like Redfin. Especially since I assumed I would make and lose multiple offers on teardowns before I got one, Smith Adams just didn’t make sense for me.
c. Percentage rebate realtors. Redfin is not available in all areas, but wherever it is up and running, its listing registry tends to be far more accurate and up-to-date than sites like Zillow, Trulia and Realtor.com. Even since I wrote the Part II on Redfin, they have jacked up their prices for home buying. They used to rebate a flat half of the buyer’s commission (1.5% of the sales price), but now they are taking more than that based on the price of the home and they do not disclose the algorithm they use to determine your rebate.
Shame on you Redfin. You were supposed to be this out-of-the-box, real-estate-industry-distrupting machine, the Don’t-Be-Evil-ers of real estate. But you got greedy. Redfin is now acting as a referral service to “partner agents” who will rebate “up to 15% of their commission” to you. In our previous example of a $100,000 home that’s “up to” a fat $450 rebate instead of $1,500 rebate they were previously offering. La-dee-frickin’-dah.
Honestly, at this point, Redfin is dead to me other than as a listing site.
Locally, there are a few places still rebating 2% of the purchase price and keeping only 1% for themselves. There are some one-man shops, and some group outfits like i-agent and Glass House Real Estate which I ended up choosing.
I didn’t realize it at the time, but Khalil El-Ghoul was a founder of i-agent who then opened up his own shop at Glass House where he has a couple other agents working for him. I chose Khalil because he had sick reviews on Yelp and Zillow for his negotiating skills and because his business model precisely fit my needs.
Khalil is an born entrepreneur who wanted to streamline the real estate buying and selling process to make it better reflect the way people shop for and buy homes today. Personally, he wanted to get out of the business of hunting down clients (cold calling everyone who shows up at an open-house, for example) and then coddling them with phone calls and check-ins for a year or more to make sure other agents didn’t poach them away. Khalil wanted to build his own agency around his real passion, negotiating. Outsourcing the majority of the finding process to his clients allowed him to rebate 2/3rds of the buyer’s agent commission to his clients, dramatically increase the volume of his business, and give him extraordinary experience with real estate transactions in the area.
Whereas most real estate agents come to real estate as a second career and do it part time or as a secondary household income hoping to do 2 or 3 deals a year, Khalil is a full-time, career agent who had already done 35 deals this year when he closed on our house in July. With that kind of volume, predictably, you get less personal attention, but really expert advice.
Khalil doesn’t make you sign those (uninforceable) buyer’s agent agreements that bind you to him. He won’t preview properties for you. He won’t send you listings (though he can tell you how to sign up for automated alerts). He won’t tell you which neighborhood you should want to live in. When you find a house you are serious about, he or his agents will show it to you, he will do the market analysis with you to help you determine what to offer, he will draw up the offer, and then something crazy happens. He will actually, for real, not like on the HGTV shows, fight to get you the best deal. I kid you not!
Once you’re under contract, he will pass your case along to one of his staff to see through contingencies to closing. If there are problems along the way, Khalil will step in to negotiate. And then he’ll represent you at closing (whatever that meant 100 years ago), which for us was the first time Kent had ever met him and the second time I had seen him. Khalil’s agency doesn’t waste time shaking hands and asking about your kids and building a relationship of trust to make you like him. Really, he just wants you to send him a concise email or text when you have an issue so he can send you a concise email or text that addresses it.
I’ll save the rest of our adventures with Khalil for the next part of the series on buying the teardown lot.
d. By the hour realtors. Just like lawyers before them, some realtors have realized they can make a lot of money on the billable hour. I looked up a couple of local shops that offer this billing structure and asked very detailed questions. One fellow at Spicer Realty told me he bills 30 to 45 minutes to “present an offer”. Not to write it or revise it. To present it. Well I recently had 6 offers presented to me, and all the realtors did was hit send. He said by the time he’s done, he sometimes bills all the way up to 3% (traditional realtor commission) or over! Wow, that’s a lot of padding.
photo by Classic Homes
How Well Does This Work?
In preparation for writing this part of the series, I spoke with a number of people who had used rebate realtors. Their experiences were mixed–as are reviews for most traditional realtors. Even our experience though it had a happy ending, had some bumps along the road. I will also mention that the majority of our friends who chose rebate realtors to buy homes had previous real estate experience. I asked Khalil about his clients. He said he had a broad spectrum from first-time home buyers to fifth-time homebuyers of all price points and ages, but that his average client is someone in their 30s or 40s, tech savvy, with some previous experience buying or selling real estate.
If you are considering using a rebate realtor or are just curious about our experience, please send me questions here in the comments or in a private email.