A Few Initial Thoughts on the Future of Buyer Agents

Happy Monday, everybody! I’m completely jammed with preparation for CMLS where something big is going to be happening. I can’t tease more than that, sorry, but… watch the interwebz later this week.

In any event, I saw something interesting on Facebook, and thought I’d jot down just a few initial thoughts. These are not heavily researched and I haven’t really done a deep dive into the issue/topic, but the question is so interesting I had to write about it to see what I think about it.

On Facebook, Brad Inman, the publisher of Inman News, posted a question with a link to an article on Inman News about Redfin Direct:

(BTW, I’m posting that image from the group as it is a Public Group, open and available and viewable by everyone.)

So, what does the future look like for buyer agents?

The answer likely depends a whole lot on the outcome of the commission lawsuits (Moehrl, Sitzer, etc.) but as a general matter, seems to me like we’ll see changes in how buyer agents are compensated and by whom.

The Problem with Buyer Agency

Before we get to what the future looks like, we ought to spend a bit of time on what the actual problem(s) of buyer agency is (are). Because there are a few.

1. Seller pays the buyer agent

Yes, we can debate this until we’re blue in the face about how the buyer is the only person bringing cash to the table, etc., but when real estate agents themselves market their services by saying, “You pay nothing! The seller pays for my services!” it’s a bit difficult to deny that perception is reality in this case.

Obviously, this is the gravamen of the lawsuits, so how those lawsuits come out will largely determine what happens to this particular problem.

2. Trying to Explain Fiduciary Duty

Closely related to the above is the problem of explaining to the average consumer that yes, I owe YOU fiduciary duty, but my pay is based on the price of the home, because the seller pays my commission.

Again, those of us who have been around the industry for a while realize that most agents are ethical and honest and do not think too hard about the $30 they might lose by shaving $1,000 from the sale price, but… it’s just not a good look. It’s too hard to explain to the average buyer who does this once every seven to ten years.

3. Paid Too Much

Another problem is that buyer agents are widely seen as being overpaid. Again, you can debate it, fight it, argue it all you want — I’m not the person you need to convince, nor are most of the readers here. The person you need to convince is the consumer, and the consumer pretty clearly thinks that the real estate agent is overpaid.

Part of the problem here is that most people have no idea what their buyer agent actually does behind the scenes to hold the deal together. That’s a communication problem and likely can be fixed by the agent.

But another part of the problem is risk-shifting. That is, just about every single agent I have ever spoken to, including my wife, talks about working with a buyer for three weekends in a row, spending hours upon hours looking for a house, putting in offers, etc. etc. and then having the buyer just up and decide, “Screw this, I’m just gonna rent.” That agent is not paid for any of that work.

So to make up for all of the buyers who flake out, the fees/commission/income from the ones who do work out have to cover that. It’s a bit like VCs who make 100x on their investment and look like greedy bastards who are just sucking the blood from entrepreneurs; but that 100x ignores the fact that 9 out of 10 investments go belly up, so just to break even, the one successful investment has to return more than 10x.

Same here: agents lose a lot of money (in the form of time spent, resources spent, even money spent, cuz gas ain’t free when you’re driving around to tour homes) from buyers who flake or are otherwise unsuccessful. So they have to make up for that by shifting the risk to the successful buyers. Sucks for them, but it is what it is.

4. Paid the Same, Regardless of Performance

There is also the problem — and this, I know I’ve talked about in the past — that there is next to zero price signal in real estate. That is especially true for buyer agents, whose commission is set by the listing agent/the seller, in advance of any work being done.

So if you’re a 20-year veteran, who is absolutely a genius of negotiation, knows everybody and can smooth over the transaction, teach other agents how to do this, and save the client tens of thousands of dollars… you get paid 3%.

If you’re a brand new licensee fresh out of real estate school and you barely know how to tie your shoelaces, and you screw up the transaction badly enough that the listing agent has to step in to rescue the deal… you get paid 3%.

Listing agents can at least demand a higher listing fee; buyer agents can’t even do that. There is no way to look at what a buyer agent charges to know whether that agent is good or bad, experience or inexperienced.

I don’t think this is particularly debatable, to be honest. All of the people who are out there in social media land yelling, “You get what you paid for!” are completely ignoring the fact that in real estate buyer agency, you often don’t get what you paid for. Sometimes, you underpay, and other times, you completely overpay. Because you pay the same no matter what.

There may be other problems, but those four come to mind right now.

Solutions? Future?

So if we are to speculate about possible solutions, a possible future for buyer agents, we have to think that whatever comes around will at least try to solve one or more of these problems.

If the lawsuits are successful, that eliminates sellers paying for buyer agents right away. Half of the commission pool disappears. So quite a lot of buyer agents will become Uber drivers.

However, as many people point out, a real estate agent is not at taxi drive, but a trusted advisor for quite a lot of consumers. They’re spending hundreds of thousands of dollars, if not millions of dollars. They’re going to want someone professional to help them out.

The rich will simply paper over the issue with money. They can afford to pay the 3% commission fee to the buyer agent at closing with a wire transfer; no big deal there.

The not-so-rich are going to have issues.

Unless the mortgage rules are rewritten to allow buyers to include the buyer agent fees into the mortgage — essentially, borrowing from the bank to pay their agents, the not-so-rich buyers are going to be pretty strapped for cash.

I suppose there are three ways out of this dilemma:

1. Buyer agent offers financing to the buyer.
2. Some other entity offers “buyer agent fee financing” to the buyer.
3. Pay by the hour.

Of the three, I think #3 is likely the most attractive for most buyers. #1 and #2 is just another form of borrowing money, and I can’t think of too many agents and brokers who want to become debt collectors. I mean, what if the buyer is on a 5 year repayment schedule and doesn’t make payments for 90 days?

Maybe a “real estate billing” service pops up like we have with medial billing, because the doctor sure as hell doesn’t want to be calling the patient at dinnertime demanding to be paid. But the whole thing just sucks, so I rather doubt that an industry based on trust and client service and relationships goes down that path.

That leaves pretty much a pay-for-service model, whether by the hour or by the project. That happens to be the way that most professional services works. Lawyers charge by the hour (or 40% contingency fees, but… that’s not happening in real estate, y’all). Graphic designers charge by the hour or by the project. Consultants like me charge by the hour or by the project.

Why not buyer agents?

By the Hour Solves All of the Problems

As it happens, this idea of paying buyer agents by the hour solves all of the current problems with buyer agency.

You instantly eliminate the problem of explaining fiduciary duty while getting paid by the other side based on the price of the house. “You pay me $100 per hour, so I work for you and protect your interests.” That’s about as clean an explanation there is.

You can’t have consumers thinking the buyer agent is overpaid because they get an invoice detailing all the work that the buyer agent did for them. It’s hard to say “You didn’t earn that!” when the agent drove you around for five hours looking at houses at the agreed-upon rate of $100 per hour.

You eliminate the risk-shifting that goes on because now, even those buyers who flake on buying a house paid along the way and the agent no longer has to get huge paydays out of the buyers who do end up buying a house. Per-transaction income goes down, but you get income from doing work, not from transactions; I think the entire thing ends up smoothing out and the agent might come out quite a bit ahead.

Finally, we’ll have price signals at last. A top notch expert agent who is constantly in demand can charge $500 an hour and have clients lined up waiting for her help. A less experienced agent might have to charge $15 an hour to build up experience, and some clients who are looking for a bargain might hire that agent.

Not a New Idea

Here’s the thing: this is hardly a new idea. Unbundling real estate services, or trying to go for hourly fees, or whatever combination that exists has been tried time and again. I’m quite sure there are companies and agents out there right now who are offering some variation of this kind of “unbundled” services right now.

Trouble is, when the dominant mode today is “seller pays the buyer agent” and the buyer is strapped for cash, that pay-as-you-go loses its luster quite quickly. That is even if the buyer is economically savvy and understands that he is in fact paying his agent quite a lot of money which he will be borrowing from the bank by way of the sale price of the home. The buyer might know all that, but still realize he has no other way to pay for a buyer agent’s services.

So the idea really hasn’t caught on, yet.

But future? Why… I could really see that happening.

Brad mentions Redfin Direct, iBuyers, and Pocket Listings. All of those threaten the current model, for sure.

But nothing says that a buyer using Redfin Direct might not appreciate having an experienced agent spend 2 hours putting her eyes on his offer and giving him some advice. Maybe he pays $1,000 for those two hours, and the agent is happy to make some extra cash for that. Same with iBuyer offers: maybe the seller is willing to pay for a few hours of an established expert agent to see if the offer is fair or not, and get some advice on how to maximize that offer.

Advice is advice, time is time, and buyers are not strangers to paying for someone’s time and expertise.

New Problems

Having said that, there are some new problems that a pay-as-you-go type of system poses.

First, in the current environment, the seller’s listing fee includes the buyer compensation. Just because the buyer doesn’t use a “typical” agent approach doesn’t mean that he automatically saves money. That’s up to the seller and the listing agent and the listing contract. But, I figure that can all be worked out, and frankly, if the lawsuits are successful, it will need to be worked out one way or another.

Second, the pay-go model poses some challenges for brokerages and franchises, most of whom have fee structures that are based on split of commissions. Does the $500 fee that an agent collected from offering two hours of advice constitute a “commission?” Probably not. In that case, what does the brokerage do? Brokers have operating expenses too, and those have to be covered. Is there a split on consulting income? How will that work?

Nobody knows, of course, because few people have tried it.

Third, “exclusive buyer agency” and “procuring cause” stuff all have to go away. If a client wants to hire seven different real estate agents to give him advice, and he pays them all, what difference should it make to anybody “who” the buyer’s representative is? They’re ALL fiduciaries to the buyer for the advice, and no one is getting paid a commission. We don’t need inter-agent fighting over, “That’s my client!” in that new world.

Fourth, and this is by no means a small challenge, the fundamental job of a buyer agent changes. Today, the buyer agent’s job is sales, specifically the sale of representation. Almost all of the training across brokerages, coaches, training organizations, etc. have to do to lead generation, lead conversion, relationship management, and so on. The whole point is to land the client.

In a pay-go future, the job is to offer advice. Sales is important yes, but if you don’t actually know what you’re talking about, you open yourself up to unhappy clients, malpractice lawsuits, and a bad day at the office. The training would need to shift dramatically to the “substance” of real estate: land use regulations, contracts, financial analysis, economic analysis, local development information, mortgages, valuations, appraisal, building materials, construction techniques, etc. etc. so that the agent is in fact an expert who can offer advice worth something.

Likely? Unlikely?

Who knows how likely this future is. If the Moehrl lawsuits succeed and are upheld on appeal, then yeah, this future is very likely. If they do not, this future is quite unlikely. Consumers are not all that interested in learning about the intricate details of agent compensation unless they are forced to, and I don’t know that they even want to think about something they encounter only once every several years. So absent legal and financial changes to the underlying system, I don’t see the consumer clamoring for a pay-go system.

Then again, seeing as how I’m the guy who has bets out there suggesting that 60% of all transactions will involve an iBuyer, maybe we’ll see more of an evolution towards a pay-go system for advisory services from within the industry. It all depends on how many agents can show that they can make a good living offering advice to people who are selling to institutions or buying from institutions and don’t feel like they need a “traditional” real estate agent but would like an expert to advise them on some aspects of the deal.

We shall see.

-rsh