Who Pays Commission?

You can be sure it is not a PropertyGuys.com client!

This question gets debated all the time. It is often thought that the home seller is the one paying commissions because of the way the transaction plays out. In a traditional agent fabricated deal the commission bundle is directed by the listing contract between the seller and the listing agent. They set the amount to be paid to both agents involved in the transaction.

The buyer's role is to simply look at houses with their "buyer's agent" and decide on one that fits their needs and price range and have their agent draw up an offer. They have little, if any, idea as to the commission amounts involved. Why would they even care, their agent did a great job and negotiated $10,000 off the asking price!

In a previous lifetime I was a purchasing agent. I purchased mass amounts of auto parts for the repair industry from all over the world. An important factor needed in my cost calculations was the expense of procuring the item. If there was shipping costs on a product than the expense needed to be included in the net cost of the items. Take a disc brake rotor for your car. These are commonly bought in China. If the rotor was worth $5 but cost $2 to ship to Canada then the "landed cost" was $7. Let's say the rotor sells for $14 with a standard mark up of 100%. If they find an alternate source to purchase the product for $6 locally with no shipping costs than that same part would sell for $12 saving you money.

Think of home buying like this. The price that home seller receives after commissions are paid is the "landed cost". If the seller can adjust his cost by not having to pay the high costs of "shipping" (read "commissions") than the savings can be passed on to you the buyer. The costs of "shipping" (again read "commissions") are actually paid by the buyer because the seller is passing it through.

Now imagine the house having changed hands 5 times. How much cheaper could you have bought it if agents had not been in the equation?

Here is an agent with a "sideways" look at who pays the commission...


M

Freindly (and Functional) Real Estate

It is hard to be friendly when you have to go through a 3rd party.

Christine Durocher of Guelph recently sold her house. She had been trying for some time. She listed her house in time for the big "SPRING MARKET". She had called upon an agent she knew quite well to list it and it hit the MLS on Mar 26 2009 at $264,000.

After being on the market for a few months and not getting the results she needed (a SOLD sign on her front lawn) she called Tonya Brubacher in our office. Because Christine didn't have to pay the $13,860 (including GST) in commissions she was able to better price her home. She listed on June 4th for $258,000 with PropertyGuys.com and was able to sell her house within 2 weeks for 97.7% of the asking price. This decision allowed Christine to pay herself $13,230 (including GST) in commissions.

Here are Christine's comments on the the sale of her home.

"PropertyGuys.com is definitely the way to go. We are very pleased with the outcome and it didn't take very long to sell our home. Thank you to Tonya and PropertyGuys.com"

I guess the only thing worse than having someone stuck in the middle would be to have THIS guy stuck in the middle...


M

Cudos Mr. Turner

Garth Turner has had a tumultuous run to say the least.

He has worn many hats in his days. From author to lecturer to syndicated newspaper columnist to TV personality to entrepreneur to 2 time MP. He may just be best known in Canada for standing up to Stephen Harper and getting the boot from the conservative caucus.

In his book "Greater Fool" he looks at where we are heading in the world of real estate. He does not see a rosy future.

Garth continues his thoughts from his book on his blog by the same name. A recent post includes a letter from a local RIM employee that recently sold his home privately in Waterloo.

"Mr. RIM" has $95,000 in equity saved up in his $244,900 house. The one thing that Garth does not expand on is the fact that had this RIM employee used a Realtor they would have used up 13.53% of their equity.

$244,900 x 5% = $12,245
$12,245 + 5% GST = $12,857.25
$12,857.25 / $95,000 = 13.53%

When we are considering whether to use an agent we make choices on a cost of 5% of our home. Unfortunately most of us don't own our home, the banks do. In the case above "Mr. RIM" only owned 38.79% of his home yet he is expected to pay the entire selling fee charged.

When you are looking at the future of your financial life you should look at the big picture not simply what is in front of you. Watch for what lies beneath the water, not just the majesty of what protrudes above the surface. That is a mistake made by so many in the past. Are we not supposed to learn from their mistakes?


M

Strength In Your Sale

Don't let a skunk eat your lunch!

It would seem that every agent wants you to believe that they have the secret that will sell your house. I am sure you have seen all the marketing ploys. The most popular one these days seems to be "Your home sold in 90 days....GUARANTEED"

Something smell off?

They always list "some conditions apply". I did some digging and this was the most detailed explination I could find.

"We'll give you a guaranteed written offer on your home within 24 hours of your listing.
This written guarantee will give you the assurance that if your home doesn't sell within 90 days, we will buy it for your upfront guaranteed amount."

If you want more details you have to call them. So what's the catch? The "guaranteed" amount will allow them to purchase your house for under market value. Not such a bad deal....for them!

Programs like these emphasize that price is what sells your home. So what can you do to strengthen your position to sell?

"We tried selling our house using an agent, but after a number of issues, we let the listing expire, as we just didn't see the value we were getting. We decided to try PropertyGuys.com, and we had immediate interest. In 3 weeks we accepted an offer!"

Joe & Heidi Devitt, Ayr ON - Listing 162639 - June 2009

Sometimes You Just Know...

Is there a higher power involved in your decision?

Have you ever walked in the door of a home and just knew? What was it that did it? Floors, colours, windows, backyard or maybe the master bedroom.

Have you considered this as a seller?

Have you focused on the key features of your home?

When a buyer pulls up out front what do they see? Not just at your house but in your neighborhood. Are the lawns kept? Is there always cars parked on the road? Can you see the park from your driveway?

They come up the walkway. Knock, knock, knock. You open your door and what do they see? Is there a predominant smell?

What makes your house stand out? Will it help you sell?

This guy knows how to sell it. I mean seriously this is the best 8:04 house tour EVER!


M

May Monthly Real Estate Statistics

It seems these days we are always waiting. Not sure it is because things take longer or because we expect things to happen that much quicker.

Guelph stats for real estate are a little slow to be posted this month. I found an alternate source that says sales are down a little over 16%. Stats for KW and Cambridge are looking a little more promising. With increases of 9.9% and 7.7% respectively it shows the first year over year increase for Waterloo Region since September 2008. This helps the YTD numbers slightly but in total MLS stats show a decrease of almost 15%.

All things have been pointing to the stop to the free fall. Low interest rates and the home buyers' plan and home renovation tax credits. Low interest rates have started to move back up. Does this put an end to people looking to buy, a halt on the pick up of the market? Anyone that was pre-approved has some time to make a purchase but anyone that does not already have the locked in rates may think twice. I would watch for a stall in the July-August time frame if nothing else changes or if the rates continue to raise.

Not to sound bleak. Just looking at what I see. It could always sound worse...


M

Do You Have IRD?

Have you checked your financial wellness yet?

Do you know whether the sale of your home will leave you in the financial infirmary? The costs of selling your home are well documented. The one that seems the most elusive though is the mortgage penalty.

It seems with the lowering of interest rates people are finding that breaking a mortgage is more than what they bargained for. Most mortgages are subject to either a 3 month payment penalty or Interest Rate Differential (IRD), depending on which is higher. With the drop in interest rates IRD is usually the prognosis.

So what is IRD? Here is a basic understanding for you. You bought your home 3 years ago. Your mortgage rate at the time was 5.99% on a 5 year fixed term. The balance left on your mortgage is $200,000. The rate your lender is charging today is 3.99%. You will take the value you have left, multiply it by the months remaining and the difference between the interest rates to get your penalty. In this instance you are looking at about an $8,000 penalty. Now this is a guideline as each lender calculates this amount in their own special way. I found a great "rough idea" calculator online for you to estimate your costs.

As with any contract, when signing your mortgage you need to read the fine print. If you are working directly with a lender (ie The Bank) make sure you ask exactly how their penalty works should you choose to break the mortgage. If you are working with a mortgage broker have them explain the different penalties on the different mortgage options you are looking at.

It is not uncommon with the rate declines we have seen over the last 6 months to see $10,000-$25,000 in mortgage penalty. I would suggest before you decide to sell your house that you find out what your IRD is so you don't find yourself looking for a miracle cure. Here is a discussion on a blog between a lender(PC Financial) and a home seller that clearly shows the lenders do not feel bad about sticking to their contracts and getting what they can. If you have made it through a bought of IRD feel free to leave a comment and advise others of the lender that infected you with this money draining condition. You may be responsible for saving someones financial life.

So what do you do if you have been diagnosed with a high cost IRD? If you are dead set on selling make sure you minimize your other costs to help maintain your financial health and then contact a mortgage professional to ensure you are protected the next time. Based on this TV ad, I am not sure this "doctor" would be my first choice to help.


M

Who's Playing Monopoly?

What is your barrier to entry?

Truth of the matter is real estate agents have, for all intensive purposes, a monopoly on the real estate game. In a recent article in the National Post, Garry Marr wrote about the dominance of MLS over the market since it started some 50 years ago.

In it he focuses on two different MLS systems. One for the consumers and one for the agents. The agent's version is much more robust and complete where as the consumer facing one is a knock down version. With today's privacy laws it will not be changing anytime soon, nor should it.

The real story here was that $131.9 Billion in real estate transacted through the MLS last year. That constitutes an estimated $6.595 Billion in commission pulled from the pockets of hard working Canadians. Was this necessary? This is a societal loss of billions of dollars done $15,000 at a time. Are you next?

I feel a need to answer a question that some may ask. Is a monopoly bad? Let's call on expert Phil Holden, an economics professor in Greece, to answer the question in this video from Youtube (unfortunately he has disabled embedding).

Is it coincidence that all the downsides experienced in a monopolistic situation Phil speaks about are alive and well in today's real estate industry?

To lighten the mood slightly here is Ernest's view...


Remember that no matter how bad it gets it can always get worse.

Communist Monopoly anyone?


M

Red Tape Wrapping

Who likes birthdays?

June marks the 20th anniversary of REM (Real Estate Magazine), a news magazine dedicated to the traditional real estate profession. Their news blog did a retrospective piece looking at what has changed in real estate over the last 20 years. It did not surprise me that the first quote was on the internet.

“If you look at the last 20 years, the biggest change has been the Internet. Fundamentally it has changed how we are perceived, how we do business, and how people can access information, which is the key,” says John Powers of Claussen Walters & Associates in Lunenburg, N.S. (25 years in real estate)

I agree the key is "how people can access information". Some stats say as high as 90% of people start their house search online. When this information was made available to the general public it changed the way the business was handled. No longer are people dependent on a realtor for their housing information, it as all online. Dwindling are the days of spending your Saturday and Sunday in the back seat of a real estate agent's Cadillac looking at house after house. You spend more time on a computer short listing properties that match your requirements.

Opinions didn't end their. Technology is not the only thing to have changed.

“What’s changed is the amount of bureaucracy and the amount of forms. (In the 1980s) the listing form and the purchase sale agreement were one page. Now they are each 10 to 15 pages. The amount of paperwork, the entanglement with federal regulations for the Privacy Act, terrorism, money laundering, the collection of HST – all that stuff has impacted our business. We’ve become a bureaucratic machine, much different and much more regulated and litigious,” says Powers.

Bureaucracy costs money, and plenty of it. Just ask your local politician or health care professional.


I use the health care profession because realtors often compare themselves to surgeons. Have you seen the ads in the paper likening selling your house to an appendectomy? I even got an email recently from a realtor with Prudential Grand Valley Realty where he said "Real estate costs are very high and the client pays for a vast network. Our commission rates are justified because of all of that.... Are you going to tell people also that they should operate on themselves and that a surgeon's fees are too high?"

Extra steps and procedures that need to be done all have to be done by someone. As the agent above states you pay for this bureaucracy? When you choose to cut the red tape of bureaucracy you get to put the savings to work for you, drop your price by the cost of their commission.

Think of it this way, two identical properties located right next to each other should take the same amount of time to sell. As one of the home sellers you have a way to reduce your price by the high cost of commissions ($10,000-$20,000 in most cases) with out effecting your bottom line. Viola, competitive advantage!

M