How the Real Estate Industry Works

There’s a lot of confusion about how the real estate industry works, who’s best interests are being served when dealing with an agent, what questions you should be asking, and where the money goes. One of my main goals with this blog is to demystify the industry and provide quality information so that you can make information decisions when buying or selling a home. I’m going to try and give a brief but comprehensive overview of the key terms and concepts you’ll encounter so you have a better understanding of the process and what goes on behind the curtain.

The MLS

The MLS (Multiple Listing Service) is the database used by every real estate agency to list properties for sale. In Dutchess County, the Mid-Hudson MLS is used, which is comprised of over 325 agencies.

If you’re about to begin the process of buying, selling, or renting a property, understand that EVERY AGENCY is using this same system. Meaning, every agent that lists a client’s property for sale enters it into this database, and every agent assisting a buyer in finding a home searches this database. Everyone is using the same system.

It wasn’t always this way. At one time, each agency had a sacred book filled with their listings, and you had to go from agency to agency to find out who had what. Now, with the internet and it’s promise of the democratization of information, all that information can now be found online. It would hurt the client to keep their property confined to an individual agency’s book, because it limits exposure tremendously. So all properties are now in the MLS.

So, what this means is that there is no need for you to go from agency to agency when looking to buy a home or rent a property, because every agency has access to the exact same listings. If you do decide to look at properties with agents from more than one company anyway, it accomplishes 2 things:

1. you waste your time, because everyone has access to the same listings. (if you switch because you didn’t appreciate the way you were treated by an agent or didn’t like the feel you got from the agency, that’s a different story.)

2. you anger the agents, and they won’t want to help you.

I don’t know how it works in markets that are much bigger, but here in Beacon (and surrounding cities – Wappingers, Fishkill, etc) agents from all the companies are constantly connected and sharing information – it’s part of the fabric of the industry. So, if you’re looking to buy or rent a place, and are jumping from agency to agency, they will find out, and agents will be less likely to want to deal with you at all.

Wait, why is this a problem?

This comes up constantly, and is kind of comical, because you’re breaking the “rules” of engagement without ever having had them explained to you. Unfortunately, it’s usually just the agents that know the rules. (hence this post)

So, here’s the gist: If you enlist the help of an agent, ask them to email you listings, and then get into their vehicle and allow them to show you properties, you are behaving as a client. That leads to the assumption that you are one. (the technical term is “implied agency“). If you then go and have a different agent from another office take you out to see properties later that week… well, you just cheated on your real estate agent!

Real estate agents make their living based on commissions, so if you don’t buy/sell through them, they don’t bring home a paycheck. This may not be a very good thing, because you could be viewed as a means to an ends instead of as a human being with emotions who’s about to get involved in a huge financial transaction and needs proper support. No wonder people don’t trust agents – there’s such a strong ulterior motive behind helping you! Unfortunately, there are enough people like that in the business that you have every right to be wary. At the same time, there are truly wonderful people who really do want to help you and to make the experience a good one. (and sure, they’re excited to get paid too). But no agent is going to be committed to you if you’re not committed to them. Your best bet is to choose an agent and stick with them.

What if I don’t like the agent?

Why would you be working with someone you didn’t like?? When you choose an agent to help you, YOU are hiring THEM. Know your expectations before you begin the process. To avoid the messy scenario listed above, interview a few agents and get familiar with their personality and the services they say they’ll offer before you settle on one. In an upcoming post, I’ll go over some essential questions to ask when interviewing a realtor. In the meantime, just remember that you are an active participant, not a passive bystander. It’s your responsibility to do the homework to ensure you’ll be satisfied with the level of service and attention you receive.

Agency: Buyer’s Agent vs Seller’s Agent

Whom does the agent represent? This should become apparent immediately, when you’re presented with an agency disclosure form, which will look something like this. As a seller, the person you’ve chosen to represent you is the Seller’s Agent. But as a buyer, it’s not always so obvious.

When you drive by a home for sale and call the number on the sign, you’re probably being connected to the Seller’s Agent. So, of course they’ll be happy to help you (they’ll get a higher commission if you buy the house….more on this below), but just be aware that they have a responsibility towards the seller’s best interests, not yours. Don’t tell them any information that you’d prefer was kept confidential from the seller. If you’re planning to buy a house, you’re better off choosing an agent who will be your Buyer’s Agent, and represent you throughout the process. They will be able to show you any home on the market, give you the market information you need to determine an offer price, and should be able to provide basic information about the area.

The third kind of representation is Dual Agency, meaning an agent represents both the buyer and the seller. There is an apparent conflict of interest in this situation, but it’s perfectly legal, and done all the time with the written informed consent of both parties. I personally think this is a fine way to go, for a few reasons: I think that pitting a buyer and seller against each other via two agents, keeping information fuzzy, and sparking anger, frustration, and a bidding war, are unethical. The industry has operated like a poker game for far too long, where everyone is trying to call each other’s bluffs and keep their cards held tight. What if each party was an informed participant in the transaction and knowledgeable about market trends and current values? Could the agent then simply be the connector between buyer and seller, helping keep everything running smoothly? Of course, this would require the seller to forget the pie-in-the-sky number they want for their house, and the buyer to forget the rock-bottom number they think they can pay and still get a quality home. Both parties have to be realistic and honest with themselves and each other. We may not all be there yet, but I think we’re moving in that direction.

Commissions

Where does all that money go when you pay a realtor fee? It looks like this:

Now, some people will say that a buyer should always have a Buyer’s Agent because it’s a “free” service. Based on the diagram above, it would seem that the seller pays the commission for both the Seller’s Agent & the Buyer’s Agent. Well, sort of. I’d argue that without a buyer, nobody gets paid. So, if you look at it that way, it’s really the buyer who pays the commissions. I guess it’s a matter of semantics… so we can just say that both sides pay.

Back to dual agency for a moment; If you’re a seller and your agent manages to also bring in the buyer, then they’ve avoided having to split the commission with another agent.  In that case, there’s no reason you should have to pay a full commission fee. Make sure you discuss this with your agent at the time of signing a listing agreement. Negotiate an alternate commission % in case the situation arises that your agent is able to find you a buyer.

Why are commission fees so high?

I’m gonna get some opposition to this statement, but in some cases, there is no reason for them to be so high. As more people use the internet and free search resources become available, the walled garden of the MLS will start to crumble. And as people learn how to do their own research and learn the fundamentals of how things work, a growing percentage will do just fine handling their own transactions.

In the meantime, the fee you pay covers the time invested by your agent to market your listing as well as the costs to do so. The MLS costs $500 a year for access, $50 to advertise in the Beacon Free Press/Southern Dutchess News/Northern Dutchess News, $30 for a line ad in the Pennysaver, and so on. Then there’s all the other expenses – the cost of gas to bring people to your house for a showing, time spent doing an open house, printing out postcards and mailers, and advertising your listing to other agencies. Plus, since your agent splits the commission with their broker, you’re also covering the cost of doing business for that broker – insurance for the agents, rent for the physical office, utilities, printer paper, and the company’s website. (this isn’t unique to the real estate industry, of course – when you buy food, the cost to run the grocery store and pay the employees is built into the price you pay).

Unfortunately, not all agents are created equal. Some of the things I’ve seen agents say and do is rather appalling. So while one agent is working really hard to close a deal, another is literally doing nothing. And they’ve gotten away with it thus far because there’s never been a good public way of holding them accountable. I’m hoping that will change soon. (One goal I have for this site is to eventually get a ratings/testimonial section going, a la Amazon.com, where people can rate their experiences with agents throughout the area and share their good or bad experiences. I think it would be a great way to get the shysters out of the industry.) But anyway, that’s another problem with the commission structure as it is currently – not every agent ‘earns’ what they actually make.

Final Thoughts

OK, we’ve covered some basics about where properties are listed, who lists them, and how they get paid. There’s more to it all, and I’m going to cover as much as I can in upcoming posts, but at least we have a start! Any major concepts I’ve left out?

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