Met with a real estate agent yesterday who sold some folks from out of state a piece of property. They are now looking for a builder and I am building a house for some other folks the real estate agent sold property to. The agent saw the house and was impressed with it, how we handle ourselves, cleanliness, etc. She takes me out to see the property and in the car asks me if I would be willing to pay her 3% of the contract amount if I get the job. I was a little surprised because I’ve never had to do this before but in this economy I thought that it wouldn’t neccessarily be such a bad idea if I got some good projects out of it. I told her I would consider it.
The thing that seems ridiculous is the percentage! I told her I assumed the percentage was negotiable and she said not really because it was set by the real estate firm she works for. It being a national chain(or at least regional in the South-Southeast) that has blue and white signs and the initials CB. What 3% means is that if the contract amount is $800,000(which is probably what this particular house would cost) she gets $24,000 out of the deal! Unless she’s working in my office full time doing my books and administrative work during the project I don’t see how she could possibly earn that simply by meeting with me a couple of times and telling her client I’m worth hiring! She said I could build it into my costs to the homeowner but I don’t care, that just isn’t right. The homeowner already paid her a commision on the sale of the land. Basically, she just won’t refer me to her client if I don’t give her something, whether I’m a good builder or not. If I tell the client(which seems like the right thing to do) and cut her out I’ll never hear from her or her firm again which could be a mistake.
I called another real estate agent friend of mine(different firm but the largest in our area) and asked if this was a common practice. He said it wasn’t uncommon but he wasn’t aware of it being an agreement between me and the firm, more between me and the individual — agent or other wise. He also thought the percentage seemed high. I told him, that being the case, that I would be willing to pay a referral fee on good projects but it would be like 1% or less and to tell his colleagues.
I think 1% or less is worth considering. That is an amount I can comfortably build in to my markup. What do y’all think? Is this a joke? Are y’all doing it? If so, at what rate?
In my area, a buyer's real estate agent collects 2.5% - 3.0% of the sale of a house simply by showing the buyer the home. In that case, the commission paid to the broker is clear, and shows up on the HUD-1 statement. The seller technically pays the commission, but in some ways the buyers pay, too, because that cost factors into the decision on what to sell a house for.
This situation seems somewhat similar, although I would expect that commissions on $800,000 homes are less than 2.5% - so 3% seems exorbitant. So, I think the concept is okay - what is not okay is the lack of transparency. I think you should include the broker's fee on your bid as a line item. That way everything is above board.
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Piffin | | #46"3.0% of the sale of a house simply by showing the buyer the home."That agent does a lot more work than simply showing the home.They find the home, they schedule the inspections and closings, they prequalify the buyer, they pay for advertising, they bring the right buyer to the right home....
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CeltsFan | | #48
In my experience, not really.
She did not "schedule the inspections and closings". The listing agent, banks attorney, and myself all spent about as much time as she did on scheduling the inspections and closings. Where's their commission?
Paying for what advertising? For herself? Advertising the sale of the home was paid for by the listing agent - who did quite a bit or work.
The prequalification was done by their mortgage broker.
Nowadays, many people do all the research themselves. In my own personal experience, I looked over the listings myself and chose which house met my needs. The buyer's agent never suggested a single property.
This is not meant as a rant against buyer's agents. Just that I think the situation is not that different from the "extortion" case. In real estate, a % commission for connecting buyer and seller is commonplace. What I don't think is appropriate, however, is for it not to be transparent.
So basically she wants $24K for making a couple of calls and having a meeting? What a racket. Another reason to love realtors.
My policy since I started in design in the 80's was no referral fees asked or offered. It started that way because I was often specifying, but I've continued it into the sales I now do.
I refer people as a professional courtesy, not to get paid. If a resource expects a referral fee or kickback from me, I simply don't refer anyone to them again.
I've adopted a similar policy with designers. I will not include anything in my bid for an interior designer. I make money on only what I sell and expect them to do the same. If they take the job elsewhere, so be it.
Replies
around here the agency charges 6% and the agent who works for them get the 3% but i don't think i'd give 3% for a referral.
I don't play that game and if I were the buyers I would be incensed to hear of it!
The RE agents fiduciary duty is to help them find the best person to serve them, NOT the one who pays the largest kickback!!!
You can end run the RE person. The sale is a matter of public record, so you can find out in the newspaper or at the courthouse or town office what their name and contact info is, then make direct contact, explaining that you are building on another ....and invite them to see your work next time they are in the area.
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Piffin,
There is nothing wrong with a finders fee.. It should be paid if the resulting 3% won't make him uncompetitive and thus likely to lose the bid.. The prospective buyers paid him a fee for selling the property and asked for his advice on finding a builder.. That's what realitors do (put buyers and sellers together) and thus is entitiled to a fee..
Adding the cost of a finders fee won't deprive the builder of any profit if added to the bid price..
Finally the world works better if wealth is spread around rather than concentrated in the hands of one..
I don't play that game and if I were the buyers I would be incensed to hear of it!
I always give this subject a lot of thought and I never really have come up with a clear answer to it, at least not clear to me.
I understand what you are saying but I also believe that I owe the person that referred me something more then a thank you.
Not saying that your way of thinking is wrong because I don't think that, just that without that referral I may not even hear about the job so then how would I know to go look for the homeowners name, which as you stated is very easy to find.
I have a good friend that when I was working as an independent gave me a lot of work and also a lot of referrals, he always had a price for his referrals and I gave it to him because I didn't have the work with out him so I thought it fair. Still don't have a clear answer to the situation but I'm not opposed to paying for a good referral?
Doug
I get a lot of referrals fro RE people. Always have and always have responded with a gratuity of some sort or other favour.But never in this sort of setting that stinks of extortion - "You agree to pay me 3% or I will not recommend you" I wonder if the RE agents customers know that she is trying to drive up the cost of their home by 3%? Is there full disclosure for sake of honesty? or is this a back door kickback deal? are all the referals made by the RE subject to these kickbacks?
http://www.coldwellbanker.com/real_estate/concierge_services
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I have no problem with paying for referrals, but the amount of payment is based upon job profit only.
Refer me a nightmare customer .... don't expect a dime.
These fees, if over $600 also get a 1099.
I also doubt this is a Caldwell Banker policy
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dogfish.
You need to step back and decide if this person is likely to provide you with additional work or if adding the 3% fee to your costs will make you uncompetitive..
There is nothing wrong with this practice.. the world works better if wealth is spread around rather than concentrated.
I refuse to pay for any referral.
I have had any number of different people want to be payed for steering jobs my way and I always refuse.
I would have told the RE agent that I would refer potential sales to her but that is the extent of what I would do.
edit for spelling.
They can't get your Goat if you don't tell them where it is hidden.
Edited 8/2/2008 10:47 am by dovetail97128
The first, (and one of the only ) spec house I built in 1990 was listed with a realtor. As they showed the house, they had a party who liked the work, etc. but were after a different style house. They introduced us, and I ended up building a home for them.
I did pay commission to my realtor, and I also paid commission to THEIR realtor, as they originally looked at my spec through mls. Paid 5% total, 2.5% to each. I will say, tho, that the two realtors did do a lot in regard to legal work, getting the customer to make decisions in a timely manner, and generally act as a liason during the construction process.( All stuff that I do myself now as a gc on custom work) I was also 24 at the time, and probly over my head a little, but it all worked out in the end.
Having said all that, I think there are two perspectives you can look at it from. On the one hand, they're bringing you a customer that you might not have gained otherwise. If you were building this house on spec, 3% would be about standard with a realtor around here, on a co-broke. As long as you go in knowing that you're paying the fee to them, you can build it into the price. Unfortunately, if they shop around to other builders w/out the realtor, it puts you at a distinct disadvantage in terms of competetive price. At the very least, I'd make sure that they understood that.
The other thing to think about is, depending on how much work you have, will this realtor shoot you more work? Sometimes it's worth it to make a little less, and gain what amounts to a repeat customer, along the same lines as a sub/contractor relationship.
I will close by throwing in a little side thought. If you like the realtor, and can function smoothly with them involved in the process, that's one thing. If they are going to be a pain in the rump, acting as the "buyers agent" and being over-involved, I'd walk away. The aggravation sometimes is not worth it. I'm actually thinking of some archy's when I write this but.....same dangers.No remote offence to the architects out there, I've just dealt with some that were, well......, out there :)
Good luck
Bing
I would ask her if she would be willing to pay you a 3% finders fee if you find her a prospective buyer/seller.
See what she has to say if the tables are turned.
Licensed Realtors can't pay a fee to an unlicensed person.
Guess who wrote those laws !!
That idea lasted about 5 minutes....... It would be a good thing to ask, just to hear her response.If she says no you have to be licensed, blah, blah, blah... then you can decide if you want to pay her a finders fee.
Edited 8/2/2008 11:34 am ET by wood4rd
Edited 8/2/2008 11:54 am ET by wood4rd
Edited 8/2/2008 12:37 pm ET by wood4rd
3% seems a bit out of line to me. I am a framing contractor so my contracts aren't as large as yours but I still will not pay more than 1% for a referal on large contracts (50,000 - 100,000). On a small addition or garage I will generally pay give a flat amount of $250. I usually will give the fee as a thank you after a referal and don't have any set agreements with anyone. I prefer being refered due to respect for my work and crew. I think that $1000 would be a more than gracious thank you for saying "Hire dogfish he builds a great home". All realtors are scum.
"All realtors are scum"I'lll strenuously object top that statement. I have many who are good friends and they provide a valuable service for the fees they earn.But this situation in the OP is a simple shakedown, borderline criminal
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In MI it would be criminal, if I remember correctly from my builders license training. To qualify for that 3% they would have to take a builders license salesperson test and be attached to our license. Bob's next test date: 12/10/07
From her POV, she sold the lot and made her percentage onm the property, but now wants to extend that to making money off the house as though she had sold a finished house sitting on that property by merely making an introduction and recommendation. That might be worth a friendly 500-1000 bucks but not a penny for an extortion shakedown.
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I understand what she's trying to do. One thing though...she implied that it was company policy. I'd have grilled her on that, then verified it with the home office. If there's nothing to hide, she would have nothing to fear by my inquiry. I think most RE agents and their offices are nuts and way overpaid. I find it amusing that they will sell a 50k piece of junk for a 7% fee but need 6% for a 600k property. It's the same amount of work. I laughed when my agent in MI wanted 10% on my vacant property "because that's what we always charge". She listed it at 6% after I discussed the numbers with her from my point of view. Bob's next test date: 12/10/07
"One thing though...she implied that it was company policy. I'd have grilled her on that, then verified it with the home office. If there's nothing to hide, she would have nothing to fear by my inquiry."That is what I suspected when I said that I doubted that is was policy. I went looking over their site but didn't find anything to indicate specifics or even a way to contact corporate headquarters with an inquiry. I think they are a franchise outfit. if so, there is definitely something in the franchise contract dealing with this sort of thing. If it was me, I would be politely inquiring my way to the top of the heap with that question.
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I think the stuff would hit the fan if someone started the inquiry routine. I'm almost sure that it's an illegal extortion attempt. Bob's next test date: 12/10/07
That is why I would do it.Notice she took him to the property in her car to discuss this in private, not in front of others or back to the office where it could be overheard.
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In NY it is illegal for this type of kickback, to a RE agent.
The real estate agent is opening themselves open to prosecution. My thought that she knows it ias not legal, or why go of someplace and inform the builder. Anytime someone requests that, I would watch out, they want something they know they are not entitled to.
Edited 8/2/2008 6:54 pm ET by frammer52
Yes...I'd like to see the written agreement. Bob's next test date: 12/10/07
Yeah, somebody earlier said that all RE people suck - and I disagreed, but I have learnt that the ones who take me aside to whisper confidentially to me are the ones I can't trust!
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Blue,
I wish you hadn't generalized like that.
Too many realitors spend most of their professional career working too hard for too little money.. Sure some get rich doing it but the cream always rises to the top in any profession..
I've known decent salesmen who tried for over two years to make a living selling realestate and wound up broke and with extremely little to show for the investment they made and fees they paid..
Frankly it's wrong to look for the cheapest realitor just like it;s wrong to look for the cheapest builder.. what you want is the best and the best doesn't come cheap in any profession..
Hows the old expression you pay more for good fresh oats than for oats that have been through a horse once.
" Hows the old expression you pay more for good fresh oats than for oats that have been through a horse once. "
And some of us can tell the difference by the smell.
When you don't notice that it stinks, maybe you've been breathing it too long.
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It sounds like shes trying to get a sellers commission off of a referral. The RE agent is correct about the 3% on a sale but I have never heard of a forced commission on a referral.
Family.....They're always there when they need you.
I dont know, i have yet to find one that I don't find to be a bit two faced and self serving. I feel pretty confident that more are scum than aren't.
Around here a 3% Co-op is common, but still highway robbery especially as the price of housing rises. Typically realtors will call us BEFORE they bring a client and ask if we co-op. If we say no, they never bring them. Our rule is that unless the agent makes the introduction and comes to the meeting, then there is no commission. If an agent calls later, too bad so sad.
John
J.R. Lazaro Builders, Inc.
Indianapolis, In.
It's all too common. You need to consider it a part of your marketing budget and mark up the house sufficiently to cover it and more. That said it seems mostly to come with difficult to deal with clients and you don't want to disclose it to them or yes they will feel betrayed by both you and by their agent.
Mark up the project an extra 5% and see if you can escrow the payment in the real estate companies escrow account payable when the client pays their bill in full. Put 5% of every payment into the fund so it comes out of your checking account in smaller checks and let be contingent that it sits in that fund until they pay the final invoice in full so as to motivate your agent to advocate in your behalf during the job. (I.E. Make him work for his or her money) This meets the intent of the deal but gets you more value out of it. And be sure that it is a marketing expense on your books, not a job cost. If they discover it the response is "we pay that out of our marketing budget, it is not added to your bill" of course all money is green but how you spin it is the point.
Bottom line is the agent will be working for you to assure that the customer is happy at the end of the job.
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"You cannot work hard enough to make up for a sloppy estimate."
by putting it into escrow you are disclosing it to the buyers. They may not notice it on the closing statement,
but wouldn't there be a line item........$15,000 payment to Realtor X?
I'm thinking the Realtor wouldn't want to go along with this
too many questions
I'm w/Piffin. This deal stinks. I would ask the Managing Broker about the policy
Actually the legality of this varies on a state by state basis. But it wouldn't show up on a closing statement if it was paid advertising for your company any more than the payment to the local newspaper or cable TV channel would show up on the statement. It's pay per performance advertising and yes it is illegal in some states but not all. So far I've not had to pay it but I'm doing a deal exactly like this right now due to my nervousness about the economy and am structuring it as described. And yes I agree that it stinks and isn't usually a good way to do business but these are unusual times. As I discussed on a separate thread we are having banks require people with good credit put 50% cash down at closing. How many homes can you sell at a 50% loan to value ratio?------------------
"You cannot work hard enough to make up for a sloppy estimate."
>> But it wouldn't show up on a closing statement if it was paid advertising for your company any more than the payment to the local newspaper or cable TV channel would show up on the statement. << Some may consider this a nit but I consider it very pertinent: Correct me if I'm wrong but in this situation where the home buyer owns the land there is no closing. More to follow in the next post...
To add to what Bing said, ask the RE what services she intends to provide for her fee - other than just the "connection".
I'll chime in.
It is extortion and not a practice that the reatly company requires, but they will take the money if offered i am sure.
If you push back, the agent will go find another builder who will play ball.
IMO, that is wrong and not in the best interest of the client, but that is what some realtors do. (Can be read MOST in some cases)
If it were me, I would discuss what the agent was willing to put into the deal. Selections? Contract and upgrade work? Etc.
If you are getting some value added out of the deal, maybe you can justify some finders fee. (I think 3% is high but that is my opinion)
If you think that she is a snake in the grass and dont want to play her games, go meet with her manager and explain your position and let them know that if they were to work with you and help your business, that you would certainly be motivated to re-ciprocate with referrals, etc but that you dont lke the extortion business.
Then put your head on your pillow and sleep soundly.
Then go after the info and find out who the buyer is and sell them directly.
If not extortion it is certainly parasitic. Another middleman pushing in between the client and the people who actually do the work. No wonder building costs so much.
Re.
"No wonder building costs so much"
The realtors can have an affect on new construction costs but not always and not in every market. Certainly they will try to get their 3-6% and sometimes they earn it.
Construction costs so much because everything costs so much.
Materials, Labor, Insurances (Health for employees, general liability, workers comp, and auto) tools, fuel, taxes on laobr, taxes on materials, cost for accountants to figure out how to fill out the darn tax forms, etc.
I did a spec. project about 12 years ago just as the local market collapsed and got caught. I ended up selling one unit for a $2000 profit and moved into the other myself. After breaking down my costs, of the $300 000 total, more than $50 000 went to soft costs - lawyers, real estate fee, un-necessary surveys etc. And that doesn't include taxes of any sort.
It's not just real estate agents I object to, it's everyone who manages to insert themselves into a transaction without really being necessary, adding anything substantial or doing any real work. Parasites!
fingersandtoes
In a sense then contractors are parasites.. I know several contractors who never pick up anything other than their briefcase and still they get their percentage..
In fact since I built virtually all of my home myself and saved design fees and all those other costs and expenses such as taxes and insurance etc.. plus I bought my wood directly from a sawmill and saved all the middlemen costs that a lumberyard has The number of parasites I eliminated must be astonishing..
ON the other hand I have over 9 years in building this place and that means every night and weekend of spare time.
Some would pay a few parasites to save that dedication and effort..
dont get me started about the fees.
I got 2 kitchen permits in the last month in two different townships.
One was 200 the other was 800
Same number of inspections. Same qualifications to be an inspector.
One building had a foyer that was about 4000 square feet.
The other was about 1000 square feet
Guess which permit was more expensive.
Oh, and in another township I paid a bribery fee of $6000 so I could get my permit after fighting for a year. I called it a donation.
Dog:
Have you built a home for someone on their land before?
From the National Association of Realtors Code of Ethics:
Article 5
REALTORS¯ shall not undertake to provide professional services concerning a property or its value where they have a present or contemplated interest unless such interest is specifically disclosed to all affected parties.
Article 6
REALTORS¯ shall not accept any commission, rebate, or profit on expenditures made for their client, without the client’s knowledge and consent.
When recommending real estate products or services (e.g., homeowner’s insurance, warranty programs, mortgage financing, title insurance, etc.), REALTORS¯ shall disclose to the client or customer to whom the recommendation is made any financial benefits or fees, other than real estate referral fees, the REALTOR¯ or REALTOR¯’s firm may receive as a direct result of such recommendation. (Amended 1/99)
REALTORS
¯ shall not recommend or suggest to a client or a customer the use of services of another organization or business entity in which they have a direct interest without disclosing such interest at the time of the recommendation or suggestion. (Amended 5/88)
Article 7
In a transaction, REALTORS¯ shall not accept compensation from more than one party, even if permitted by law, without disclosure to all parties and the informed consent of the REALTOR¯’s client or clients. (Amended 1/93)
Jeff