HOME BUYING METHODS OTHER THAN COMMISSIONS IN CALIFORNIA

Commissions are the most popular way of paying for real estate agent services when purchasing real estate today. Buyers often believe that their agents are free as they are not asked to pay any money upfront to start working with an agent. These services are not free. The commission is included in the price of a house. So, are there other home buying methods one could use? How do they compare to the commissions?

In this post I am focusing on characterizing the following home buying methods: cash back (or discounting) commonly offered by real estate agents, the Redfin method which combines the use of employees with discounting offered by Redfin and professional services offered by lawyers and the independent brokers, such as Cimpler Real Estate.

Cash back (or discounting) has been quite common in the Bay Area for quite some time. It is a variant of the commission method in which the buyer and his/her agent agree for part of the commission to be refunded to the buyer at transaction completion. Its popularity is fueled by large amount of agents competing for clients. Many newly licensed agents are using it to break to the market helped the established agents to fight back discounters by claiming that they provide inferior and incomplete service. The opposite claim that an agent provides full service, so it has to be superior is often just an empty promise.  It certainly means that agent will charge a full commission, but says nothing about the amount of service to be provided or its quality.

The Redfin Method: The key innovation of the Redfin method is its use of real estate licensees as employees and not independent contractors. Anyone who provides home buying and selling services in California has to be licensed by the State of California, so both agents working as independent contractors (most) and Redfin employees are licensed California real estate agents. Additionally, Redfin is a discounter and offers cash back to clients at the completion of home selling or buying transaction.

The key differentiator of the Redfin’s method is that Redfin’s  real estate licensees are employees, therefore not paid commissions but wages. Redfin believes that they can control the quality of the process better by using employees instead independent contractors, so they will have more happy customers. The main question is "will the best professionals surrender their independence for a steady income of companies such as Redfin?" Will a Redfin employee do everything an independent agent would do? Imagine that you are calling both, an independent contractor and employee during the Giants game. The employee might forego his premium by not responding to a client’s call, but independent contractor would risk the entire commission by doing so. It does not take a rocket scientist to figure it out who is going to answer your call! At the same time, there is no doubt that Redfin is in a better position to control the quality of the less skilled agents.

Professional fees for home buying: While they are not offered and used as widely as commissions they provide home buyers with the option to pay less. Professional services are offered by many smaller, independent brokers and by real estate lawyers. The key advantage is that you pay only for service you requested and not for all unpaid services your agent provided for other clients (agents working for commissions perform a lot of work for which they are never paid for as transactions frequently fall through) .

• The Cimpler Way is a fee based method of Cimpler Real Estate. Buyers pay fees only at the completion of a home buying transaction. To make first time buyers comfortable and secure with paying fees Cimpler also offers an all inclusive comprehensive service, similar to a full service in a commission based method.  A very important distinction of the Cimpler Way is that discounts are offered by lowering the price of the house and not as cash back to a buyer. Thus, the buyer not only pays less for the house, but also pays less for other services which cost depends on the house price, such as real estate tax, mortgage, home insurance and down payment. Cimpler offers part of its commission (transaction savings) directly to seller increasing seller’s proceeds.  Cimpler allows buyer, either to choose his/her own real estate agent, or to work with a Cimpler selected agent.

• Using a lawyer (who also has real estate license) for selected services is another choice you have. Please note that California is a state that does not require an attorney for closing of a real estate transactions (some states do require it). The payment methods and fees vary for different lawyers, you might pay per hour or pay a fixed fee per transaction for specific service requested. Per hour charges are usually high and add up very quickly, but if a fee for service method is used, buyer pays much less than if a commission method is used. A lawyer will provide the purchase agreement and help buyers to negotiate the final contract. All other services being part of home buying are performed by buyers. This method is mainly used by experienced buyers, most of the time investors, who can perform many services usually performed by agents.

Do your research and choose the method that suits your needs best. This post was prepared using the “Cimpler Advisory for the CA Home Buyers”. The Advisory helps buyers to take better advantage of resources available on the internet to learn how to buy a house and how and when to choose an agent. Most importantly the Advisory also shows how to distinguish between any real estate agent and someone who really is a “real estate professional”. If you are interested to receive the entire copy of the Advisory, please contact the author.