Paul Meloan – Vested Interest

As real estate emerges from its six year coma, we are beginning to see signs that interest and activity are picking up.  If you are looking to buy or sell real estate, no doubt you have noticed all the slick brochures and descriptions of homes in your area, or homes you may be interested in buying.

Before you become involved with a realtor, it’s important to remember what a realtor is and is not.  First off, did you know that the word “realtor” is a trademark?

A Realtor(tm) is a member of the National Association of Realtors, the biggest trade group that represents the interests of its members before local and the federal government.

A realtor can advise you on how to present and market your home to the world.  Presumably they have expertise on how to stage a home and make its availability known to the universe of persons who may be interested in purchasing it.

What is a realtor not?

Realtors do have their limits, like here and here.

A realtor is not an attorney.  He cannot give you legal advice, and if he does it may end up being some of the most expensive advice you never paid for.

A realtor is not an architect, designer or builder.  He may have all kinds of grandiose visions for the house you are considering, but absolutely no idea whether they can happen.

A realtor is a prisoner to an archaic system where they earn 100% of their commission if the deal closes, and zero % of it if the deal does not happen.  This is a bigger source of friction that you may imagine.  For example, if on a $1 million purchase the buyer and seller are $50k apart (let’s say the asking price is $1.025mm and the offer is $975k).   I have $20 in my pocket that says in every instance both realtors will advise their clients to split the difference, regardless of the actual market for the house and how good or bad a deal that is for their particular client.

At a gross commission of 6%, divided between two brokers, each broker stands to make up to $30k if the sale closes.  Most agents have a revenue sharing arrangement with their offices, which means of the $30k anywhere from 60-95% goes into the pocket of the agent involved.

If the agent’s cut is 75%, on that $1 million sale he will make $22-23k.  Is there a realtor on earth who will walk away from $22k in the bag just because his client may be over- or under-paying by 5%?

Paul Meloan is the co-founder and co-managing member of Aegis Wealth Management, LLC, in Bethesda, Maryland USA. Before Aegis Paul was a practicing attorney as well as working in the tax practice of Ernst & Young, LLP.

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