Friday, July 28, 2006 | In San Diego’s stagnant downtown condo market, sellers trying to unload their properties have discovered a new tactic: Offer real estate agents up to three times the normal commission to find a buyer.
(Editor’s Note: Due to mathematical errors, the original version of this story gave the false impression that Richard Caty, the seller of the condo, netted about $14,500 less than he would have had he dropped the condo’s price $24,000 and sold it with a regular commission. Rather, the difference would be an estimated $3,645. Caty and his agent said he made no more or less on the sale as a result of the commission, as his agent said the buyer made other concessions in the closing of the deal. Likewise, the original version of this story erroneously reported that agent Scott Hoover’s commission would have been $13,530 had he received a 3 percent commission. The commission should have been estimated at $19,530. We regret the errors.)
Those who have pioneered the trend say it’s capitalism at work, with motivated sellers looking for new ways to make their condos stand out from the growing crowd of downtown properties on the market. But the triple commissions have others in the industry concerned that the new approach leaves Realtors – rather than buyers – reaping a windfall from a buyer’s market.
In at least one of the three examples recorded locally in recent months, the seller offered the enhanced commission instead of dropping his sales price by $25,000.
“Thank God you can’t find that many, that there aren’t that many out there. There is something that isn’t absolutely correct in what’s being done,” said Tom Stevens, president of the National Association of Realtors. Stevens said though high commissions are a legitimate sales tactic, commissions as high as 7 percent or 8 percent are unusual.
Some industry experts worry that the new marketing technique could lead an agent to hunt for the best commission, rather than the best property for their client.
“I think there’s definitely an inclination on the part of agents to steer their buyers to deals where the commission levels are offered at higher amounts. That’s just human nature,” said Gary London, president of the London Group Real Estate Advisors in San Diego.
Typical commissions downtown range between 2.5 percent and 3 percent of the sales price, and are set and paid by the seller of the property. In recent months in San Diego, buyer’s agents have three times received a commission of between 7 percent and 8 percent, according to the Multiple Listing Service – a database of local real estate transactions.
All three deals were recorded in the first five months of 2006, but local Realtors said the practice is more widespread than the MLS records suggest. Each of the three recorded high commissions came from downtown condo sales.
The trend comes as the downtown condo market cools. Three years ago, there were fewer than 100 condos for sale in downtown San Diego. These days, there are nearly 600 condos for buyers to choose from.
As sales have slowed, increased competition among sellers has inspired a host of marketing incentives aimed at attracting buyers: Sellers have offered to pay buyer’s homeowners association fees for five years. Some have even bought exotic sports cars for agents who can close deals. Meanwhile, many local developers have increased their standard commission rates for agents who bring them buyers – but not to the extent of the handful of high commission deals seen recently in downtown.
In what is supposed to be a buyer’s market, the increased competition for sales often results not in cheaper homes for buyers, but in more lucrative deals for the agents involved, some local experts said.
Other local Realtors said such deals are a natural byproduct of a changing market.
“It’s just people helping people,” said Tyler Adams, a San Diego Realtor who received a beefed-up commission one of the recent high-commission deals. “When an agent offers a high commission, they’re letting other agents know they’re serious.”
Adams said the MLS records are deceptive and that there are many more high-commission deals happening in San Diego at the moment and not just in downtown. He said he knows of at least 10 high-commission deals currently pending in downtown.
“You just have to know the right people,” he said.
In May, Richard Caty sold his one-bedroom condo in the Grande condo tower overlooking San Diego Bay using a high commission to attract buyer’s agents.
He had been willing to lower his asking price by $25,000, he said, but instead chose to pay out a higher commission upon the urging of his real estate agent. The incentive worked. So well, in fact, that he ended up selling his unit for $651,000 – $2,000 more than the asking price, according to property records.
The buyer’s agent in that deal, Scott Hoover, a broker based in the Ventura County town of Newbury Park, received a $48,825 commission. At a standard 3 percent rate, the commission would have been $13,530.
Caty said the deal left him feeling uneasy – he said he was concerned that the Realtor was reaping the high commission at the expense of his buyer, who could effectively have bought the condo at the reduced price.
“There was a lean, green doubt in my mind,” he said.
The buyer of that property, Gene Azar, also of Newbury Park, said he was happy with how the sale panned out. He said he was unconcerned by the high commission his agent received for arranging the deal, even when he learned he could have purchased the unit at a lower price.
In the end, Caty netted about $14,500 less in the deal than he would have had he dropped the condo’s price $24,000 and sold it with a regular commission.
Ben Mason, who as Caty’s agent set the commission, said the offer is just the latest in a long line of incentives that have grown out of the changing real estate market in San Diego.
“When you have a motivated seller, the commissions are driven by that motivation,” he said.
Jim Abbott, a downtown Realtor who wasn’t involved in any of the recent condo deals, said there are two schools of thought when it comes to incentives: cater to the buyer directly through price reductions or other perks like paying their homeowners association fees, or look to agents by offering a higher commission.
Abbott prefers enticing buyers directly, but said he understands why some sellers instead choose the other marketing route.
In a market with hundreds of listings, buyers are spoiled for choice and sellers have to make their property visible, he said.
“If you’ve got 300 things to choose from, which 20 are you going to show?” he said.
A buyer’s agent owes a duty to his or her client to represent their best interests. That’s a fundamental principle of the real estate industry.
It’s the agent’s job to find a property that best suits their client’s needs, regardless of what commission they are likely to get out of the deal. The concern among some analysts is that Realtors could take advantage of their position to reap the high commissions instead of best serving their clients.
Raphael Bostic, an analyst at the University of Southern California’s Lusk Center for Real Estate, said buyers and sellers are especially vulnerable in a market in transition like downtown San Diego. Sellers may feel helpless because they are desperate to make a sale, he said, and buyers may be unaware of the area, the sales history in a neighborhood or the shifts that are taking place in the market.
“The Realtor’s able to take advantage of desperation on both sides,” Bostic said.
If Realtors are taking advantage of market conditions, consumers were doing the same thing when the real estate market was hot.
A couple of years ago, when condos in downtown San Diego were selling within days of being listed, Realtors often found their commissions reduced. With so many buyers to choose from, sellers could negotiate commissions downwards and, according to downtown Realtors, they often did.
But these days, selling a property can almost be something of a liability for agents, said Anthony Napoli, a Realtor in Little Italy. It could take an agent several months to sell a property in today’s market, he said. That costs time and money, he said, and it’s only natural that a Realtor should expect a non-discounted commission in return.
“To do it properly, you have to make up fliers, you have to put ads in the paper, you have to run open houses – that all takes time and material and personnel,” Napoli said.
Nevertheless, Napoli thinks 3 percent is an adequate commission to pay buyer’s agents.
Charles Jolly, president of the San Diego Association of Realtors, said his organization has never commented on commissions. Commission levels are set by each brokerage or broker, he said, and it’s not the association’s place to comment on individual marketing techniques.