Questions About REALTORS^®

What is a REALTOR^®? What’s the difference between a REALTOR^®, a real estate agent, and a broker? Why the funny looking ®?

"Real estate agent" is a general term that refers to a variety of real estate professionals, including salespeople, property management professionals, and leasing agents. In Illinois, real estate license laws require that any of these real estate professionals hold a real estate license. The term "REALTOR^®" refers exclusively to real estate professionals who are members of the National Association of REALTORS^® (NAR), the largest real estate trade organization in the United States. So why the funny looking ®? The term "REALTOR^®" is a trademark of NAR reserved exclusively for use by its members.

Why should you, the consumer, care about this seemingly subtle distinction? All REALTORS^® must adhere to a strict code of ethics designed to protect the interests of consumers and to generally elevate the standards of the industry. While all real estate professionals must adhere to applicable laws, REALTORS^® voluntarily agree to hold themselves to a higher standard.

Finally, a broker is simply the title of an individual who has obtained the higher-level real estate license offered in Illinois. While a salesperson license (the lower level) requires taking only one course, the broker’s license requires several additional courses and passage of a more comprehensive licensing exam. A broker may operate his own real estate practice, while a salesperson is required to practice under a sponsoring broker. To make matters just a bit more confusing, many individuals who hold broker’s licenses choose to practice as salespeople, working beneath another sponsoring broker. A REALTOR^® may be either a broker or a salesperson

Back to FAQ main page   Email Matt Difanis

Why should I use a REALTOR^®?

When you need to draft a will or replace the transmission in your car, if you want the job done right, you will probably seek assistance from a trained professional. Buying and selling real estate is no different.

If you use a REALTOR^® to sell your home, your agent should:

• Perform a Comparative Market Analysis, so you’ll know how your home compares to other similar homes in your area that have sold recently;

• Advise you in determining a list price;

• Handle all advertising; including listing your home in the Multiple Listing Service;

• Be available at all times to field inquiries about your property, weeding out "lookers" or unqualified buyers;

• Help ensure your compliance with applicable laws and contract terms, including disclosures and inspections—keeping you out of trouble and saving you from unnecessary litigation and legal bills;

• Negotiate on your behalf to obtain the best possible price and the most favorable terms for your property; and

• Be thoroughly trained and licensed, so you know that you’re depending on a knowledgeable, trustworthy professional

If you are a buyer, you should be able to count on your agent to:

• Help pre-qualify you for a home, so you will know up front what you can and cannot afford, and so you will be prepared for what banks and mortgage lenders will require of you;

• Show you a variety of homes meeting your criteria, including homes listed with other agents or other companies;

• Be honest and forthright, letting you know of any drawbacks or potential trouble spots in the properties that you visit;

• Provide you with a Comparative Market Analysis (CMA) for any home in which you are interested, so you will be able to see what other similar homes have sold for recently;

• Work diligently on your behalf, helping you negotiate the best price and the best terms for your situation; and

• Assist you in preparing for closing, including tracking down title work, scheduling inspections, and working with your lender.

You can see that having a knowledgeable professional on your side (see "Whose side is the REALTOR^® on?") can make a real difference to you, whether you are buying or selling. Read on to find out about the price tag for such a marvelous service!

Back to FAQ main page   Email Matt Difanis

Whose side is the REALTOR^® on?

This issue is a very common source of confusion for consumers—particularly for first time buyers or sellers. Under the traditional common-law system, all agents worked for the seller. That is, when a property owner hired a real estate agent to sell her home and list the property in the Multiple Listing Service, the listing agent worked directly and exclusively for the seller. Additionally, all other agent members of the Multiple Listing Service worked indirectly for the seller as sub-agents. While this system was great for sellers, it left buyers out in the cold—relying upon the caveat emptor philosophy.

Until recently, an inexperienced buyer could easily be led to believe that an agent represented him, even while that agent worked for the seller. Here’s a common scenario:

John and Sally buyer walk into a real estate office that they have seen advertised on the sides of trash dumpsters all over town. They explain that they wish to buy a house, and they tell Amanda Agent their criteria. Amanda Agent takes John and Sally out to see many different homes, listed with many different agents and companies. John and Sally work only with Amanda. Whenever they have any questions, they ask Amanda, trusting that she is working on their behalf.

Amanda Agent’s efforts pay off. John and Sally find a house that they absolutely love, listed at $100,000. John and Sally instruct Amanda Agent to present an offer on their behalf for $92,500. At the same time, they confide to Amanda Agent that they love the house and they simply must have it—even if they will have to pay full list price. Amanda Agent dutifully presents the offer from John and Sally to the sellers’ agent, but she warns: "Tell your sellers not to take $92,500. John and Sally will pay full price."

Here’s the score at the end of the transaction: The sellers get full price for their house; they are thrilled. Both agents receive their commissions based upon a sale price of $100,000—not $92,500—and they are both thrilled. John and Sally paid full price—never knowing that "their" agent had worked against them.

You’re probably thinking that this seems terribly unfair to buyers, leaving them wide open to exploitation. The Illinois General Assembly agreed, finding "the application of common law agency to the relationships among real estate brokers and salespersons and consumers of real estate brokerage services has resulted in misunderstandings and consequences that have been contrary to the best interests of the public." (225 ILCS 455/38.5) The result: Since January 1, 1995 Illinois has provided for buyer agency, under which a buyer agent is obligated to work in the best interests of the buyer, keeping all confidential information confidential. Illinois law further stipulates that representation does not depend upon the source of the agent’s compensation. This means that like the old system, sellers typically pay the real estate commissions for both agents, but the buyer agent is loyal only to the buyers. What a deal for buyers: Enjoy all the benefits of working with a REALTOR^®, and let the other side pay your agent! (In case you’re wondering who looks out for the seller under this new system, remember that the seller usually has her own agent, working exclusively for her.

In Illinois, while you will sometimes encounter agents who represent only buyers or represent only sellers, most agents represent both buyers and sellers. The most common example of doing both with one client is when an agent is hired to sell a client’s home and also work as a buyer agent to find the same client her next home. The term "buyer agency" simply means that, while acting as an agent for a particular buyer, that agent must work in the best interests of that buyer client.

In my own practice, I work with both buyers and sellers. Since I am fairly young, I work with many young first time buyers whom I know personally. Because of my young age, I have always worked under the current buyer agency system. While many buyers like to see an agent who has some gray hair to show for years of experience, many of the veteran agents still work under a "list price" mentality. That is, many of these agents worked for so many years under the old system that they have remained in the habit of working toward a full list price sale whenever possible. After all, they do typically make more for a higher selling price. Further, many agents do not volunteer information about comparable properties to their buyers, since it involves additional effort and may sometimes "kill" a deal. I pride myself in prioritizing my clients’ best interests above my own. When working with buyers, I negotiate aggressively to help them obtain the lowest possible price and the most favorable possible terms. Additionally, I always volunteer to provide additional information about comparable properties. While these practices have undoubtedly created extra work for me at times, I simply believe them to be good business!

Back to FAQ main page   Email Matt Difanis

How much do REALTORS^® charge, and is there a typical "going rate" for their services?

Buyers: see "how much do buyers pay" below

The short answer to the "how much" question: It depends. The fees that brokerages (and their agents) charge for services vary. When a property owner lists her home for sale with a REALTOR^®, that seller typically agrees to pay the agent’s company a fee when the house sells. While not always the case, that fee is generally a percentage of the gross selling price of the property.

So you say, "it depends." Is there a typical "going rate" for Realtors’^® services? Absolutely not!

The real estate industry must comply with federal and state antitrust laws. While many people immediately associate antitrust with monopolies, such laws also prohibit practices such as price fixing, group boycotting, and allocation of customers or markets. The real estate industry must be particularly careful to avoid even the appearance of such practices, because competing REALTORS® tend to frequently work together. For example:

I work for RE/MAX Realty Associates, and Amanda Agent works for Dark Ages Realty. Even though Amanda and I compete for the same clients in the same areas, I work with my buyers to sell Amanda’s listings, and vice versa. (See Multiple Listing Service below. Additionally, Amanda and I might be on the same committee at the Champaign County Association of REALTORS®, working together to set policies for all local REALTORS® to follow.

Because of this complicated dichotomy of competition versus cooperation, REALTORS^® must be especially careful not to give the impression that commission rates across all brokerages are fixed. Consumers should see our cooperation through the Champaign County Association of REALTORS^® and through the Multiple Listing Service as a benefit to the public—not as a vehicle for coordinated consumer exploitation!

So back to the original question: "What can I expect to pay?" The commission charged by a brokerage will depend upon a variety of factors, including the price of the house, the amount and type of advertising, and any additional work the agent has to do (e.g., coordinating repairs and maintenance for an out-of-town seller). Keeping these factors in mind, sellers in the Champaign-Urbana area commonly pay between 5% and 7% of the gross selling price of their property.

While prices may not be fixed across different competing brokerages, there often will be a set pricing policy within an individual brokerage. Also, don’t base your decision solely upon the commission amount. When you list your property for sale with a REALTOR^®, you do so because you want it to sell quickly for top dollar. Signing a listing agreement with a bargain priced brokerage might be a huge mistake if it means that your home sells for less than it should, or—even worse—that it doesn’t sell at all.

How Much Do Buyers Pay?

When a buyer works with a buyer agent to buy any property listed in the Multiple Listing Service, that agent’s commission has already been provided by the seller and the listing agent. This means that buyers generally don’t have to pay any commission at all! One possible exception to this rule is a buyer who uses a buyer agent to purchase a home for sale by owner (FSBO). In this case, the agent can sometimes negotiate with the seller to pay a commission to cover the compensation for the one agent (since there is no listing agent); otherwise, the buyer would have to reach an agreement to pay the buyer agent’s company.

Back to FAQ main page   Email Matt Difanis

Don’t REALTORS^® make a fortune? Where do they spend all that loot that they make on the backs of sellers?

Yes, and at casinos. Just kidding. J

While you've undoubtedly seen many REALTORS^® cruising around in Cadillacs and dripping with jewelry, REALTORS^® on average don't tend to make loads of money. But how can this be, you ask, since they get a cool 6% (or whatever exorbitant commission rate they charge) on each house that they sell? Consider this very true-to-life example:

Lester Landlord hires me to sell one of his rental houses. When Lester signs my company’s listing contract, he agrees to pay a gross commission of 5.5% of the total selling price of his property. One month later, I become Lester’s hero when his home sells to a buyer client of Amanda Agent for $100,000. At closing, however, Lester is no longer thinking about my heroism, when he pays a gross commission to my company in the amount of $5,500. Before quitting your job to go into real estate, thinking that it is surely the ticket to fame and fortune, consider the following: As a RE/MAX agent, I pay all of my own business overhead.  That is, my company does not pay for any portion of my costs.  Right now, my basic fixed business expenses run close to $3,000 per month.  Additionally, I pay nearly that much more in variable expenses, such as my mileage, printing expenses, computer hardware and software, etc.  With literally thousands of dollars of business expenses charged to me every month, I would have a negative net income if my earnings from sales is less than my overhead.

In the case of Lester Landlord above, I pay out $3,000 of the $5,500 total commission to the brokerage whose agent brought the buyer for Lester's property.  The remaining $2,500 does not even come close to offsetting even one month of business expenses for me.

Indeed, there are a decent number of real estate professionals who make a good living, and I am blessed to count myself among them.  But those agents do not make their living from gouging a few clients a year.  Instead, successful agents with high incomes earn their living by providing expert services to a great many--a few dozen or more--clients per year.

Back to FAQ main page   Email Matt Difanis

Why do REALTORS^® have all the peculiar letters and terms after their names? Is this some sort of secret code?

Although a real estate novice might mistake all the letters for top-secret nuclear launch codes, they are really quite harmless. The letters are abbreviations for various designations. Again, this is one of those things that REALTORS^® love to plaster all over their business cards, even though it looks like Greek to most normal people. Here’s the rundown of the most common ones:

• GRI: Graduate REALTOR^® Institute. This means that the REALTOR^® has completed a series of seminar-type training sessions to improve his or her overall skills and level of competence.
• CRS: Certified Residential Specialist. As the name suggests, this designation is somewhat specialized, training the agent in dealing with residential transactions.
• CPM: Certified Property Manager. Here’s another one that’s fairly self-explanatory, once you see the full title. This designation is less common among sales agents, but very desirable for property managers and leasing agents.
• CCIM: Certified Commercial Investment Manager. Again, less common among agents who primarily sell houses, but a highly coveted designation for someone in a commercial sales position or for a real estate investment consultant.
• Multimillion-Dollar Producer: Okay, this one does not involve cryptic-looking abbreviations, but it is worth mentioning. This designation refers to the gross sales volume (e.g., $2.5 million of houses sold per year)—not to the agent’s take-home pay. While agents will frequently decorate their cards with some version of this designation, it doesn’t mean much: If an agent produces less than multi-million dollar volume, he probably doesn’t earn enough to make a living. (See "Don’t REALTORS^® Make a Fortune?")

A FINAL THOUGHT ABOUT DESIGNATIONS:

It is important to realize that a business card crammed full of designations doesn’t automatically make that agent either intelligent or any good. Illinois license laws have very lax requirements for licensees—too lax in my opinion. A licensee may have obtained any or all of the above designations without having even graduated from high school (only a GED is required). When selecting a real estate agent with whom to work, ask questions and be critical. After all, you will be depending upon that individual to walk you through a very complex and critically important financial transaction. Take time to choose wisely!

Back to FAQ main page   Email Matt Difanis

What is the MLS (yet another one of those secret codes) on many Realtors’^® business cards?

The Multiple Listing Service (MLS) is perhaps the greatest invention to hit real estate since the invention of the tacky photo business card! The Multiple Listing Service simply refers to an information sharing system among REALTORS^® within a particular market. All members must pay several hundred dollars each year to participate. All participants agree to submit all of their listings to the MLS, where all other REALTORS^® will have access to them. The result: When a seller lists her home with a REALTOR^® who is a participant in the MLS, the listing agent works to sell her house, and every other MLS participant will also be able to show and sell her house to their buyer clients! This works in favor of buyers, too. Any buyer can walk into the office of an MLS participant, and that one REALTOR^® can access all houses for sale with all MLS members! In the Champaign-Urbana area, the MLS is managed as a committee within the Champaign County Association of REALTORS^®, so nearly all of the area’s 400 REALTORS^® participate.

REALTORS^® don’t pay hundreds of dollars each year just to exchange notes; the benefits of the MLS go much further. All participants use the funny looking keyboxes that you’ve probably seen on the doorknobs of homes for sale. With these keyboxes, MLS members who are working with buyers can actually show other agents’ listings—often without ever having to contact the listing agent. Additionally, MLS members have access to an enormous online database with detailed information about all current and past listings. REALTORS^® may use this data to perform a Comparative Market Analysis (CMA), in which they prepare a report for a subject property that details what other comparable properties have sold for recently. Again, this works in favor of both buyers and sellers. A good buyer agent will perform a CMA for his clients to protect them from overpaying for a property, while a listing agent will use a CMA to assist her clients in selecting appropriate list prices for their homes.

Back to FAQ main page   Email Matt Difanis