Real Estate Commissions

Steven Pearlstein
Washington Post Columnist
Wednesday, May 18, 2005; 11:00 AM

Washington Post business columnist Steven Pearlstein was online to discuss real estate commissions and listings. In his latest column , he writes that the current, convoluted arrangement misaligns the agents' incentives, stifles innovation and prevents efficient, competitive pricing..

A transcript follows.

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Richmond, VA: What is a REASONABLE commission to expect to pay now days? I live in the Richmond Metro area and homes sell rather easily. Why pay 18,000 for a $300,000 (which is very average in this area.) Also, do you recommend shopping for the best commission rate?

Steven Pearlstein: Every area is different. Up here in Washington, you can sometimes get the agents down to 5 percent on an expensive house. But my experience is that when you try to suggest something less, or a more creative structure with a base of 4 and some add-on incentives, they just won't talk to you. If you ask for a proposal from a brokerage, they tell you all about how great they are and their past successes, but never mention price. That is how the 6 percent conspiracy is maintained, and why shopping around is likely to be so unfruitful among the traditional agents who probably are, in fact, the best people to help you sell your house.

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Bristow, VA: Steven,

Thanks for finally saying what's needed to be said for a long time. Many in the real estate industry refuse to change, continue to overcharge for services rendered and real alternatives are needed.

I don't blame them though. If I could bag a $20k+ commission on a listing that sold in less than a week with minimal effort in this active market, I'd try to stave off competition too.

Rob Parker

Steven Pearlstein: Rob, By saying what you're saying, you can be sure you're about to get a blizzard of letters from angry real estate agents telling you that they really earn every penny they get. Just a warning.

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Seattle, WA: I would be interested to hear your opinion on a phenomenon I've witnessed a lot recently both here in Seattle and in D.C. It's the situation where an individual purchases a 'diamond in the rough' vintage bungalow, then does a lot of paint/cosmetic work, updates the kitchen in the cheapest way possible -while still including granite counters], and perhaps replaces the roof or heating unit.

Not a whole-house gut job, just paint, putty and a new kitchen and/or bath.

Then house goes on the market again within 4 months or so for $400K more. And it sells?!;

So, why do you think so many people overpay _so much_ for the pleasure of having someone else put in a cheap kitchen, paint the walls, and refinish the floors? I understand there is time crunch factor for busy buyers, but it strikes me as really irrational to pay about $250,000 for a result you could contract out for yourself at a cost of about $75,000.

Thoughts?

Steven Pearlstein: The wise-guy answer is: Have you ever DONE a kitchen and bath renovation? But you are right: we overpay for these things because we are irrational.

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KSR, VA: How long do you think the housing boom will last?

Steven Pearlstein: A bit longer, but not much, in hot markets like ours.

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Fairfax/Chantilly, VA: What do you think of FSBO (For Sale by Owner)? It seems that more and more of them are popping up around our area. Thanks!;

Steven Pearlstein: In hot markets, it is worth a try for a couple of weeks. Get a good real estate lawyer, though, to help you prepare the "offering documents" and handle the closing. You also have to consider whether you want to offer a selling broker's fee, and how to advertise its availability. Contrary to what the code of professional ethics calls for, agents are known to allow their own self-interest to color their view of their clients' interest.

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Silver Spring, MD: Could large banks or financial institutions eventually corner the market on real estate transactions?

Steven Pearlstein: Ah, this is the great fear of the realtors groups in lobbying against reforms of the closing process, which is rigged against consumers and ridiculously over-expensive. The world may be moving to a model where a single company handles all aspects of a transaction, from listing to closing to inspection and financing. Realtors want to be able to do that, but don't want banks to be able to do that. That's ridiculous. Either everyone should be able to offer a package, at a single price, or nobody should be able to.

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Arlington, VA: Houses in my neighborhood are still selling in less than a week with multiple offers and the selling prices are just under $500K. I do not want to pay full commission (6%) but I think I would benefit from a full service realtor... My question is, will listing agents be more likely to work with a seller on the commission rate knowing that inventory is still low, houses are still selling quickly, (and in most cases with multiple offers), and that a home owner can shop around for a listing agent to see who will be willing to work with them on the commission... or will most agents try to bully the home owner into a full price, 6% commission. Also, are commission rates paid part of the public record when the sales transaction is recorded with the County? Thank you.

Steven Pearlstein: I don't think commissions are on the county record, although they are on some forms filed with HUD.

On your other question, you'd think, in markets with tight inventory, full service agents would be willing to bargain on commissions. Again, a few are, particularly involving expensive properties, and in those cases you should be able to find a good one willing to go down to 5 percent. But remember, selling agents for one customers are also buying agents for another, so they may not be as desperate as you think. They have a lot at stake in maintaining the traditional price levels and disabusing consumers about the wisdom of bargaining on price. These are conversations they DON'T WANT TO HAVE.

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Arlington, VA: I'm a would-be first-time homebuyer and I'm perplexed by the DC marketplace. I finally decided to sign on with an agent thinking this would make things easier. Five unsuccessful offers later, I'm now told that houses are going for 10-15% over asking price.

If I had known that at first I might have not placed the three offers to begin with. Having read your article, I now wonder whether the disappointment was orchestrated to instill a sense of desperation that would make less desirable, slower-moving properties more appealing.

Steven Pearlstein: No, there may be an unwritten conspiracy among agents to prevent price negotiation over commissions, but the market for the actual property is not rigged. It reflects an excess of demand over supply in many price ranges.

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Washington, D.C.: I hope the realtor profession changes dramatically in the next few years. It astounds me that sellers' agents typically earn 3% of sale price, when sale prices are so high nowadays. On a million-dollar house -- not so unusual around here -- that's $30,000!; For what?? Putting together a brochure, sitting through a few open houses, helping sellers evaluate offers, and paying a few listing fees? I just don't think the work they put in, particularly when houses typically sell in a few weeks or less, is worth anywhere near that amount. No wonder so many people are trying to become agents.

Steven Pearlstein: Indeed. And with so many new agents, it is putting downward pressure on agent income, because a relatively fixed number of transactions has to be divided among a greater number of agents. But, interestingly, it isn't yet having a big effect on the price of the services (the commission rate), as economic theory would suggest, which raises the suspicion of a less than perfectly competitive market. To be sure, average commissions have come down from the 6 percent rate a decade ago to just over 5 percent today, nationally. But remember, during the same period, the price of real estate has probably doubled. So do the math: a 16 percent reduction in the commission rate, applied against sales prices that are 100 percent higher. Translated: A big increase in per transaction fees.

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Bethesda, MD: I remember back in the 70's my father went to Montgomery College and took a "real estate course". Passing such a course meant that you could act as an agent when buying or selling a home thereby claiming half the commission. That was legislated away and replaced where you could only receive such training by working for a real estate company. I know of no other profession where THE LAW says you must work for the profession before you can become trained in the profession. I agree with everything in your article except the 2.5 - 3% commission Wes Foster is happy to receive. Long&Foster wants 7% on the homes it sells (of course, that is negotiable :-)

Steven Pearlstein: Wes only receives 7 percent if he represents the seller and represents the buyer, too -- or doesn't have to split the commission because the buyer has no agent. And you have to realize that Wes doesn't get the full commission. His agent or agents do. And while in the past the traditional split was 50-50 between broker (Wes) and agent, the good agents that bring in lots of business now command a much more generous split, which has been putting downward pressure on the profits earned on each transaction by the brokerage. The brokerages, however, have made up for that by getting into the title insurance and financing business.

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Washington DC: As an agent in DC, MD and VA I WISH that buyers and sellers could have their own commission arrangements irrespective of the counter party. However, most buyers today presume that they will not have to pay for their commission 'out of pocket' and therefore this concept is a problem. Buyer's Agency, of which I take full part, is one solution - but try telling a buyer (who has signed a legal document) that if they buy such and such house, they will have to pay an additional point out of pocket to me, and they go crazy.

the commission size represent an amount of risk for the agent as well. there are countless instances where i have worked with a buyer for months only to have them change their mind for some unrelated reason, or simply get priced out of their desired market. This work goes uncompensated. Or, a listing takes a long time to sell for whatever reason and the agent has paid $1,000+ out of their pocket for marketing expense - with absolutely no assurance that money will ever come back.

its true, most experienced home buyers do not need a real estate agent. first time buyers need them almost as a rule and these are the ones that take the most time and effort for an agent.

listings require the hand of an experienced agent - if an agent can't pay for themselves in an increased price for the listing then they are little more than a phone secretary. thats why i'm worth 8% instead of 6%.

Steven Pearlstein: Several points.

I heard this repeatedly that buyers are unwilling to pay for their agents, so the bill has to be secretly tucked into the sales price. This is circular logic: it is because it is. Buyers habits can be changed in real estate, as they have in lots of other markets. All it requires is having the market open and unrigged enough so that buyers agents start advertising that they will rebate some of their commission, and the old model will crumble. Very few do that, even thought the first ones would certainly get more business. Why do you think that doesn't happen?

If you are, indeed, able to get higher prices and have a deserved reputation for that, there is no reason why you couldn't command 8 percent. That's great. That's the way markets should work. But I suspect one reason you can get 8% is because there is a 6% floor propping up your 8%, one that is the result of informal price fixing on the part of an industry that enforces these prices with all sorts of subtle and not-so-subtle tactics (like refusing to deal with discount brokers). In a truly free market, you still might be worth an exgtra 2 percentage points. But the base on which those points are added would surely be lower than 6 percent.

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Bethesda, MD: After buying three and selling two homes I have found the real estate "industry" to be akin to the mafia, requiring a cut of any home being bought or sold. These experiences include the following, which I have found to be widespread and not single incidents:

-While looking for homes we were steered to homes "we would like", but not homes we wanted, based on my race and income. Many times I was told "you don't want to live there".

-While being driven to homes for sale by an agent I was told that we could not see a particular house that was "open" because it was a FSBO and the agent would not get a commision from the seller. In other words, all FSBOs were off the agent's list of houses to take us to.

-Being lied to by agents sitting on a house about defects that were pretty obvious. "Oh that is easy to fix" were typical responses for foundations cracks and other major defects.

-Agents who fight over their own commissions and the contract when the buyer (me) and seller are in total agreement and want the sale to go forward. At one house we were purchasing I found that the seller's agent was trying to get an additional 1% out of my agent's commission. I called the seller to explain their agent might kill the deal and he needed to talk to his agent. It fixed the problem and the sale went forward but the sellers agent had the gall to tell me later that it was a "nasty trick" for me to call the seller and tell him what she was doing.

So, like the mafia, the real estate industry, at least here in MD, is a self regulated industry that gets huge sums of money for little work. All you need to do is understand that the settlement lawyer, who can be sued if there is a problem in the contract the agent prepared, gets about $400 for his work while the agent on a sale of a $400K home can receive 6% or $24,000. Something is wrong. If I can sell a car myself I should be able to sell a home without paying such huge fees to people who do not even require a college degree to be the experts they claim to be.

Steven Pearlstein: Interesting....

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Washington DC: Shouldn't real estate agents either get permission, or at least inform home sellers, if they are not going to distribute the listing through other brokers consumer facing websites?

Steven Pearlstein: You'd think that would be required by regulation, or at least under the industry's code of ethics.

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bowie, md: I'm buying a house, have signed with an agent. We're looking at one tonight that's on another brokerage's "listings" page but is actually (our agent has said) FSBO. Do you know if there are any issues I need to be aware of going forward in a situation like this?

Thanks for your column today! (By the way, my husband's a boat broker, and they charge 10 percent. In Annapolis, the split is 70 percent to the "selling" broker (buyer's), 30 to the "listing" (seller's).)

Steven Pearlstein: Well, if it is FSBO, is the seller willing to pay a commission to your broker, or have you some other arrangement to pay your broker if the seller doesn't. Because there is no reason to think that your broker should be doing any work for you for free. This is what I mean about the silliness of the current system. You should have an arrangement with your broker to pay some flat fee or percentage of the buying price or so-much per hour. Then, any commission or referral fee he or she might receive should be rebated to you 100%. And you should insist that there is no side-deal hankie panky between your agent and the selling agent.

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Washington DC: I'm a homeowner. I would like to be able to save some money by doing some of the sales work myself, like open houses and negotiations. Why do some real estate brokers think I should have to pay for services I neither want nor need?

Steven Pearlstein: I think the answer to your question is pretty obvious: they think that because if they and all the other agents think that way, and act on that belief, you won't have the choice of buying a bare-bones set of a la carte services -- at least not from a reputable, experienced, well-plugged in agent. Of course, you can do it yourself, as I said previously, with some help from a lawyer and some open listing web sites, newspaper ads, signs, etc.

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Bethesda, MD: How about (fantasy, I know) an a la carte selection of real estate services-- as in, I can show my house and look for new houses myself, but I need help with the paperwork.

Steven Pearlstein: yea, how about it?

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Arlington, VA: Why do you think the real estate brokers have been able to stifle competition (especially on the Internet) so long when it has lead to dramatic cost savings for consumers in other brokerage businesses, such as airline, stocks and bonds, hotel reservations etc.?

Steven Pearlstein: Because they have captured state legsialtures and regulatory bodies to help them enforce a price-fixing regime, and been very disciplined themselves about not defecting from the cartel pricing model.

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Arlington, VA: Thanks for beginning the discussion. Like you, I have no problem paying for services rendored, but this is getting out of hand. My husband and I have found realtor that has negotiated a better deal for all parties, and we have been VERY impressed at their drive to work for us, their client. I think that there will be more technology based realtors in the near future. That will keep costs down for everyone.

Steven Pearlstein: Good news. Thanks for sharing it.

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atlanta georgia: I was reading yesterday that a major supermarket chain in the uk will be offering homeowners for 50 pounds $100 listing services for selling their homes. This seems like a great idea and maybe how the future of home sales going, especially as people are amazed at how much real estate agents are making in this easy to sell market with very little effort. Do you think it would work here in the USA.

Steven Pearlstein: There is no reason, in a genuinely open and free marketplace, there should be a number of well-publicized agents shouldn't be out there willing to work for a fixed fee. That there are not is very curious (or should we say suspicious).

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Silver Spring, MD: So how do you get the seller&buyer to each pay their own agent? When I worked with buyer's at a more traditional real estate office, they would balk at the 'admin fee' the company charged let alone want to pay me a fee when they were spending so much to buy the property.

Steven Pearlstein: We just have some work to do in moving people to a different system. Remember, if the buyer is paying his agent directly as a general rule, this should mean that the selling price of homes goes down by a comcomittant amount, because the seller knows he is having to pay only 3 percent off the top, not 6 percent.

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Boston, MA: Does the negotiate your own fee, "bring your own broker" (BYOB) compensation plan you suggest in the final paragraph of your columnrequire the uncoupling of the traditional two sided real estate commission? That seems to be but the glue that holds the MLS together and commissions artificially high. How do consumers as a group or individual buyers and sellers get there from here?

Steven Pearlstein: Well, that's the $64,000 question (or should I say the $60 billion one, which is what brokerage fees were in the U.S. last year). I think it will require some changes in state and federal laws (such as on whether brokerage fees can be financed), professional codes of conduct and a change of heart at the National Association of Realtors. If there is no change, however, the system will eventually change on its own as Internet brokers gradually increase their market share and lower prevailing commission rates.

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Arlington, VA: When I bought my condo 2 years ago, I obtained a buyer's agent who assured me that their services would not cost me anything. At closing, there was a $395 administrative fee charge payable to their realty agency. Is this common in this market? What was the purpose of this fee? Would package deals put an end to these extra fees?

Steven Pearlstein: The fees are common, but they should be disclosed. They probably were in the form you signed, although the agent should really have pointed that out. If this happens to anyone else, and there was no disclosure, my suggestion is to refuse to pay the fee and report the person to the state real estate licensing board immediately. You might also spring for a little ad in your local newspaper, in the home listings, telling other buyers that Agent Smith lies about his fees. It will cost you less than $395.

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NW DC: I am a part-time commercial real estate agent and could not agree more that real estate sales constitute a real racket. For example, if I refer someone to another agent, I can receive a 20% referral, but you can't. Why? It is not as though there is any risk or skill in making a handoff to another agent.

The ostensible reason is to protect the public. But while I admit there is a certain talent to selling property, I doubt that it needs to be as restrictively licensed as it is. In my business, the only risk to anyone is that my rich clients don't pay the commission.

I have consulted on large&risky real estate transactions where millions of dollars were at issue. No license is required for that, but it is to get a referral on a $500,000 condo.

Of course, all these excessive requirements are geared to limiting competition to the greaterst extent possible, thus resulting in higher fees&limited competition. Protecting the public is a secondary concern of realtors at best.

Steven Pearlstein: Thank you for that. Normally, I would have asked if you would give us your name, to lend some credibility to your accusation. But I can understand why you didn't.

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Sterling VA: Do "Discount Realtors" offer the exact same services as the "Full Service" companies? If a discount realtor offers his service for 1%, he is still making more $$$ than a full service realtor at 3% made only 5 years ago.

Steven Pearlstein: I'm not sure I agree with you about discount realtors giving the same level of service -- some may, but I doubt that is the general rule. As for your math at the end, it is correct.

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Alexandria, Va.: Several years ago, for my sins, I was briefly in the home inspection business. My fee was paid at the time of the inspection by the buyer. Occasionally one would ask me why and my answer was that I was the only one involved who was working for the buyer and not for the sale. I gave my report and collected my fee without regard to whether the sale went through. This is one of the reasons that inspection contingencies were an early casualty of the current boom.

Steven Pearlstein: And we're better off for it. Thanks.

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Petoskey, MIchigan: You suggest that "buyers and sellers each pay their own agents at a price and service level they negotiate beforehand." As an exclusive buyer's agent, I couldn't agree more. Many listing agents are upset that buyer's agents are profiting from "their" listings, and that we bring "nothing" to the table. With the listing agents in the driver's seat, by virtue of the fact that the MLS is the dominant real estate marketplace, buyer's agents and discounters can be squeezed out, if the DOJ does not remain vigilant. Has there been any indication that DOJ's position will change with the departure of Mr. Pate, or that Mr. Pate's departure was not voluntary?

Steven Pearlstein: No reason to think Pate left on anything but his own steam. And I think he's really raised the profile of these issues in a way that any successor will be hard-pressed to reverse direction. This is one of those areas, price fixing, that even conservative Republicans think requires government action.

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St Louis, MO: Why has the media not reported the fact that Realtor Associations in 13 States have/are successfully passing laws that make the newest innovation in selling a home illegal? The laws require "minimum service" and force a consumer to pay for services that they may not want. In Missouri, this law passed unanimously in both State houses. I am a discount real estate broker that offers consumers an MLS listing for less than $500 and if they accept an offer from a buyer involved with an agent they have to pay a 2.5-3% commission. The seller schedules showings and negotiates the offer themselves, with my company always available for questions and help with the paperwork. The Realtor Associations don't like the competition, and are displaying their political muscle. In Utah they just passed a law making it a misdemeanor for a broker not to provide the minimum services. What happened to letting the consumer decide and why is this not newsworthy? Thank you.

Steven Pearlstein: This is a classic example of rent-seeking behavior on the part of a powerful economic group that disadvantages consumers, reduces competition, stifles innovation and raises house prices artifically. The attorneys generals of those states should be ashamed of themselves, really, to say nothing of the legislators.

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Washington, DC: Steven: If you think the fees to the realtors are bad, wait until you see what tricks settlement companies are up to these days. The buyers are responsible for choosing these companies, and often get referrals from their realtors. Many of them are popping up out of the woodwork to take advantage of the hot market. Unnecessary charges are common (recently one such group tried to charge my client $150 for preparing a release even though there were no mortgages on the property). Inflated fees are common. You literally now have to negotiate the terms that appear on the settlement sheet, which is difficult to do when you are at the table. Its the wild, wild west out there. Caveat emptor.

Steven Pearlstein: Thanks for the warning.

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Baltimore MD: Just want to say that there are some discount brokerages that provide full service. One company in Baltimore that has a pretty good number of newspaper listings is Advantage Realty--they advertise 1.75% commission. Don't know how they co-op with a buyer broker (or even if they do), but it shows it's possible to get rid of the drudgery of a FSBO without paying exorbitant commissions. (And, no, I am not a broker.)

Steven Pearlstein: Thanks.

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Rockville, MD: I just wanted to comment on the poster (an agent) who says he/she charges a certain percent because they spend "months working with a buyer". That's what the rest of us call "working for a living". I don't feel sorry for you that you spend hours and hours earning $30,000 from me when I buy a $500,000 30-year old townhouse. For me to "earn" $30,000 I'll need to work 40 hour weeks for almost 6 months. I doubt you are spending 40 hours a week on any one client. Agents are whining because they spend "months" earning thousands and thousands of dollars from one client? Wow.

Steven Pearlstein: Go, Rockville.

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Washington DC: Steven,

The current structure of real estate transactions is designed to promote price appreciation. In flat markets, much of the slow steady appreciation is probably due to sellers wanting at least purchase price plus 5-6% to cover commissions. This way prices will continue to rise. Also, while sellers look at one big check, an extra $1000 is an extra $1000, buyers see the extra $1000 as only an extra $6 per month, making them more willing to go over their preset budgets.

Steven Pearlstein: That's an interesting angle. Got to think about that one.

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Annapolis, MD: Just had to weigh in on this one. Over the past 27 years I have purchased four homes, sold three, and bought a rental property. In all those transactions, I have only dealt with one agent on either side of the table who earned the money--except he wasn't even actually the listing agent. I have had one who was absolutely unscrupulous (and who wound up a big shot in the county realtors' association), one who was scared to talk to her client, one who was manic depressive, and a variety of airheads and goofballs. Frankly, given what passes for "competence" in this industry, my next sale will be a FSBO.

Steven Pearlstein: A bit harsh, I would say, but there's one man's (woman's?) opinion.

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Washington DC: Steven,

I'll preface this by saying that I have been extremely happy with the agent I have worked with over the past few years. One thing that most people overlook is that you are given a document to sign called something like an Affiliated Business Agreement which basically means that your agent is getting a nice kickback for pushing you to a specific settlement company, appraiser, title insurer, inspector etc. Try and tell your agent that you will be going with someone else and watch a rebate magically appear to match the price. The whole homebuying industry is a series of invisible networks and there is no effort to seriously look out for the best price/services etc...

Steven Pearlstein: That's probably a good place to end with, because it is right on the money. And when the Bush administration dared to try to bring some sunshine, and some competition, to that process, every single one of the industry groups rallied around to protect the status quo. While saying that they were, in fact, all in favor of reform, they each proposed a reform package that was grossly unfair to the other parts of the industry, and that they knew could not pass. So nothing was done, which was just fine with them. And consumers got the short end of the stick again.

Thanks folks. See you next week.

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