There’s always something to howl about.

A consumer’s guide to the divorced real estate commission: Why buyers and sellers each paying for their own representation is the most significant reform that can be made today in residential real estate

Part I: How we got into this mess in the first place

Can we be straight with each other? I’m not a soft and subtle kind of guy, and my working assumption is that you are sick to death of being hustled — handled — lied to. We yammer all day about transparency, but if transparency is something other than old wine in a new bottle, it’s time we told the truth, don’t you think?

So let’s start here: The National Association of Realtors, which celebrates its 100th birthday this year, is a vast and largely successful conspiracy against consumers by real estate brokers. By brokers, mind you, not agents, although agents are not without sin. The purpose of the National Association of Realtors is to limit — artificially, by fiat of law — the number of people to whom you might turn for help in effecting a real estate transaction. Before the NAR got real estate licensing laws passed, you could have worked with anyone: A friend, a relative, the local beautician or insurance agent. But because of real estate licensing laws, your choices are limited either to real estate brokers and their agents or attorneys. No one else can represent you in a real estate transaction, accepting compensation for their efforts, without breaking the law.

Why did the NAR do this? So that it might artificially raise the price you are obliged to pay for real estate representation. This is the conspiracy against the consumer, and it has been largely successful for the real estate brokers. The real estate licensing laws are written in such a way that the secondary victims of the NAR conspiracy are real estate agents — who fail in massive numbers — but they’re on their own today. What we are talking about, in the broadest possible terms, is how the residential real estate industry can be reformed so that it is not a conspiracy against the consumer.

I would warn you against rebuttals that take the form of, “Yeah, but.” The “yeah” concedes the point, and the “but” seeks to muddy the waters. So brokers will read this and say, “Yeah, but licensing laws protect consumers.” This is false in its essence. The licensing laws enact a pantomime of consumer protection, but their purpose is to make sure that real estate brokers get paid whether or not consumers get what they want. Clicking on this link will take you to the Buyer Broker Agreement used in my home state of Arizona. If you take a close look at lines 10 through 27, you will see that the broker is going to get paid no matter what happens. If you get the house, the broker gets paid. But if you don’t get the house, the broker still gets paid. The purpose of the real estate laws, written in their original form by the NAR and lobbied for by the NAR to this very day, is to protect the interests of real estate brokers, not consumers.

But there is still more to be learned from lines 10 through 27. What that language says is that “your” broker, as represented by “your” agent, will in fact be compensated for the work done in “your” behalf not by you but by the seller’s broker. “Your” agent, who is allegedly working for you, putting your interests ahead of all others — including his or her own — will be paid for this effort by your opponent in your negotiations.

This is actually doubly insane. The person paying your agent to get you the lowest possible price for the home is the same person who is being paid by the seller to get the highest possible price for the home. You may start to think that you are getting screwed, having discovered that “your” agent is being compensated by the listing broker, but think about the poor seller: He is paying two brokers to pursue — at least in the abstract — antithetical goals. If you did a good job picking your agent, the seller will have paid the listing broker to pay your broker to pay your agent to frustrate the seller’s objective.

How could this possibly make sense?

The answer: It doesn’t make sense.

Not that long ago, “your” agent wasn’t your agent at all. Every agent worked as a sub-agent of the seller. The listing agent worked for the listing broker, and every agent of the listing broker worked to get the highest possible price for the seller. But every other broker in the MLS system also worked for the seller. And every agent of every cooperating broker worked for the seller, each one of them bound by a fiduciary duty to get the highest possible price for the seller.

From the seller’s point of view, at least, this made sense. The seller paid the listing broker to get the highest price, and the listing broker paid a portion of his commission to whomever brought in the buyer. He would have preferred it to be one of his own agents — this is called a dual agency — since his net profit on the transaction would be higher. But if another broker brought in the buyer, the listing broker would “split” his commission according to the terms provided for in the MLS. This split is called the cooperating broker’s commission or the co-broke. The essential data field of an MLS system is the co-broke.

From the buyer’s point of view, every agent working as the agent of the seller was a disaster. Luckily, buyers knew almost nothing about it. For one thing, buyers bonded with “their” agents, honestly believing that “their” agent was on their side, even though that agent was duty bound to work only in the seller’s interests. Still worse, many agents bonded with their buyers and actively worked in their interests, contrary to their fiduciary duty to the seller.

Can you guess what happened? Huge court battles. Buyers felt — with justice — that they had been sold a bill of goods. Sellers felt — with justice — that they had been betrayed by the people they had hired to protect them. The brokers took it in the shorts, because every sub-agent of every brokerage created an extended liability for the listing broker.

So what changed? Almost nothing. The brokers cooked up a new idea called buyer brokerage. Now, instead of representing the seller as a sub-agent of the listing broker, an agent working with buyers would represent those buyers as buyer’s agents. This was really, really good for the brokers: The extended liability for the actions of sub-agents working for other brokerages was severed. Now the broker was liable only for screw-ups by his own agents.

But isn’t buyer brokerage also good for buyers? It can be, but, practically speaking, the change was purely cosmetic. In the MLS system, the compensation for the buyer’s broker is now listed as a buyer’s broker’s fee, rather than as a sub-agent’s fee. The commission is still paid by the listing broker, who in turn is being paid by the seller. We went from a system that was a de facto con game to one that is merely insane. Is this an actual improvement? Not so much.

Consider this. When I take a listing, no matter how much I negotiate for my own compensation, I always set aside 3% for the buyer’s broker. Why? Because, like most agents in my market, I don’t trust buyer’s agents to show my listings if I offer a lower co-broke. Even if I am taking nothing as the listing broker, which sometimes happens, I pay 3% to the buyer’s broker. Even if the seller is “short” on what he owes the lender — that is, even if the seller will have to bring his own money to the closing table to get out of the loan — we’re going to offer 3% as the co-broke.

This is twice wrong. First, I am determining what “your” employee is to be paid. And second, and far worse, I am betting with my own money that some substantial fraction of buyer’s agents will consciously or subconsciously betray their fiduciary duty to you as the buyer over money. If I were to offer less than 3%, my listing might not sell, or might not sell as quickly, because some — certainly not all — buyer’s agents would be pushing their clients into homes that paid the agent more money.

Want to go once worse? What is the purpose of a buyer’s agent’s bonus. The language will read like this, in a part of the MLS listing that isn’t printed on the version you see: “$1,500 bonus for successful Close of Escrow by December 15.”

What does it mean? If “your” agent cajoles you into buying the seller’s home and closing on time, “your” agent will get $1,500 extra on top of the 3% commission that is already being offered. What your agent does about this is a matter of his or her own ethics, but what is the seller doing? Trying to buy “your” agent’s loyalty, right?

Buyer brokerage allegedly did away with sub-agency. That’s a white-wash, in my opinion. As long as the listing broker pays the buyer’s broker, the buyer’s broker works for the listing broker — and, hence, for the seller. But even allowing for the broker’s “yeah, but” argument, the idea of the buyer’s agent’s bonus removes all doubt: Unless it is disclosed at the outset to the buyer and conceded in full to the buyer at Close of Escrow, a buyer’s agent’s bonus creates a de facto sub-agency. Both agents are presumed to be working to get what the seller wants, and neither agent is working to protect the buyer’s interests.

What can be done about this? The answer is obvious, isn’t it? In truth, it is and it isn’t.

The obvious answer is for buyers to pay their own agents. If home-buyers were to pay for their own representation, they could assert much greater control over their agents. They could decide what work is to be done, when and in what quantity. And they could negotiate compensation, just like sellers do.

But the obvious answer turns out to be not so obvious after all. Buyers have never paid for their own representation before. Often, they do not have cash available to pay their real estate agent. And the mechanisms we have used, until now, to settle up the funds in a real estate transaction do not provide for buyers to pay their own agents.

At this point the old time brokers will have advanced from “yeah, but” to thoughtful arguments like “impossible!” and “preposterous!” There are ways to solve the problems we have identified, and we’ll address them in due course.

But first we should think about the differences between buyers and sellers, an exercise we will undertake in our next installment.

 
In Part II: How buyers can earn their place at the table

< ?PHP include ("http://www.bloodhoundrealty.com/BloodhoundBlog/DCFile.php"); ?>

Technorati Tags: ,