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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

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14 comments

14 Comments so far

  1. Will November 7th, 2007 12:10 pm

    I don’t know if you do this is AZ but up here in Canada we have the Real Estate Services Act (RESA) which stipulates that the amount of commission earned by the Buyer’s Agent is to be disclosed and acknowledged by the Buyer. There are a lot of old-timers (and some of my clients) who think it is just insane to be disclosing but I, as a relative newcomer (post year 2000), see nothing wrong with doing so.

    It’s true that the Seller pays his agent to sell his home. It’s true that the Buyer’s Agent receives their pay from the Seller’s Agent. It’s true that bias definitely enters the mind of the Buyer’s Agent when they look at the commission offered. Some less ethical realtors are more likely to dissuade lower commission offerings and promote the higher commission offerings. Disclosure takes that once-hidden bias away.

    As to Buyer Agency contracts: I use them and will not work with a client unless they sign it. It stipulates that I will get paid a certain amount (which is usually just a tad less than what the vast majority offer). It also stipulates that if the commission offered is less than what we agreed to then the Buyer will cough up the difference. It also stipulates that anything offered over the agreed Buyer Agency amount is rebated to the Buyer. It also stipulates exactly what services are to be performed (for example, I include the lawyer fees). In effect we have negotiated a service and a commission. And let me tell you, with one of those signed I have never looked at the commission offered until we have viewed the home and the Buyer expresses interest.

    You simply will not be able to divorce commissions entirely. Bird-dog fees, bonuses, incentives, etc will always remain a part of this business. What you can do is agree with your client how much you will be compensated for your services and disclose what is being paid by the Seller. Sellers already do this with a listing contract so why shouldn’t buyers?

  2. Brian Brady November 7th, 2007 5:36 pm

    “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?”

    I absolutely did just that with the sale of the Litchfield Park manse in 2003.

    We offered a 4% co-broke and dug-in when it came time to negotiate repair items. The buyer’s agent attitude was that the repair items were less than $1,000. My attitude was “work it out with your client, that’s why I bought you”.

    It worked. I stoked… no… I counted on… the loyalty of the tainted buyer’s agent.

    I’ve got so many “yes, buts” to point out but we both know that I’d be making your point.

  3. […] One of keys to the debate over divorcing commissions is the notion that the seller pays the buyers’ agent to work against the sellers’ best interest. Greg Swann explained this in some detail today. Of course, not everyone is united in the belief that the seller actually is paying the commission on the sale. In fact, some agents tend to be of two minds about it: Except in a Short Sale, the buyer brings every dollar to the closing table, so every disbursement of dollars comes from the buyer. The seller brings the house. The idea that the seller is paying anything is an vestigial artifact of sub-agency, a reflection of the fact that the seller hires the listing agent to market the property, and, therefore, in most cases sets the amount of the buyer’s agent’s compensation. […]

  4. […] The writing has inarguably elevated the conversation. Two years ago the “divorced commission” concept was one that made sense, but had not congealed on a national level. Now, to a much greater degree, it has. I believe that there may be an end to Dual Agency in my lifetime, thanks in large part to the conversations held locally and nationally – again, due to these national blogs. The disagreements and debates are of a higher level than found almost anywhere else. The intensity with which writers and commenters argue is frequently fierce and typically civilized. […]

  5. […] If you’re new here, you may want to subscribe to my RSS feed or sign up for Email Alerts. This blog tracks the real estate market in the Charlottesville, Virginia region, local politics, technology and other matters impacting the local real estate market. Thanks for visiting!Continuing the argument for Divorcing the Commissions. The current system exists due to the legacy of sub-agency, where there was no such thing as Buyers’ Agency. While this is currently allowed, the culture of “we’ve always done it this way” is a seemingly immovable force. […]

  6. Jon January 4th, 2008 7:37 pm

    Greg, interesting debate. Thank you for the forum. For a buyer it should all be about value created. My closing check is paying the $15K co-broke; I would like to know that I am getting 15K of value from my representative. If I do all the research and find the places that I want to see and hand the list to the agent, and then marshal the closing process what value is my rep providing? certainly not $15K worth. Other than offer preparation time and showing time the only other big ticket area that I can see that might be worth this type of cash is a lower sales price. The problem is that a negotiated reduction in sales price (equal to the co-broke less doc prep fee and ‘showing time’ fee) is not likely to happen. Why? It is not in the agents’ best interest. The system is not setup to monetarily compensate buyers agents for always acting in their clients best interest. In fact from my perspective the system is setup to monetarily compensate agents to not act in the buyers best interest.

    The all too pervasive industry attitude appears to me to be: it does not matter if the buyer is paying for value not produced; the 3% co-broke is a right no matter what the dollar amount. When I call listing agents, or view open houses unrepresented the agents simply see dollar signs (hey I get to double end this deal). When I make offers less the 3% co-broke plus a doc fee and explain the rational behind my offer the reaction has been hostile to say the least. Basically: how dare you mess with ‘my’ money? It is not your money, no extra value was created for the buyer therefore the agent has not earned the cash. I see the day of reckoning coming near when buyer’s agents will be forced to consistently create value equal to their pay. In the mean time I am going to use the discount on-line buyers agent who only charges me $3.5K (rather than $15K) doc preparation fee.

  7. […] this is an artifact of the co-broke, the archaic practice of buyer’s representatives being pai…. If commissions were divorced, all of the Top Secrets of the MLS system — every one of which […]

  8. […] this is an artifact of the co-broke, the archaic practice of buyer’s representatives being pai…. If commissions were divorced, all of the Top Secrets of the MLS system — every one of which […]

  9. […] consumer that is the MLS philosophy. If buyer’s agents are squealing in Massachusetts today, the proper target of their complaints is the schizoid idea of the co-broke and it’s precious a…, not Zillow or MLS […]

  10. […] how the NAR hopes to rape agents and consumers over the next decade. But remember this as you read: Divorce the commissions and every bit of this nonsense goes away, as it […]

  11. Curtis Reddehase August 9th, 2008 9:46 pm

    In these times more than ever I see professionals working for their money. I see agents who know how to overcome the tough issues with working through short sales, foreclosures and keeping people from those situations. I see experience making a difference in the clients lives for the better.

  12. Greg Swann August 9th, 2008 10:01 pm

    > I see experience making a difference in the clients lives for the better.

    I agree. In this market, expert representation can make a dramatic — decisive — difference for both buyers and sellers.

  13. Jon August 28th, 2008 9:50 am

    From my perspective I have not consistently seen evidence of value add equal to the cash demanded in the R/E transactions I have completed. The more research I do on a market before buying the more I feel I am being severely led astray by R/E professionals whose overwhelming motivation is to sell me the most expensive house as quick as possible.

    The point is: An adjusted compensation method, a la carte, flat fee, etc. may cause me to feel otherwise. For the folks who want to sit back and let the R/E agent do all the work….charge ‘em for the value produced. For those that are not looking for a hand to hold do the same thing. Certainly don’t continue to play the shell game where Seller broker collects the cash and pays off the buyer broker; all the while spouting the line to the buyer (read sheep) that they are not paying anything (‘it’s free representation’).

  14. Michael Daly November 16th, 2008 9:32 am

    This is exactly why people look at us with a blank stare when we go into why they should use a Buyers Agent. It’s the same blah, blah, blah from a different “angle” – even if we’re trying to do the right thing! “The more I see, the less I know”.

    I am licensed in New York. Which state currently has the most transparent model that we could lobby the NAR to move towards as a step – is there one?