Jim Duncan issues a battle cry for divorced commissions:
As a profession, we need to rid ourselves of Cooperative Compensation and the practice of the listing broker paying the Buyer’s Agent.
Cooperation between Brokers need not go away. In fact, without cooperative compensation, the practice of real estate representation will be enhanced, as the perceived collusion between Realtors will be mitigated significantly. What needs to disappear is the inherent conflict of interest that comes from the Listing Broker paying the Buyer’s Agent.
Jim argues for legislative changes, but my thinking is that lenders could effect this change overnight, without new laws.
How?
By refusing to honor the terms of the Listing Agreement.
If mortage underwriters disallow any commission over 3% or 3.5% from the seller, with all of that going to the Listing Broker, while simultaneously allowing a commission of up to 3% or 3.5% from the buyer, with all of that going to the Buyer’s Broker — what will happen? The brokers will immediately rewrite their employment agreements. We are always changing language to get it past the underwriter — and the smart ones among us write the language their way from then on.
The simple fact is, except for all-cash sales, we’re going to do what the lender tells us to do. No loan, no transaction. If lenders decide to divorce the commissions, they’re going to be divorced.
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Technorati Tags: blogging, compensation for buyer representation, disintermediation, real estate, real estate marketing
Shaliesh says:
Greg,
I guess if the lender will not allow it then this might happen. However, then the buyer has to come up with 3%. I mean that is going to be tough especially for the first time buyers and even for other buyers. They will then have to absolutely sell their home just to pay the Realtor forget closing costs and down payment.
We’ve already dabbled into dangerous territory (use of low doc loans) trying to figure ways of not having to daisy chain purchases. This would add another layer of complexity.
From the lenders side, less buyers (even first time) means less profit. Would they ever support a proposition like this? How about the politics? The entire establishment is committed to increased homeownership!
Finally, with this in mind which lender is going to go first?
Thanks,
Shailesh
May 21, 2007 — 11:35 am
Greg Swann says:
> I guess if the lender will not allow it then this might happen.
But, of course, lenders already allow the buyer to borrow the full commission — up to 7% — on the seller’s side of the HID-1. The change I’m suggesting is purely one of accounting, thowing the Buyer’s Broker’s commission to the buyer’s side of the HUD-1.
> Finally, with this in mind which lender is going to go first?
The one who fears lawsuits most? If an attorney can convince a jury that lenders are complicit in the de facto sub-agency of Realtors, then the deeper pockets are pried open. That’s a strong incentive, I think, to making what is to the lender a completely trivial change.
May 21, 2007 — 11:40 am
Brian Brady says:
“If mortage underwriters disallow any commission over 3% or 3.5% from the seller”
Now we’re fixing prices, Greg; commissions are negotiable.
Of course, I love this idea. Perhaps we could alter it to say that lenders will allow up to 3% commission to a buyer’s agent and require that all compensation paid to a buyer’s agent be pre-disclosed in a contract prior to the agreement of sale.
May 21, 2007 — 7:58 pm
Greg Swann says:
> Now we’re fixing prices, Greg; commissions are negotiable.
Commissions are negotiable by the brokers — and that won’t change. In fact, the quantity of negotiation will double, at least.
But lenders already set the maximum amount of commission they will underwrite. The only change is to disallow the current pretense that “the seller pays.” In a 100% financed deal with “seller-paid closing costs,” every damn dollar on the closing table is brought there by the lender. I believe everyone will be happy to do things the lender’s way.
May 21, 2007 — 8:06 pm
Russell Shaw says:
And to get MY listings shown and sold I continue to offer a commission to any broker who brings me an offer acceptable to my seller. Which houses do you really think will sell first – those with the seller’s agent offering to pay a commission or those that have the buyer paying it?
And how about builders? That will most likely always be the seller paying the agent – unless you are just seriously TRYING to make less money.
May 21, 2007 — 11:37 pm
Greg Swann says:
> Which houses do you really think will sell first – those with the seller’s agent offering to pay a commission or those that have the buyer paying it?
How would that be possible if the lender would not allow it on the HUD-1? Do you foresee sellers or Listing Brokers bringing cash to the closing table to compensate Buyer’s Brokers? That seems like porcine aviation to me.
May 22, 2007 — 12:50 am
Russell Shaw says:
🙂 Obviously, I arrived late on a runaway train. I truthfully don’t believe that lenders could legally ever set commission amounts or that the government would want to – as any maximum would tend to be also seen as some kind of legal minimum. Further, I see this (setting aside my view that it would not be helpful to homebuyers or Realtors) a wild uphill battle with homebuyers. They just don’t believe that they pay the commission and this would have to be a very long term PR campaign to attempt to convince them otherwise. I don’t believe such a campaign would ever be successful.
But if it were, I can’t think of anything that would thin out the Realtor ranks faster or make it more difficult for new agents to come into the business. New agents (who usually work buyers) would seldom have the skill to get a livable commission agreement signed and the most likely outcome of such a rule or law would be buyers buying directly from the listing agents. The public doesn’t see the “seriousness of agency” nearly as important as some Realtors.
I can’t imagine a law being passed that forced a buyer to use an agent, therefore all buyers would still be free to buy from a FSBO or directly from the listing agent. As variable commissions (the listing agent charging less if they sell it themselves) becomes more and more common there would not be much of an incentive for any buyer to ever pay an agent anything if they could just buy directly from the listing agent (without being “represented”).
May 22, 2007 — 3:10 am
Brian Brady says:
“The public doesn’t see the “seriousness of agency” nearly as important as some Realtors”
I fought that battle with the seriousness of transparency in mortgage brokerage. The public is ambivalent towards it.
May 22, 2007 — 2:18 pm
Jim Duncan says:
To me, this is an argument for Divorcing the Commissions. This would cause the business models to shift to a more traditional one – those with less experience charge less, those with more, charge more. This is the case in nearly every other profession with which professional Realtors (myself included occasionally) try to align themselves.
If Realtors were to lead the charge towards a more professional and transparent method of compensation, that would lead to just that. It may not be the easiest task, but one that is worth undertaking. Many buyers and sellers need and want competent representation and see the value in it.
May 23, 2007 — 7:30 am