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Separating the Buyer Agent Commission From the Listing Commission is a REALLY stupid idea

This is a continuation of Jeff Kempe’s thoughtful post below. At first, I was going to reply to his post via a comment. But as I thought about it I realized there was way more I wanted to say.

First things first: Welcome Jeff, Lani & Morgan! I’m delighted to have you here.

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It is common for a person to have a completely false idea of why something is good or bad and for them to still be correct that it is good or bad. This can come about when the person looks to see why something is the way it is and not knowing the correct answer (real reason why) they then make up or invent an answer. This new datum is then used to explain away some situation or circumstance they observe. This is so common that you can see examples of it in almost every profession, industry and government. Failure to correctly observe the real “right why” is THE WHY for every failure any individual, organization or government ever had. A real WHY opens the door to handling.

Man too often finds that his “solutions” become his new problems. Most of the difficulties one faces on a regular basis (problems) are, in fact, themselves solutions to earlier problems.

I do not intend to be disrespectful here towards your friend and mentor, Jeff – but several of the things he has informed you about are completely incorrect. The thinkingcapidea that a Realtor not sharing a commission was passed into law in state after state after state, across the country, to “protect Realtors” or to somehow impede discounters is just flat wrong. I can’t say that any of those laws were the best possible solutions but they had nothing to do with “protecting Realtors”. In every state where a real estate license is required to legally earn and collect a commission (all 50 in the United States, last time I checked) there is some sort of rule or regulation that states commissions can not be paid to an unlicensed individual. In most every state there is a special exception to this rule for lawyers – a lawyer can charge and collect a commission for handling the sale of a property and not run afoul of state licensing laws. The original idea behind these laws was to prevent someone from doing an end run around the real estate commissioner and his or her rules. Now, I don’t really disagree with Greg that in most cases having a real estate license does little to actually protect the public. But if we are going to totally do away with not sharing a commission with an unlicensed person we would be heading down a path of getting rid of real estate licenses in general. The other one – which I really never fully understood, was not offering money or “prizes” to a buyer, as it would be an “inducement to buy” and that was illegal. That type of rule has been “softened” quite a bit over the years in most states. The original purpose of those rules wasn’t to protect agents but the public. The various government officials (just like the FTC, DOJ, and FDA) feel it it their purpose to protect consumers from being scammed. For example the laws regarding inducements were originally intended to prevent an unscrupulous salesman from taking advantage of a returning veteran who just came back from fighting a war and could get a 100% loan under the G.I. Bill.

I am assuming this statement is from your friend, as well, “Twenty years ago, before the internet, we didn’t have that reputation. Now 80% of transactions don’t even really need a buyer’s agent.” Twenty years ago the average Realtor was thought of by the public pretty much like they are today – right down there with car salesman, lawyers and politicians. The public perception of a Realtor is actually slightly better today than it was twenty years ago. Just slightly. And the internet has changed precisely nothing with regard to the public “needing a Realtor”. I fully understand that many people think otherwise. They are wrong. What is different today because of the internet is potential buyers can see most of the listings online. They can also get just about any medical information, previously available only to a doctor. Same with dentists, I can get all of the information about teeth online now too. For those who become upset with me comparing “real professions” to real estate (I secretly do it just to aggravate you because I know it will) use plumbing or electric wiring as an example. Pretty much any and all information known by plumbers or electricians is also available online. This has not put even a dent in the incomes or amount of business that plumbers and electricians have and it isn’t going to either. Reason? The evaluation of a datum is more important than the datum. We pay professional people to evaluate data for us and to guide us to the optimum decision and for them to “take care of it”. The internet can’t and won’t change that. Ever.

What did customers want 20 – 25 years ago? To be treated like they were important, to be dealt with honestly, to have the person guiding them put the customers interests above their own, and to receive excellent service. Go back 100 years and you will find that is what customers wanted then too. Go forward 1,000 years and that is what customers will still want then. Anyone who thinks those things will ever become “obsolete” simply can’t think at all and has their head in a place where they can’t see anything either.

With regard to him hoping he is out of the business before the buyer agent commission is separated from the listing commission – I’m betting he can stay a long time. He has nothing to worry about. Even though it is the title of this post I am not going to spend a lot of time on it. I don’t have to – it is just that stupid an idea. Agents working with a buyer seeing (validly) that the seller or seller’s agent paying them a commission can be a conflict for them with regard to agency. And if only the lenders would see how awful this is and allow the buyer to finance the commission why the buyer agent and the buyer would really be independent of the listing agent. Blah blah blah blah. OK, each and every agency issue you can raise is “true”. Let me just concede they are all correct and you are 100% right. Unless your actual goal (as a buyer agent) is to literally route yourself completely out of the real estate business – stop working on this issue.

If you “succeed” and all buyers are then free to pay you a commission via their loan, you will collect very few commissions and the ones you do manage to get will be quite meager. There is never going to be any rule or law that forces a FSBO to have “representation” and any buyer who wants to buy a house from a For Sale By Owner directly will always be free to do so – without government interference. And how much do you really think any buyer is going to want to pay you to go around and register him with half a dozen homebuilders? But none of that is the Big Reason. If you are in the position of asking a buyer to pay you for something they don’t believe they ever needed to pay – unless you are planning on a hell of lot more “federal government help” than I can even imagine – all that would need to occur for your buyer business to go away COMPLETELY is listing agents to start promoting, “Buy Direct from the listing broker – PAY NO COMMISSION”.

What branch of the government or what governing body is going to stop that so that the buyer has agency representation? My answer is none. The very thing, the very reason it was important to separate the buyer agent commission from the listing commission would wind up being the very thing that ultimately caused the buyer to receive NO representation at all. (see the fourth paragraph from the top)

 
The divorced real estate commission file: This is an organic compendium of weblog posts and internet-based articles arguing for and against the idea of divorcing the residential real estate commission — eliminating the co-brokerage compensation from the listing agreement, with buyers contracting for and arranging compensation for their own representation. One way this might be effected: Lenders could permit buyers to expense representation on the HUD-1 form as sellers do now. The entries collected here represent the full gamut of opinions on what may be the most important issue facing Realtors today. To submit additional posts or articles for inclusion on this list, fill out the form at this link.

Related posts:
  • Greg Swann Joins Redfin – Kelman Rejoicing!
  • Blogoff Post #26: Ask the Broker: If the buyer has no agent, what does the listing agent get paid . . . ?
  • Ask The Broker – What Do We Do If We Can’t Find The Listing Agent?

  • 15 comments

    15 Comments so far

    1. Jeff Brown May 28th, 2007 1:50 am

      A-frickin’-men to the Nth power.

      Excuse me, I have to go change. :)

    2. Karen Rhodes May 28th, 2007 4:28 am

      Brilliant!

    3. Doug Quance May 28th, 2007 4:44 am

      You gotta get up pretty early in the morning to beat Russell Shaw…

      Yep… pretty early…

      :lol:

    4. Brian Brady May 28th, 2007 5:40 am

      What if the buyer doesn’t want representation? Shouldn’t they be allowed to “bank” the commission normally reserved for that representation?

    5. Greg Swann May 28th, 2007 7:06 am

      I’ll come back to this (I’ve been meaning to hit the topic again, anyway), but this is sufficient for now: Your argument is that divorcing the commissions would be bad for Realtors. I dispute that, but that’s not even the point. If we stipulate your entire argument without contest, have we arrived at a valid reason not to divorce the commissions? In fact, right and wrong are what they are whether or not Realtors get paid. The argument that right is what is right-for-Realtors is the naked essence of what I call Rotarian Socialism: Rules and laws made by — and for the benefit of — a politically-powerful minority in pursuit of plunder and privilege. There may be a valid reason for refraining from divorcing the commissions, but creating a special Un-Free-Trade Zone for Realtors is not it.

    6. Will Farnsworth May 28th, 2007 8:07 am

      >And the internet has changed precisely nothing with regard to the public “needing a Realtor”.

      53% of buyers want “help in finding a home” from an agent (NAR, 2006).

      >What is different today because of the internet is potential buyers can see most of the listings online.

      Sounds like “man” has again found a solution to its problem.

      >Pretty much any and all information known by plumbers or electricians is also available online….and has not put even a dent in the incomes or amount of business they receive

      The majority of business in these professions is new construction. And if you assume that educated, web-savvy “do-it-yourselfers” don’t put a dent in the total amount of residential repair work receipts these industries collect then you should talk to a travel agent…or the MD in Bangalore evaluating an MRI from the Cleveland Clinic…

    7. Jeff Kempe May 28th, 2007 8:22 am

      HOOOOWHEE! Thanks, Russ; great post.

      The reason I asked WHY Oregon had passed its Do Not Share! law in the first place was simple curiosity; I couldn’t rationalize any way it might help the consumer, even in theory. I still can’t.

      But ex post facto the WHY is irrelevant. The practical effect is that it protects me from having to compete with other agents or agencies – Redfin – that give parts of their commission back to buyers. That doesn’t protect the consumer, in fact the opposite. It’s my belief that what’s bad for the customer is ultimately bad for me.

      The thirty nine states that DON’T have such laws have pretty much proven that buyers aren’t so venal that they don’t understand they need good representation. Redfin will go out of business pretty much on its own.

      Note that would also argue – persuasively! – against the notion that, if commissions were split, buyers will run to a listing agent to avoid having to pay a buyer commission . That’s a lengthy argument in which I’m happy to engage…

      …but right now I need a second cup of coffee!

    8. Russell Shaw May 28th, 2007 7:12 pm

      Brian: there isn’t always a commission “reserved” for representation. For example, we charge our sellers 2% less if we sell it vs. another agent bringing the contract.

      Greg: one of my points is that changing the system would not solve the stated problem for buyers. Set the Realtor getting paid issue completely aside and I don’t see the buyer paying their agent’s commission ever resulting in most buyers getting “representation” – it would just result in either more dual agency or NO representation for them at all. I’m quite certain that most buyers (given a choice) would take “being treated like a customer” – if it were free – over “being treated like a client” – if they had to pay for that treatment. I’m saying that buyers are getting better representation right now than they would if the system was forced into changing. The special interest pressure and money to various politicians, ultimately resulting in government protection for Realtors, is something we are stuck with as long as we have our current form of government. I don’t agree with many of the positions that NAR takes but if they were to be less relentless we would most likely find ourselves needing a federal license to sell real estate. I don’t see that having the federal government “manage agents” would somehow be better than the various state governments.

      Jeff: I agree with you on several points. I believe that any agent should be free to give their money to anyone they want to give it to and I also agree that Redfin will go out of business (but look for a TV special explaining how “traditional Realtors” conspired to drive them out!) With regard to separating commissions bringing about most buyers actually directly paying them – I don’t see it as a lengthy argument. I see it as simply observing the way the world works and using simple logic to see what will happen next. The main issue being ignored by any agent who believes that buyers would pay them handsomely is the way the mind works with regard to “truth”. The original breakthrough text that addresses this particular point is, “Positioning, The Battle for Your Mind” by Ries and Trout. It doesn’t matter what is “true”. It is what those people BELIEVE is true. Most buyers do not look up to real estate agents any more than they look up to car salesmen. The “facts” are not what is important in a PR campaign – what people hold to be important and true is all that matters.

    9. B.R. May 28th, 2007 8:54 pm

      Awesome.

    10. [...] Russel brings it home in a compelling post. Everyone on both sides of the commission debate should read this. Russel is one of the only industry mega producers I believe, trust, and listen too. Why? Because he produces, and boasts an average DOM of only 14 days. He is respected and well known all over the country, and can back up what he says. Do yourself a favor- read this: What did customers want 20 – 25 years ago? To be treated like they were important, to be dealt with honestly, to have the person guiding them put the customers interests above their own, and to receive excellent service. Go back 100 years and you will find that is what customers wanted then too. Go forward 1,000 years and that is what customers will still want then. Anyone who thinks those things will ever become “obsolete” simply can’t think at all and has their head in a place where they can’t see anything either. Sphere: Related Content [...]

    11. Kaye Thomas May 29th, 2007 8:14 pm

      It never ceases to amaze me that agents and others continue to give so power to the internet.. If every agent in the country decided to pull their listings and all related real estate information ( blogs, websites etc) from the internet.. there would be nothing left for anyone to use. Agents control the information that goes to the internet not Zillow or Redfin or Trulia or any other inanimate entity.
      The internet is a tool.. nothing more.. and contrary to what Redfin and others preach people don’t buy houses on the internet without physically seeing them. The average buyer who spends 12-24 months trolling the internet looking at pictures still will see about 10 or more homes before making a decision.
      One thing everyone needs to remember… buying a house on the internet is not like buying a pair of shoes from Nordstrom’s or Macy’s online… you can’t take it back in a month if you decide after moving in that it doesn’t quite fit… Great post Russell!

    12. Jack Frisk May 30th, 2007 3:42 am

      Thank you sir, for the informative and entertaining start on my days activities. Your comments warmed my heart and along with this first cup of coffee created a great start for the day. The comment about your average DOM being 14 days is the thing that intrigues me. If you ever feel like elaborating on that, please forward your comments to me.

    13. [...] Pause here. I’d give up half my income for a year to be mentored by Russell Shaw. I asked a friend who’d moved from here to Phoenix if he knew who he was and he said “Are you kidding? He’s a legend!” But even legends can be wrong: [...]

    14. Gerry Davidson July 16th, 2007 4:22 pm

      Kudos, Russell. A very well thought out, clear post with no confusing language to cloud the issue at hand. Solidly grounded in reality, you are a powerful and compelling voice of reason. Thanks

    15. [...] well known all over the country, and can back up what he says.  Do yourself a favor- read this: What did customers want 20 – 25 years ago? To be treated like they were important, to be dealt with … Post by Benn RosalesBenn Rosales Also Wrote…Buying Your Type of Neighbors? dsSearchAgent Special [...]