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Ask the Broker: How can the seller paying the buyer’s broker’s commission be fair to the seller?

By: Greg Swann, Phoenix Real Estate, Post Archive, RSS Feed
Posted: Wednesday, October 3rd, 2007, 10:02 am MST
Category: Ask the Broker,Marketing,Real Estate

Here’s a truly fascinating question from an agent working in Nassau County, Long Island, New York. The idea of buyer brokerage is just being introduced there, and our interlocutor is understandably mystified:

I am a bit confused, to say the very least.

If I write up a listing contract with a seller, traditionally, when offering compensation to a sub-agent that agent was working in the best interest of the seller as well — working to get the seller the best price and terms.

However, If we are now offering compensation to a Buyer Broker, we know that the other agent is going to be representing the interests of the Buyer — working to get the price as low as possible.

Why would a seller agree to compensate the Buyer Broker for any part of the commission?

Where traditionally the sub-agent would negotiate the best possible price for the seller. It seems to me we are telling the seller to pay a party who is going to negotiate against their favor? Isn’t this unethical?

So far, to my knowledge, there has been one actual rigorous argument against divorcing the commissions. We do what we do for practical reasons, and I have offered practical solutions to these problems, but, so far, no one has been able to defend seller-paid commissions as a matter of equitable rectitude to both principals. If I’m wrong about this, cite the link to the argument.

Meanwhile, our interlocutor makes defending seller-paid commissions that much more difficult. I don’t think there is any way to dispute the argument that buyer brokerage, as compared with sub-agency, induces sellers to act against their own interests — even as the seller’s hands on the purse-strings provides incentives for buyer’s agents to betray their clients.

Does anyone have any thoughtful answers to these questions?

 
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.


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    • 10 comments

    10 Comments so far

    1. Carey October 3rd, 2007 11:15 am

      As a broker in Colorado (probably the leader as far as buyer brokerage goes) we let the seller know that the compensation offered to the buyer broker is “like” a marketing fee. Paying the buyer broker is really the best thing for the seller. The buyer broker is bringing the most important piece to the party…THE BUYER. On my own personal properties I always pay more to the buyer brokers then the prevailing rate for the area. I want the one thing that broker can bring me…THE BUYER.
      I’m sure it seems counterintuitive to have the seller pay someone working against him. The answer to that is simple: You don’t have to offer compensation to cooperating brokers. Just let the seller know that the marketing time will multiple by about 75 fold.

    2. Bruce Hahn October 3rd, 2007 11:34 am

      Offers from sellers to pay any buyers expenses, be they buyers closing costs, loan rate buydowns, buyers commissions, etc., are in the end all marketing expenses for the seller.

      Of those expenses, paying the buyer’s advocate (agent’s) commission seems the most counterproductive from a seller’s perspective, because it goes to a source (if the buyer is using an agent) that, rather than being neutral in the transaction, is actually trying to help the buyer reduce the net selling price even further.

      You would think most sellers who choose to offer buyer incentives would therefor much prefer to offer to pay buyer’s closing costs, loan rate buydowns, etc., rather than the buyers agent’s commission. Yet the latter offer is almost universal and the former only occasional. Part of the reason may be habit – a holdover from the old pre buyers agent days when everybody represented the the seller, but the larger reason I suspect, is that most seller’s agents strongly urge their sellers to pay the buyers commission (and in many markets today sweeten it with a higher rate and/or a bonus for the buyers agent).

      They do so for several practicle reasons. The first is that unless all other sellers simultaneously stop offering to pay buyers commissions, the absense of an offer to pay the buyers agents commission will likely hurt the seller because many buyers agents will not show their clients the property absent such an offer (notwithstanding the ethical questions that practice raises). The second is the sellers agents self interest, because they also represent buyers. It’s therefor not in their own long term interest to discourage the payment of buyers agents commission’s, even in the strongest sellers markets.

      The ultimate solution is to divorce buyer and seller representation – either be an exclusive sellers broker/agent or an exclusive buyers broker/agent. Then sellers agents would have no incentive to urge their clients to offer to pay the buyers agents’ commission, and that offer from sellers would become much less common. Buyers could of course propose to recover their commission obligations in their purchase offer, along with other settlement expenses or whatever else.

      Notwithstanding other constructive suggestions of ways to divorce buyers and sellers commissions, until we get to that point the dilemma will continue. To get there the support of the real estate services community is essential. Consumers, after all, did not the create the real estate laws and regulations that perpetuate this problem. Changes needed to address it can only happen if the majority of the real estate services community supports them.

    3. John Kalinowski October 3rd, 2007 12:09 pm

      Greg,

      The real question is, what will happen to the real estate brokerage industry if/when the commissions are divorced? Won’t this completely destroy the business structure of most existing brokerages? Assuming they make half their profits from the buyer side, what will happen when that half all but disappears?

      What most people are missing (and Russell Shaw has attempted to beat into our heads), is that once the seller stops paying the buyer’s broker on the HUD, most buyers will not be willing (or able) to pay their own agent to handle the transaction. No matter how you argue it, buyers today do not see themselves as paying the commission their agent receives. Once they feel it is coming out of their pocket, they’ll be much more likely to go directly to the listing agent and purchase the home without their own representation.

      Many (if not most in the last few years) buyers do not have any additional funds available beyond what is required to cover their closing costs and a down payment. Where would they come up with the additional cash to pay their own agent if that number is now coming from their side of the statement?

      It makes sense ethically and from a fairness standpoint, but the mechanics of it seem to be a disaster in the making for the brokerage industry.

    4. Greg Swann October 3rd, 2007 12:40 pm

      John: Quoting myself from this post:

      We do what we do for practical reasons, and I have offered practical solutions to these problems, but, so far, no one has been able to defend seller-paid commissions as a matter of equitable rectitude to both principals.

      It there is a practical problem, I’ve shown (repeatedly and in tiresome detail) how it can be resolved. What there definitely is is an equitable problem, and I don’t think anyone opposed to divorcing the commissions has addressed it.

    5. John Kalinowski October 3rd, 2007 1:00 pm

      Greg,

      You solutions are well thought out, and definitely make sense from a mechanics standpoint. You have an incredible mind for putting together the scientific side of this issue, but I still think the stumbling point is in getting past the psychological problem of making buyers understand all of this. In their minds, it will still look as if they are now paying more.

      We’re in the industry, and we live this stuff every day, but most buyers don’t, and I think it would just look like another big cost to them. Even if it’s only 2% of a $300k sale, we’re talking another $6k that they never understood was coming from them in the past. If they have it, I think they’ll use it for appliances and upgrades and pass on their own representation. If they don’t have it, they won’t understand why they have to take out a bigger mortgage to get it.

      From your post:

      “To the contrary, taking control of their agent’s compensation should empower them to pay less and/or get more overall value from their representation.”

      I think the majority would choose to pay less, by just skipping the buyer’s agent altogether, particularly with all the new technology available to buyers online to help them in the initial search.

      Yes, a few will understand the value proposition of paying their own agent, but I still think the majority will just go directly to the listing agent. For a small brokerage like yours, with low overhead, it would probably be wonderful. But for the majority of big, national brokerages, it would be devastating.

    6. Russell Shaw October 3rd, 2007 1:17 pm

      I still want to know who pays you, Bruce. Why do you persist in keeping that a secret?
      http://www.bloodhoundrealty.com/BloodhoundBlog/?p=1451

    7. Greg Swann October 3rd, 2007 1:22 pm

      > I think the majority would choose to pay less, by just skipping the buyer’s agent altogether, particularly with all the new technology available to buyers online to help them in the initial search.

      I suppose that’s possible, but the contrary argument would be: Who is going to run searches for them? Who is going to get them pre-qualified? Who is going to show houses to them and then tell them why that black mottling under the sink means they are not buying this house no matter how much they love it? Who is going to teach them how to negotiate, how to react to an inspection report, how to negotiate around a low appraisal? Who is going to teach them how to satisfy the seller’s objection to their need to move in prior to closing?

      Your argument would seem to be that most buyers are Redfin-like buyers. This is not my experience.

      > I still think the majority will just go directly to the listing agent. For a small brokerage like yours, with low overhead, it would probably be wonderful. But for the majority of big, national brokerages, it would be devastating.

      Let’s stipulate this. I could quibble with it, as above, but it’s more interesting if we accept is as written.

      My rejoinder?

      So what?

      People don’t buy houses in order to compensate real estate brokers, and if the buyer’s perception of his own best interests is that he is better served by working directly with the lister, what contrary argument could I make in justice?

      In other words, it’s practical for us to do things this way, and it’s profitable for us to do things this way, but, so far, I don’t think we have heard an argument that it is equitable — just — for us to do things this way.

      Am I wrong about this?

    8. John Kalinowski October 3rd, 2007 1:40 pm

      Greg,

      You are completely right, and I do agree with you that it’s the right thing to do. I was really complementing you, because you have built a great little company, and you will be the type of person that will survive as the equitable changes take place. That’s partly why I obtained my broker’s license as soon as possible after getting my salesperson’s license in 2004. Changes are definitely coming, and I don’t want to be left out in the cold when they do.

      Thanks for your writing. It is much appreciated at my end!

    9. Jeff Brown October 3rd, 2007 4:29 pm

      Nothing’s gonna change. Nobody cares. Every entity in the real estate transaction is getting what they want – and have been for more than the last half century. One of the comments used the word ‘tiresome’, which is an apt description of this topic.

      99% of the public is apathetic when it comes to which trail the money took to get into their agent’s pocket. They care about the same thing the ‘other side’ of the deal cares about.

      Are they happy with the deal they got.

      The rest? On it’s best day is fodder for cocktail discussions between bored academics.

      Every now and then this discussion pops up. I heard it first when Carter was president. Blah blah blah.

      This is no different than being told in the ’70′s that windmills would save us from oil dependance. We’ve since learned, to be kind, that prediction was 98% wish, and 2% science.

      So – who is gonna win the World Series?

    10. Cash Back Realtor Buyer\'s Agent Rebate - Testimonials Atlanta, GA Georgia June 12th, 2008 3:50 pm

      Although the seller pays the commission at closing, the buyer bears some of the burden through the sales price; hence, the buyer is paying for his/her own agent indirectly.