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Defining the Divorced Commission: A short-hand term for understanding alternative real estate compensation models . . .

By: Greg Swann, Phoenix Real Estate, Post Archive, RSS Feed
Posted: Thursday, October 19th, 2006, 5:50 pm MST
Category: Blogging, Disintermediation, Dual Agency, Marketing, Real Estate

I just spent a very informative hour on the phone with Jeff Brown, and I want to summarize what I took away from our conversation.

First, Jeff has a very different understanding of the term “co-broke” compared to the way it is used in Arizona. When we went to essentially 100% buyer-brokerage for residential real estate, we kept the term “co-broke” to mean the compensation that would be paid to the buyer’s broker — even though the buyer’s broker is never a sub-agent of the listing broker or the seller and represents only the buyer.

Jeff writes explicit contract language to make pellucid his exclusive buyer’s agency and is also taking his compensation from the buyer. What the listing agent chooses to do about the portion of the sales commission set aside for any cooperating broker is between the listing agent and the seller.

I would describe that as an instance of what I want to call Divorced Commissions. The lingering idea of subordination — seller oversees listing broker who oversees cooperating broker — is completely eliminated, at least from the buyer’s side of the ledger. The buyer contracts for and compensates his own representative.

Similarly, writing the listing agreement to concede any shared sales commission directly to the buyer effects the same sort of divorce. We are doing this with one listing right now, and I gather that Ardell has just done something similar.

This again is a form of Divorced Commissions. Even though in this instance any buyer’s agent’s commission is originating in the listing agreement, neither the lister nor the seller are attempting to use these funds to advance the seller’s interests at the expense of the buyer’s.

Nota bene: The original purpose of encapsulating the cooperating broker’s commission within the listing broker’s commission was to align everyone’s interests with the seller’s interests and against the buyer’s interests. The cooperating broker working with the buyer was compensated for introducing the buyer to the seller and for actively working against the buyer’s interests in the seller’s behalf.

You might argue that, at least in Arizona, where sub-agency is no longer practiced for residential real estate, the “co-broke” in the listing agreement is vestigial and essentially harmless. I disagree, and this is why I keep hammering away on these points.

Mark Nadel’s proposal, which we have discussed at some length, is a third form of the Divorced Commission. His way is the least practical of the three, for now, but his way is at least envisionable as a matter of policy, where Jeff, Ardell and I are engaged in matters of peculiar practice — solitary instances contrary to the overwhelming norm.

But let’s leave all three particular ways of doing this and simply consider the Divorced Commission in the abstract.

Why would we want such a thing?

From my point of view, there are three crippling defects in the traditional real estate industry:

  1. The rigidity of the commission structure
  2. The exclusivity of MLS systems
  3. The dysfunctional management structure of the broker/salesperson employment model

Of these, two are a direct consequence of the traditional practice of encapsulating the buyer’s agent’s compensation within the listing agent’s commission.

Do you see why? The practice the NAR calls “cooperation” is actually a metaphor for a graduated hostility. Because there are two “sides” built into the listing commission, the short-term pecuniary self-interest of the listing broker is to keep both “sides” to himself. The idea of procuring cause is a way of inducing “cooperation” by delimiting and circumscribing what we might describe as the leonine avarice of the listing broker.

But in a condition of Divorced Commissions, the listing agent never has access to more than one side of the transaction (except in a disclosed dual agency). The buyer chooses his own representation, and compensates his agent from his own side of the ledger. The issue of procuring cause has become moot.

Moreover, an unrepresented seller has no need to worry about compensating the agent of a represented buyer. In the same way, an unrepresented buyer isn’t compelled to compensate the listing agent for advice and counsel he does not receive.

The actual purpose of MLS exclusivity is protection of the doctrine of procuring cause. When we can achieve a state of universally Divorced Commissions, we no longer have any need to exclude unrepresented sellers. The business model would have to change to accommodate them, and there are other practical details — all of them trivial — to be worked out. But, since there would be no offer of compensation to the buyer’s agent in the listing, there would be no need to distinguish represented from unrepresented listings.

Divorcing the Commissions is a very potent reform. This one change might be enough to turn the practice of personal service real estate into a true, modern business…

 
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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Related posts:
  • Who pays the buyer’s agent? Once we’ve divorced the commissions, we can stop worrying about it
  • If lenders divorce the commissions, they’ll be divorced
  • Divorcing the real estate commissions is simply a matter of HUD-1 bookkeeping effected by the mortgage lender

    • 13 comments

    13 Comments so far

    1. RE SALES October 19th, 2006 6:33 pm

      Always get an exclusion paragraph written in the Real Estate Agreement which carves out any buyers which you bring in as non commissionable.

    2. dustin October 19th, 2006 8:33 pm

      I just clicked on your related ad “How can one save you thousands of dollars when you buy a home” and I like every bit of it except the last sentence. It’s such a beautiful piece of writing that I hate to see it end with something so over the top as “if you don’t jump on this opportunity now, you’ll regret it forever…” Just another random note from a random guy. :)

    3. ardell dellaloggia October 19th, 2006 9:31 pm

      Well I’m clearly not with you guys on this one. Ultimately the buyer consumers would not be best served with this method, as procuring cause protects the buyer’s rights more, than requiring buyers to sign contracts to see a house.

      As it stands right now, you cannot give the buyer the fee until first ascertaining that he didn’t use an agent to find the house and see the house and lead him to his decision to buy the house, before offering him the fee.

      If we totally “divorce” the fee. No buyer would be able to see a house without signing a buyer agency agreement.

      I “divorced” the fee twice recently. One took the money, the other used it to hire an agent. In both cases I knew that the buyers were not working with an agent. One was the neighbor who “happened in” and liked it enough to buy it. He used the money to hire an agent. The other had stopped working with an agent a month prior and came from my Open House Ad and had seen no homes with any agent during the term of my listing.

      Blanket policies to “divorce” the fee would require that agents showing houses “protect themselves” by having all buyers sign buyer agency agreements before seeing a house. Not a good thing for buyers and clearly NOT a “trivial” detail.

    4. Greg Swann October 19th, 2006 10:25 pm

      > Blanket policies to “divorce” the fee would require that agents showing houses “protect themselves” by having all buyers sign buyer agency agreements before seeing a house. Not a good thing for buyers and clearly NOT a “trivial” detail.

      I don’t think you’re thinking this all the way through. I don’t see dual agency surviving at all except in extraordinary circumstances, but certainly the situation for all buyers is far worse now. Your way of doing things or mine or Jeff’s will have zero impact except in those isolated cases. Until buyers control their own destiny — which means taking control of their impluses, as well — nothing will change.

    5. Greg Swann October 19th, 2006 11:01 pm

      > Always get an exclusion paragraph written in the Real Estate Agreement which carves out any buyers which you bring in as non commissionable.

      That one I’m not getting at all. An issue in Arizona is that we are constantly remonstrated not to introduce compensation issues into the Residential Purchase Contract. I don’t think this is a terrible hurdle, though, if Jeff Brown’s kind of language is expressed as disclosures. Then the dispositive language can be written in the employement agreements, with the Residential Purchase Contract serving simply to disclose those arrangements.

    6. Real Central VA - Tracking the Charlottesville and Central VA real estate market and more » What is the future of the MLS? October 20th, 2006 12:57 pm

      [...] What is the future of the MLS? By Jim Duncan In a meeting yesterday, someone remarked how much I have been writing recently on the MLS. It’s true. I do not intend to bore readers, but this has been a very hot topic of late, and I am fascinated by the direction of the MLS for a variety of reasons: [...]

    7. The Divorced Commission and the MLS: Building a much better home search tool . . . | BloodhoundBlog | The weblog of BloodhoundRealty.com in Phoenix, Arizona October 20th, 2006 2:18 pm

      [...] Okay, carrying on from the idea of the Divorced Commission — a condition whereby, by some means, the buyer’s broker’s compensation has been divorced from the listing agreement — what are the implications for the Multiple Listings Service model of propagating real estate listings? [...]

    8. Real Central VA - Tracking the Charlottesville and Central VA real estate market and more » Real estate carnival 10-30-2006 October 30th, 2006 4:27 am

      [...] Greg defines the “Divorced Commission,” writing more eloquently than most where the industry must go. [...]

    9. Redfin.com’s Real Estate Consumer’s Bill of Rights: A wolf in sheepskin clothing . . . | BloodhoundBlog: Real estate marketing and technology blog | Realtors and real estate, mortgages, lending, investments July 16th, 2007 9:06 pm

      [...] I am a hardliner on the subject of reform in the real estate industry. Over the last nine months, I have written at great length about, among other things, the skill-set required to survive in the future of full-service real estate, empowering buyers, dual agency, how the NAR makes war on the free enterprise system, divorcing the buyer’s agent’s compensation from the listing agent’s fee, rebuilding the MLS without the co-brokerage fee, eliminating the IRS safe-harbor for real estate brokers to induce them to take responsibility for managing head-count, and getting rid of real estate licensing laws — or at least the broker’s level of licensing — to promote better competition among agents and better due diligence among consumers in hiring agents. There’s all that, plus much, much more. [...]

    10. Divorce commissions come to Charlottesville! | Real Central VA March 8th, 2008 12:19 pm

      [...] been writing about Divorcing the Commissions for quite some time now, not quite as eloquently as Greg, but vehement in my advocacy [...]

    11. Stephanie Edwards-Musa September 7th, 2008 6:11 pm

      Greg, I don’t think this is such a bad idea. The only hurdle I see with this is buyers not having the money to pay.

      This would really make buyers choose who they want to work with and could be a positive thing for everyone. The industry is changing quickly, but I don’t know if it will change to this extent. I will check out your ebook.

    12. Greg Swann September 7th, 2008 6:24 pm

      > The only hurdle I see with this is buyers not having the money to pay.

      I have an idea about this, but it will require lenders to to be honest about money — which may be an insuperable hurdle…

    13. Stephanie Edwards-Musa September 7th, 2008 6:46 pm

      All the way around could be like making the Government honest. :)