ALL PHOENIX REAL ESTATE

Posted on November 7th, 2007 by Jonathan Dalton

This afternoon I took the kids to see the Bee Movie. I don’t consider this to be a spoiler so I won’t tell you to skip ahead, but …

… at the very outset of the movie we are educated briefly about why bees cannot fly. And yet they still do in defiance of logic and all that we know.

Every now and then the idea of divorcing commissions comes up - buyers pay for their agent (assuming they have the cash), sellers pay their agent (assuming there still are qualified, ready, willing and able buyers coming to home in an era of full free agency) and all will be right in the world. Or so we’re told.

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.

That’s from the same Bloodhound seven months earlier. If this were a high school speech and debate competition, extra points would be scored for being able to defend vigorously opposite sides of the same question.

So who does pay the commission? As I’ve argued from the outset it’s two sides of the same coin. Some will argue that any commission paid is reflected in the sales price and therefore the buyer is financing the commission as part of their mortgage.

But this argument falls flat when there’s a cash sale. The buyer’s not financing anything. And I’ve yet to see any empirical evidence that the sales price automatically drops by 3% or so if a buyer is purchasing without the use of their own agent.  Many buyers think that, encouraged by listing agents looking for a double-dip, but there’s no such guarantee.

(Greg, myself and others I have said in the past the mortgage industry effectively can divorce the commissions by moving the buyers’ commission to the other side of the HUD-1. This already occurs in nature when the commission truly is being paid by the buyer and not by the seller through their agent.)

Much of this is ancillary to the basic premise of a truly divorced commission and I realize that. I also realize that on its face it’s fully illogical for both sides of a negotiated transaction to be compensated by the same source.

Yet somehow, just as the bee flies, the system works.  When I represent a buyer I work to get them the best possible deal. It’s inconsistent (if not disingenuous) to argue that I’m not doing my best work because I’m compensated by the seller (especially if you’re arguing simultaneously that the buyer pays the commission in full.) Others, who execute far more transactions than I, agree.

More important to this argument, yet rarely considered, is the public’s view. Exclusive buyers agents have not come to dominate the market in the years since buyers’ agency was introduced. These agents’ compensation is negotiated with a buyer before the search begins and their pay is independent of the co-broke fee being offers (more or less - if the amount of the co-broke matches the negotiated rate, they belly up to the bar and accept the money offered by the seller.)

Why has it not become a more dominant segment? Apathy. We as an industry have done a terrible job of explaining the value we provide. And try as you might you can’t force people to see the value in an effort to collect payment. Either they see it on the surface or they don’t and whether they are willing to pay depends on the view at first blush.

Real estate professionals can debate who pays what and why the commissions for selling and listing agents should be divorced. But until the public truly cares (and there’s next to no evidence that the vast majority does) we’re wasting a lot of zeros and ones on what amounts to solely an academic enterprise. Maybe that’s why it began with academicians.

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Categories: General Real Estate, Marketing