Divorce May Be The Answer

avatar.jpgIn his vivisection of Redfin’s so-called Bill of Rights yesterday, Greg stated that many of the issues Redfin raised could be solved through the divorcing of the real estate commission from the transaction – in short, sellers pay their listing agent and buyers pay their buyers’ agent.

Under the current system, sellers pay both agents in a transaction. The listing agent negotiates the overall commission for the transaction and then offers a portion of the commission through the MLS’s cooperative agreement to other broker members. This is an off-shoot of the days of subagency, when all agents involved worked for the seller and buyers were on their own (whether they realized it or not.)

There’s a long-standing debate over who truly is paying the commission. Some will argue that it is the buyer since the cost is wrapped into their mortgage in a higher sales price. Others will argue that it is the seller because the money comes out of their proceeds.

The answer’s truly both – it’s two sides of the same pane of glass. But the debate on how best to handle compensation for buyers’ agents often is divided based on whom you feel is paying the commission.

In yet another of our almost continuous debates, Ardell suggested an unrepresented buyer ought to receive the portion of a commission set aside for a co-broke. After all, the seller already had mentally written that money off. Considering we’re in a market where the buyers already are asking for concessions, I find the idea of an automatic credit to be misguided at best.

The buyer has no God-given right to the co-broke fee. If the seller wishes to negotiate a credit then so be it. But to say the seller simply should hand the money over without the option of negotiation is ludicrous on its face.

I’m in favor of consumer protection, but not at the expense of half of the consumers on the market – the sellers. And that’s one of the many areas where Redfin’s co-called Bill of Rights falls woefully short.

Back to the idea of divorcing commissions from the transaction. On the surface it sounds like an ideal solution. The question is whether we want to force the buyers who likely need representation most into the ranks of the unrepresented – first-time buyers, for example, or others who can afford a home but not the cost of representation.

There’s always going to be a less expensive option on the market. But it’s also true that you get what you pay for. Before dismissing that as another cliche, think about it.

Those who are the best at what they do, regardless of the profession, demand premium payment. Agreed? So why would the most skilled in a given profession perform their craft for minimal compensation? Wouldn’t it seem likely that the least experienced and the least knowledgeable real estate professionals would gravitate toward a lower-cost alternative as a sort of entry position? What if these alternative brokerages offered a salary rather than commission-based compensation? Would they move then?

And at the end of the day, who is more motivated to work on behalf of their clients … the agent who is working for his check every day or someone guaranteed direct deposit every two weeks regardless of performance? (All closings are not alike – in complication or in the level of stress accrued by buyer and seller.)

Still, separating buyer and seller compensation would be a better solution than arbitrarily reducing the sellers’ net, just because a buyer elects to work without representation.

As I have said many, many, many times – until it can be proven unequivocably and repeatedly that a home purchased by an unrepresented buyer will be sold for x% less than the same house where a co-brokerage is being paid, you can’t say the commission is being paid by the buyer with no impact to the seller.

Again, it’s two sides of the same glass.

Change for the sake of change is worthless. Change for the sake of progress is priceless.

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About Jonathan

Jonathan Dalton is a 30-plus-year resident of the Valley and has been helping folks buy and sell homes since 2004. He can be reached at 602-502-9693 or info at allphoenixrealestate.com.

  • Jonathan I agree with you on this one. And Redfin (admittedly not in my area) seems to want the listing agent to do a large portion of work on their buyer deals…so why not suggest the Redfin portion of commissions get cut? I might not be opposed to a complete separation, where a buyers agent gets paid by the buyer and seller pays listing agent. But an unrepresented buyer is de facto assisted by the listing agent. I agree with you, sellers can negotiate commissions depending on how the transaction winds up – that idea is not in the buyer’s best interest. Good blog. And nice to see you!

  • Good to be seen, Carole! I’m only recently trying to come back to AR. Too many people, too little of real substance left there.

    It’s the fact that an unrepresented buyer is helped by the listing agent that causes me to receive a little more than half my normal commission if there is an unrepresented buyer.

    The other portion goes back to my seller for them to negotiate with as they please. I don’t believe this money is owed to the buyer in any way, shape or form. Let them negotiate for it. Plain and simple.

  • Jonathon, if you haven’t read Brian Larson’s articles on this topic, I commend them to you. Brian used to manage the MLS in Minneapolis and now represents many MLSs in his legal practice.

  • This looks like good stuff, Michael … I panned through quickly because it’s later but definitely am going to revisit it.

  • Can’t the buyer’s agent fee just be considered a cost, reported on the left side of the HUD, and seller’s can offer a credit towards “closing costs”?

  • Great post JD. Thanks for submitting it to the Carnival of Real Estate.

    I have no idea why my CoRE post didn’t ping this one… (as well as several others)

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  • Dax Larkworthy

    Just to give you an idea of a buyer’s viewpoint, I’m currently going through the buying process now without a buyer’s agent. Because I am not in a rush to close, I intend to negotiate for the 2.5-3% that would normally go to the buyer’s agent as a reduction in price or cash back as closing. If the seller balks, I have time and will walk.

  • And that’s not a bad strategy, Dax, if you’ve been through the process before and have a handle on what is involved. The question is whether it will be the seller or the listing agent who balks.

    If you came to the majority of my listings and wanted to purchase unrepresented, there would be a 2% reduction for the seller because that’s written into the majority of my listings. It would be the sellers’ call whether to pass that on to you. Would I recommend they do it? It all would depend on the other specifics of your offer. But I would not object as this already was covered.

    The trade-off for you is you would be on your own to find an inspection, schedule inspections and meet the rest of the contractual deadlines. But if you’re comfortable with the process, there’s no reason why you shouldn’t be able to go it alone.

  • Dax Larkworthy

    Jonathan,

    So would I be better off financially to find a buyer’s agent like Redfin or a realtor friend to represent me so that the seller is forced to pay the buyer’s agent fee to someone?

    Otherwise, my plan is to agree to a price and then ask for the commission as a concession. I also plan to use a real estate attorney, so I will not be without representation. My impression is that you can get legal representation for much less since they don’t work on a percentage basis. Since you will need a lawyer anyway, why use the realtor as a buyer’s agent?

  • Redfin’s not going to give you the concession you’re looking for, Dax. They’ll give you part but not the whole buyers’ agent fee.

    What I’m saying is it depends on the seller and the listing agent. My situation is different than many because I write the reduction into the bulk of my listings. So then it’s strictly the seller’s call. You can’t force the seller to make that concession. If they want to sell, and their agent doesn’t raise a fuss (and I hope they wouldn’t) then they likely will do it. But I’m also in a market where concessions of 3% towards buyers’ closing costs have become the rule more than the exception.

    In a slow market, and I presume you live in one, concessions are easier to obtain. In a fast-moving market, the seller will tell you to take a hike and will move on to the others waiting.

    And you don’t need a lawyer in all states. Arizona is one of those where a lawyer isn’t necessary. A real estate attorney can help with writing the offer and the like; beyond that, I can’t speak to what services they offer regarding inspections and the like because they’re not that common here.

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