Real Estate Commissions – Where Academic Theory Falls Short of Basic Reality

avatarthumbnail.jpgLet’s start with a disclaimer.

I have no issue with the concept of the so-called divorced real estate commission – where seller pays the listing agent and buyer pays the buyers’ agent – in theory. As a theoretical discussion it’s completely logical which, by extension, means the current concept of the seller paying both agents out of their proceeds is completely illogical.

I get it – in theory. But now let’s talk about the reality.

Once upon a time in the real estate industry, all agents represented the seller. Buyers may have thought they were being represented but under the old practice of subagency, only the sellers’ best interests were being protected. Buyers were on their own.

Then buyers’ agency was introduced and, for the first time, you had someone working on the buyers’ behalf and in the buyers’ best interest. Representation was separated. The commissions were not. And so you had sellers agreeing to pay a brokerage x percent to sell a home, and that brokerage offering x percent to whomever brought the buyer.

Such a system doesn’t make sense, as I said before. But it does mean more buyers are being represented in real estate transactions than if they were having to pay their agents’ commissions out-of-pocket as an additional closing expense.

(And please spare me the “we’re still performing subagency” argument. If you are a buyers’ agent and you’re functioning as if subagency were in play, you’re doing it wrong. It’s not complicated to figure out whose best interest you’re trying to protect.)

Academic theory says the buyer should pay his own; reality says many buyers are scrapping and saving just to have enough to cover a down payment and traditional closing costs. Adding the cost of a real estate agent (regardless of the amount charged) isn’t feasible. And so more buyers would be entering into transactions unrepresented, which is in opposition to much of the point of creating buyers’ agency.

One of the central themes of the divorced commission debate is the idea that buyers are paying their agent’s commissions as part of the purchase price. In some isolated cases that may be the case. But if that truly were the case, the prices of homes where only one agent is involved should be 3% (used simply for demonstration purposes) than surrounding homes. And it’s just not. One agent, two agent – it doesn’t impact the price of the home in the vast majority of cases.

Those arguing for divorced commissions will argue that the consumer simply needs to be made aware of the value they will receive in using their own buyers’ agent paid for out of their own funds. Sure. And if we only can convince Americans of the value and simplicity of the metric system, I’ll be buying my happy hour beer at Rock Bottom in liters.

Here’s the thing … you can’t force someone to see the value in a particular service. And even if you can convince them of the value, you also can’t guarantee that they’ll have the money to avail themselves of that service.

I see the value in weekly massage to relieve the tendonitis in my shoulder but I don’t necessarily have the money to spend in such a fashion. So I ask my wife to rub my shoulder, which isn’t nearly as effective because she lacks both the training and the wrist strength to do what’s needed. She’s perfoming the same function but not at the same level. Still love her, but it’s not the same thing.

Reality also usually takes care of the “why would my agent negotiate for less when he receives a percentage of the sales price” argument. Let’s assume I’m going to receive a 3% commission as the buyers’ agent. On $10,000 that’s $300. After office expenses and my brokerage split, I’m now at $255. Take out taxes and I’m down to $204.

Maybe it’s just me, but it doesn’t really seem worth it for me to try and screw someone over for a couple of hundred bucks. Would other agents? Don’t know. I’d like to think not. The point is, for such small numbers it’s virtually a non-issue.

Yes, the perception may be there. But that perception usually fades the first time that I speak to a client and they find themselves hearing me explain that the most expensive property – the property they could afford – doesn’t make sense if it’s more than they need.

When I’m convinced that divorcing the commissions will not lead the vast majority of buyers toward entering into real estate transactions without any representation, then maybe I’ll support the logical theory. Until then, it seems clear that the somewhat less logical reality actually is better for the consumer.

[tags]real estate commissions, Phoenix real estate[/tags]

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 couldn’t agree with you more. It sounds like you’ve read the same article about divorced commissions I recently read. Divorced real estate commissions would result in less buyer representation but not a decrease home selling prices.

    In Australia, where my wife is from, buyer’s must pay for their own representation and as I understand it most choose not to. Oddly, enough there is starting to be a shift towards the way buyer’s representation works here in the U.S.

  • The subject is a non-starter. Always has been, probably always will be.

  • Compensation does not create fiduciary, statutes do. Properly executed buyers agency agreements, per state statute governing agency creates the agency and eliminates the non-disclosed dual agency risk. No different than the insurance industry where client’s agents are paid by the insuring company, this practice is well seasoned with no forseeable moe change beneficial than the present. There is little use carping about what system is best. It is good mental health to accept it and work within the system and require clients to sign buyerts agency agreements or do not represent them.

  • Excellent post. I think I read the same recent article that you and Gary both read. Couldn’t agree with you more Jonathan! I think it’s SO important to break things down for our clients – buyers or sellers – in raw dollar amounts that everyone can understand. With my entire career resting on my good reputation, it would be crazy to screw my buyers for a couple of hundred bucks!