A call for an end Cooperative Compensation

As a buyer or seller, does this make sense? As a Realtor, what are your objections or words of support? Lenders – what do you think? Is this a challenge worth undertaking?

We can write about it til our fingers bleed. We can talk about it until we are blue in the face. Not much will change until we get the relevant laws changed. For that, we need the help of the NAR. As a profession, we need to rid ourselves of Cooperative Compensation and the practice of the listing broker paying the Buyer’s Agent.

Cooperation between Brokers need not go away. In fact, without cooperative compensation, the practice of real estate representation will be enhanced, as the perceived collusion between Realtors will be mitigated significantly. What needs to disappear is the inherent conflict of interest that comes from the Listing Broker paying the Buyer’s Agent. That is always a fun conversation with first-time homebuyers as well as more-savvy ones.

Buyer: So, how do you get paid?
Buyer’s Agent: Well, the Seller pays me.
B: What do you mean?
BA: Well, not really, you are paying for the house, and you are getting the mortgage, but the Seller has agreed to compensate my company for my services.
B: What do you mean?
BA: It’s complicated.
B: Well, am I bringing the check to closing?
BA: Yes.
B: Then how and why is the Seller paying you?
BA: Because that’s the way it’s always been, and the laws have not changed sufficiently to allow for buyers to finance their representations’ commissions into the mortgage, Realtors have not adapted to the new realities and they are stuck in the mindset from when all agents represented the Sellers.
B: But why is the Seller paying you?

It’s easier for the Buyer’s Agent to just take whatever the Seller is offering – there is no negotiation with the Buyer about the Realtor’s compensation, so much so that often times the answer to the “How much is your fee” question is “It’s free to you – the Seller pays me!”

I went around and around with some of my clients for several hours one time, agreeing with them the entire time how convoluted, antiquated and archaic the Buyer’s Agent’s compensation arrangement is, but there was nothing we could do to change it. It needs to be simple. If Realtors want to equate themselves with other professionals, we need to be paid that way, heck we could lead the charge towards transparency in fees.

Attorneys are paid by their clients, except when they lose, and do we really want to equate ourselves with that side of the legal profession? Who knows how doctors get paid? More often than not, they can’t even tell you how much a simple test costs because they don’t even know.

Greg Swann has written an enormous volume on this issue, but we need more. Educating the consumers is but one part of the equation. Educating Realtors is another. Effecting change at the legislative level is an even greater challenge. Making the argument for “divorcing the commissions” is relatively easy. Changing laws is not.

Here’s what we do.

At our local Realtor Associations, meet with the Government Affairs Committees and ultimately the local Boards of Directors. Then our state lobbyists. Then our state legislators. It won’t be easy, but we can get it done. Matter of fact, it will be time-consuming and mostly unrewarding, in light of the expected attack from those who are content with the “way things have always been.”  It’s going to take more than blogging.

I was seeking advice from an “old-timer” in the business a few weeks ago on how we could get rid of Dual Agency. His response:

What it would take to get rid of dual agency is for the General Assembly to pass a law that would change that. The reason that it exists today is that it is a carryover from the past when an agent, representing the seller, worked with a buyer and appeared to represent(and in many cases did) the buyer. Old habits die hard! You are in a position with VAR to have the General Assembly change that.

It’s not often that one has the opportunity to effect change like this. The time may be right, and beneficial to everybody – consumers, Realtors, regulators – to change how we do business to a more transparent, ethical and professional way of working and compensating.

Maybe we can rid ourselves of Dual Agency while we’re at it. And referral fees. Transparency is a good thing.

Am I wrong? Off base? What are the arguments for keeping things the way they are?

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25 Comments

  1. Michael Wurzer May 21, 2007 at 11:28

    Jim, in addition to Greg’s excellent analysis of this issue, your readers may find Brian Larson’s series of articles valuable.

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  3. Jim Duncan May 21, 2007 at 13:28

    Thanks, Michael. There seems to be enough support among those who are advocating change that we should be able to actually effect change.

    Change will have to come from more than one front, however.

  4. Shailesh May 21, 2007 at 14:42

    Jim,

    As a lender I get this question from time to time from first time buyers. They’re a bit unsure of using a Realtor and I tell them the seller pays for them anyways. They are always a bit confused.

    I agree there needs to be a change. The buyer needs to pay some of the cost and this whole dual agency is a bit outdated. However, making the buyer pay can be a bit tricky. We have buyers with no down payment money and then for existing buyers having to sell their homes just to pay the Realtor.

    Thanks,
    Shailesh

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  6. Jim Duncan May 21, 2007 at 15:19

    Shailesh –

    Thanks for commenting. If the lenders would change their regs so that buyers can finance the Buyer Agents’ commissions, wouldn’t that help to solve the problem?

  7. Michael Wurzer May 22, 2007 at 00:07

    Jim, here’s a quote from Brian’s article that speaks to your last comment:

    What about this notion of the buyer paying?

    It is widely believed that it is impractical or impossible for the buyer to pay her own broker at closing. A report published in spring 2006 discussing the future of MLS considered the idea of buyers paying their own brokers: “It is unlikely that this will happen unless HUD and Fannie Mae allow the buyer to finance the portion of the commission that the buyer would need to compensate their own agent.”

    In fact, HUD and Fannie Mae regard a commission paid by buyer to buyer’s broker at closing as a valid closing cost. In other words, to the extent that closing costs can be financed, a buyer broker’s fee can be financed as well. The traditional view is that the buyer borrows money to pay for the purchase price and comes to the closing with the closing costs in cash. Practically speaking now, buyers have the option to come with a piggyback loan ready to cover some of the down payment and closing costs in return for a second lien position on the property. There may even be tax advantages to this approach for the buyer.

    Even if you are queasy about the buyer paying, the transaction can still fund the buyer broker’s commission. The buyer merely seeks the necessary amount as a concession from the seller. Note that this is a request from the buyer that the seller cover some of buyer’s closing costs. It is not a request from the buyer for the seller’s broker to pay more than the published cooperating compensation to the buyer’s broker; such a contract clause would likely run afoul of NAR’s Code of Ethics. A seller concession to pay the buyer broker should be perfectly OK from the perspective of mortgage lenders and the secondary market. But the buyer broker had better have a buyer representation agreement first.

  8. Jim Duncan May 22, 2007 at 05:28

    Michael –

    Thanks for the snip. I think I actually noted that last year when I wrote about this before. The issue here is that closing costs in my market generally run 2.5%-3% of the Purchase price; coupled with a buyer-broker fee of 3% of the Purchase Price, this would be in excess of most of the limits set by lenders, so we need their help as well.

    The challenge is that the changes will have to be made for the majority of Realtors, as 98% don’t want to negotiate the buyer-broker fee without being dependent on whatever bait the seller is offering. It muddies the waters of true buyer-client representation.

    Take this hypothetical situation – a buyer-broker can choose between three houses to show (in this market, it’s more like 100. One is offering 3% to the Buyer-Broker, one is offering 2% and one is saying that the Seller is not offering any commission because the property is not listed in the MLS. While the one not listed in the MLS might just be the better house, it probably would be shown last, if at all.

    Having the buyer pay (and finance) the commission may be feasible now, but it’s just not done. For that, we need fundamental and sweeping changes from other sources.

  9. Doug Aegerter May 23, 2007 at 21:33

    Are we overlooking the obvious, sellers all FSBO, then all buyers need to do is hire a buyer agent, at some level of service, to negotiate the deal and follow the contract safeguards. If a mash-up comes up with a FSBO MLS, it could happen.

    http://www.stlouisrealestatevoice.com

  10. Jillayne Schlicke May 24, 2007 at 20:08

    Hi Jim,

    Seller should pay the listing agent to get the home sold.

    Buyer should pay the selling/buyer’s agent for his or her time, knowledge, expertise, and negotiating skills.

    Lenders are financing both sides of the commission anyways; it’s embedded inside the purchase price.

    As I said on the inman blog a couple of days ago, why are banks jonesing to get into the real estate business? So they can collect the buyer’s side commission AND write the loan. Of course they’ll finance it…..if they’re the ones allowed to earn it.

    Think like a corporation: Profit. It is the next logical step.

    Commissions on both sides are headed downward. The winners will be those who can create ways to make a profit in the new lower commission world.

  11. Julie Emery May 24, 2007 at 21:58

    Jim,
    I’m late to the discussion on this, but we definitely need to make eliminating dual agency a priority. There is no way to justify the practice! The only one helped is the agent who might pocket extra commission money. It hurts the consumer and it definitely hurts our reputation!

    Buyers being responsible for their portion of the commission does make logical sense. And it would work in many instances. But how do we protect those buyers for whom that additional percentage make the difference between affording a home or continuing to rent?

  12. Jillayne Schlicke May 25, 2007 at 00:54

    Hi Julie,

    Those buyers don’t need to be “protected.” They are not being victimized by anyone.

    We would call those buyers “future homebuyers” and present day renters.

    Homeownership is not for everyone, nor is it a right. Over time, renters can choose to become homeowners.

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