Ray Wilson, author of Bought, Not Sold, brings academic discipline and field experience to expose consumers to the reality of the realty industry.
Reality inReality in
1. "When An 'Agent' is not an Agent"
2. "Is You Is, Or Is You ain't, My Agent?"
3. "The Dating Game"
4. "States of Confusion"
Realty 2001 1. Career Advice
1.1 "Don't Quit Your Day Job"
2. Seller Advice
2.1 "Appraiser, Yes! CMA, No!"
2.2 "Listing Purpose & Pitfalls #1, 2, & 3"
2.3 "Listing Pitfalls #4 & 5"
3. Buyer Advice
3.1 "EBA, EBA, EBA"
3.2 "Promises, Promises, Promises..."
3.3 "You! You! You!"
3.1 "The 'Big Grab' versus the Big Dope"
3.2 "If not revolution, then evolution""
1. "Making Magic in Chicago"
2. "No Sign of Reform in NAR Leaders"
3. "The Wrong in the Percentage Commission"
Percentage of Commission to Buyer Agents:
Time to Stop the Madness
Ray Wilson - March 5, 2006
© 2006 by Ray Wilson
Sales commissions reward salespeople for high priced sales and penalize low price. Unlike salesfolk, purchasing agents have the job of acquiring goods at the lowest obtainable prices. It would be a short career for any business executive who would apply the sales commission structure to his company's purchasing agents.
Such an action would be either stupid or a deliberate act of sabotage. Leaders of The National Association of Realtors (NAR) are not stupid, nor are their minions in state associations and member firms who impose the percentage of purchase price sales commission upon buyer agents in virtually every state of this country. Sabotage of the buyer agency trade by this power and profit obsessed nationwide sales trade association is clearly evident in its undermining of agency laws in more than half the states (clearly targeted in all of them). It goes beyond the assault on the consumer protections of the Common Law by PAC-financed lobbies and stealth legislation to trade-restraining efforts exercised in the conduct of daily business in the market itself. There is no more blatantly clear evidence of total disdain for consumer well-being or for a buyer's right to engage those in the buyer agency trade than the unconscionable imposition of this simply insane fee structure on buyer agency.
Buyer agents are placed in the preposterous position of being penalized for high performance (i.e., achieving low price) for their buyer clients and of being rewarded for poor performance.
Loss to the buyer is obvious, but sellers are socked too, since sellers must first be buyers and will usually be buyers again within weeks of selling. The overall economy takes an inflationary hit as both sides of real estate transactions -- unlike in other markets -- push prices in an upward direction only. All gains (at the expense of everyone else) are to the sales trade (including the double agents on sales staffs who masquerade as buyer agents) and its national and state affiliate trade associations.
With a few enlightened exceptions, buyer agents (even real ones who are never in sales firms) resign themselves to the percentage of purchase price as a cost of staying in business with the local sales establishment. They accept the imposition upon them and their buyer-clients as a mere annoyance "worth it in the bigger picture." The rationale is that they do not want to risk "killing the deal" for their client by offending the listing agent, or to jeopardize their very ability to do business by incurring the wrath of the local Board of Realtors.
So, what is the "bigger picture"? You get the picture if you're thinking blackmail. It is only because the threats are very real that legitimate buyer agents would allow themselves to be in the ludicrous position of suggesting that a buyer pay them more for doing less, and less if they accomplish more. Remember that it is the buyer who is the actual paymaster in rewarding everybody to work against the buyer's interest. It is a perfect example of prima facia insanity.
Once upon a time, the only real estate agents in a transaction were a seller's agent and possibly a seller's subagent. One, the listing agent, was hired directly by the seller, and the percentage commission with its built-in sales incentive made sense. Real estate firms shared their lists of homes for sale with other firms (all firms had lists), using both their own listings and the combined list (the multiple list) to attract buyers. If a firm sold a home from its own list to a buyer who walked in its door, the firm kept the entire commission. Otherwise, it escorted its attracted buyers to homes on the lists of other firms, acting as a buyer-procuring subagent of those firms, and collecting a sub-agent's share of the commission. A nasty secret of the system was that no buyers had agent representation, though most escorted buyers were led to believe that the agent accompanying them was their personal agent. A 1982 FTC investigation revealed that 76% of escorted buyers were scammed by this masquerade.
An important social reality is highlighted by the callous duplicity of seller agents masquerading as buyer agents. Seller agents come into being as contractual employees of sellers, and their employment contract -- the listing agreement -- establishes buyers as objects to be procured and not as persons to be served. This employment contract implicitly includes two distinct functions -- (1) property marketing and (2) buyer procurement. It hires the listing agent and encompasses any subagent who performs and conforms according to its terms as employee of the listing agent and as sub-agent of the seller.
The buyer is not a party to this agreement and is neither granted rights by it nor obligated to any of its terms.
It is important to note that it is the employment relationship, and that alone, which allows agents in normally competing offices to even discuss fees. Buyers' agents are employed by buyers, outside and independent of the seller's employment contract. Simple cooperation in a transaction is not only insufficient justification for fee collaboration beyond the employment structure, it is in fact the defining basis for a charge of conspiring to fix prices. Still another example of insanity: offering "cooperation" as a defense against a charge of collusion.
There was a second reality revealed by the FTC's uncovering of the double-agent masquerade. Both the deceived buyers and the masquerading agents were acknowledging that, conceptually at least, buyers and homes could be matched together by buyers' agents procuring homes rather than by sellers' agents procuring buyers. The FTC investigation had uncovered a genuine unmet demand -- i.e., a legitimate business opportunity. If the pretense of buyer agency kept buyers with an agent whose property list had simply run out, then genuine buyer agency could attract buyers. Thus, a whole new trade -- buyer agency -- began to emerge within the real estate industry, related to the sales trade only in the commodity changing hands, but no more like it than purchasing agents are related to salespersons in other sectors.
Consider the two realities identified above
- the two distinct performance functions of the sales contract are to
(a) market the property and (b) procure a buyer.
- Instead of buyer-procurement by someone employed under the listing
contract, the transaction might come about via property-procurement
by someone employed by the buyer.
The inescapable conclusion is that when the match between a property and a buyer materializes because of the property procurement activity of a buyer agent, then there has been no performance of the buyer-procurement covenants in the seller's agency employment contract. Put simply, there should be no obligation upon the seller to pay the seller's agent for that unperformed activity.
That reality which actually always existed could have made life and business simpler for listing agents intending to deal fairly with consumers and willing to allow the free exercise of trade for buyer agents. An offer to purchase which includes a fee to a buyer's agent to be paid from the transaction eliminates all need to split the listing agent's commission. The listing agent gets to keep the same amount of money as when the cooperating broker is a buyer-procuring traditional agent. A "bonus" to both the seller and seller's agent is that neither has any liablity for errors, ommissions, or misrepresentations by the buyerside agent.
The caveat of the previous paragraph is the assumption of fair dealing and free trade. The real world is more accurately reflected in an actual scenario occurring in a Southeastern Massachusetts city a couple of years ago:
A buyer agent contracted to find a buyer a multifamily home for up-to $120,000. The fee was contractually set at $3,000. On the buyer agent's advice, and contrary to the listing agent's unsolicited advice, an offer was made for $98,000 on a property listed at $129,000. The seller accepted. The accepted offer specified the $3,000 buyer agent fee. At the closing, seller's agent and buyer's agent each received a check for $2,940 -- 3% of the purchase price. The listing agent told the buyer's agent, "I'm not giving you more than half my commission."
The buyer's agent was penalized $60 for having saved his client several thousand dollars.
With a conventional percentage of purchase price commission, the buyer agent would been paid $3,870 at a full listing price sale, and $3,600 for an offer at what he knew was the buyer's maximum. The corrupting influence of a sales (percentage) commission on buyer agency performance should be evident.
Where the percentage commission is corrupting, those willing to enforce it become corrupt. In the case of this listing agent, one explanation of motivation may be that those higher commission numbers also represent what this person would have earned if not for the ethical and effective work of the buyer's agent. Worse than being a price fixer, the listing agent became a price enforcer -- a far more serious offense. On top of that, he was guilty of third-party interference in the buyer agency contract. And, most important of all, he got away with it because he was backed up by the corrupt system behind it. After all, the buyer agent did want to keep doing business beyond this particular deal.
In the listing agent's defense, one might argue ignorance rather than greed, that he really simply couldn't see beyond splitting what he really believed was his commission and giving the other guy "more than half."
That is possible for a local operator caught in the emotion of a particular deal, but not for the system planners and facilitators in the national sales trade association hierarchy. But ignorance and even innocence on the part of sales agents is more than a mitigating defense. It is evidence of something that every sane business executive knows, and what Justice Department and FTC investigators should know -- that sales trade people don't really understand buyer agency because it is not in any way part of the sales trade.
Purchasing agents ain't salespeople....