Not showing a less-than-3% SOC commission? That's unethical and illegal

This is not legal advice. For legal advice, consult an attorney directly, not a blog.

It’s common knowledge (based on those comments, at least) that some buyer’s agents will not show properties with an SOC of less than 3%. Is that a problem? In a word, Yes.

First, the ethics: The term “ethics” in this context refers to the code of conduct by which a professional is expected to perform his or her duties. “Ethics” in this sense usually — but not always — correlates with what a layperson would consider “right” and “wrong.” Generally speaking, “ethics” in the professional sense imposes an obligation to perform a professional duty in a fair and reasonable matter.

Admittedly, I am not up to speed on the rules of ethics that would apply to a real estate agent. Many agents are also Realtors, and I know that they are thus subject to a particular code of ethics. Attorneys are subject by law to the Rules of Professional Conduct, rules of ethics formulated by the State Supreme Court. I am unaware of any similar rules that apply to agents.

With that disclaimer, it certainly seems like this conduct SHOULD be considered unethical. Surely an agent has an ethical duty to diligently work for the client, including the identification and showing of any property that is or may be suitable for the client. From an ethical perspective, I would even argue that this applies to properties with no SOC whatsoever. Admittedly, in that circumstance, the agent has every right to and should discuss this with the client, as the agent need not work for free. Thus, the agent should, either at the initiation of the representation or when the issue arises, discuss with the client whether and how the agent will be compensated if the agent finds a house that does not offer an SOC. The parties may agree that, in that instance, the client does not expect and has no right to receive information from the agent about that property. Regardless, with this conversation, whatever its outcome, the client can knowingly consent to any limited scope of representation, and consent is the key when dealing with an ethical issue.

Now, the legality: This conduct is almost certainly illegal (at least where there is something more than a 0% SOC), but there is very little chance that it will give rise to liability. How is it illegal? RCW 18.86.050 is the relevant statute. It requires a buyer’s agent to “make a good faith and continuous effort to find a property for the buyer,” except that the agent need not “show properties as to which there is no written agreement to pay compensation to the buyer’s agent.” In addition, the agent is relieved of this obligation entirely IF the buyer agrees otherwise in writing after receiving the required “Laws of Agency” pamphlet. So, assuming the property offers a commission in some amount (i.e., greater than zero), I believe the agent has a legal duty to bring that property to the client’s attention.

So why no liability if the agent fails to do so? That turns on general legal principles applicable to wrongful conduct. Where such conduct causes an injury, the wrongdoer is liable for the harm caused. Here, assume an agent fails to show a “dream house” to the client because of a 2% SOC. The client subsequently buys another house for the same price. The client then finds out that he was denied an opportunity to buy his dream house because his agent did not tell him about it. What is the injury? Given that they are the same price, there is no way to quantify the client’s injury. Under those circumstances, it will be difficult to find the agent liable. Note, however, that if the house actually purchased cost MORE than the dream house, the client may be able to recover the difference.

From a practical perspective, too, there is little chance of the agent being held liable. The whole claim turns on what the client did not know. So, in order to even raise the claim, the client has to learn that his agent failed to inform him of his dream house. Needless to say, it is hard to even fathom a situation where the client would learn of this information after the fact.

So, it ends up being one of those unfortunate facts of life where — as of today, given the laws as they exist — there is no real remedy for the injured party. Unethical? Yes. Illegal? Probably? Any way to stop the behavior? Unfortunately, probably not.

144 thoughts on “Not showing a less-than-3% SOC commission? That's unethical and illegal

  1. There is an exception… with the new buyer agency agreements, a buyer’s agent has the right to refuse showing distressed properties or short sale homes… considering they could garner four months of your time and in the end, the deal is likely to fall apart, or if it does go through, it would be with zero commission.

  2. “Admittedly, I am not up to speed on the rules of ethics that would apply to a real estate agent.”

    An awful long post about ethics for someone who’s not up-to -speed on the ethics of real estate agents.

    ” It requires a buyer’s agent to “make a good faith and continuous effort to find a property for the buyer,

  3. Greg — you fail to note whether I my post is off the mark. I’ll assume that, my lack of knowledge notwithstanding, I am right.

    As for the law and Buyer’s Agency Agreements — that is an unexpected and additional benefit. Anything that gets buyer’s agents and buyers to discuss compensation is a good thing.

  4. Oh, Criag,
    You start in your title “That’s unethical and ILLEGAL”,

    Then of course you have your disclaimer “This is not legal advice.”

    Then you, “Admittedly, I am not up to speed on the rules of ethics ”

    Then you, “Now, the legality: This conduct is almost certainly illegal .”

    Then you make a shift, “Illegal? Probably? ”

    We do agree, that compensation conversation between Buyers agent and Buyer is a good thing.

  5. Greg — yeah, I’m shifty (at least if you parse it out).

    Consider the larger point, Greg. Given two comments by you, where you fail to comment on the MERITS of the argument, I assume you agree with the larger point: Agents act unethically and illegally when they fail to show properties with a less than 3% commission. I’m glad to hear that you agree as I thought some agents might balk (given that many, many agents engage in that very conduct).

  6. In all seriousness, I believe Buyer’s Agency Agreements should be executed for Buyers just as often as Listing Agreements are executed for Sellers. These agreements spell out the business and compensation agreements between the parties.

    We recently had a opinion on this issue from corporate attorneys: On a BAA, if the compensation is less than agreed to between the parties, the Buyers Agent can negotiate with the Seller to pay the difference regardless of what is offered in the LA. Without a BAA, per NWMLS rules, a Buyers Agent cannot renegotiate a commission with a seller.

    Without such agreement, the agent must “show properties as to which there is no written agreement to pay compensation to the buyer’s agent.

  7. Ah, increased commission offerings — now THAT is a different kettle of fish. I actually think I can do something about those (assuming they are not disclosed to the buyer)…

    My argument did not concern BAA’s, Greg, so how is it that your comment addressed my argument? Also, a point of clarification: it is the new law, not BAA’s, that provide the additional and unexpected benefit (getting buyers and their agents to discuss compensation and, perhaps, even sign BAA’s).

    That said, this discussion is nothing more than a colorful bickerfest — fun, but really meaningless. Based on the thread, it does sound like you generally agree with my thesis: it is unethical and probably illegal for buyer’s agents to not show properties with a less than 3% SOC. If you disagree with that thesis, speak up — THAT will be a meaningful conversation.

  8. Ah, increased commission offerings — now THAT is a different kettle of fish. I actually think I can do something about those (assuming they are not disclosed to the buyer)…


    I do believe, correct me if I’m wrong, that negotiated compensation and “best interests” even in the case of a fiduciary in the eyes of courts are different issues and unrelated. Commissions are negotiated and, as we’re seeing, market driven.

    That being said, if a BAA specifies a certain commission, AND the offering is for above such specified commission, then the extra must go to the Buyer (as agreed to in the contract). It cuts both ways, which is another good case for a good BAA.

  9. It seems that, under certain circumstances, it is illegal for a licensee to fail to show a prospective buyer properties based on the selling office commission. (Me no lawyer.)

    However, there are other potential situations where this wouldn’t apply – for example, you might have a list of contacts with whom you’re not in an agency relationship, and you might elect not to alert them to a listing where the SOC was “unsatisfactory.” Would that be illegal? Unethical?

    Speaking of “ethical” – are not ethics simply professional values that exceed the requirements of law? Otherwise, do we not confuse “unethical” with “jerkiness?”

    (Apologies to Ardell for trespassing.)

  10. Greg — Market-driven? Only in the sense that you cannot suppress market forces entirely. The current system is largely insulated from market forces, although the trend towards BAAs (whatever may be driving that trend) is a positive development towards bringing market forces to bear. If every agent — buyer’s and seller’s — truly negotiates the fee, then market forces will exert themselves.

    Mack — I agree with your definition of ethics, and you’re right, my “illegality” argument is predicated on there being an agency relationship. No such relationship (as defined by the statute), then no illegality.

  11. Craig,
    I’m not thinking suppressing market forces….. is the system really that insulated from market forces?

    Today’s seller is facing more competition, higher absorption rates and increased market times. Motivated sellers want a market advantage. We are actually currently in a more normal real estate market than we’ve seen for years.

    The seller’s offering (commission) is a way for the seller to make his property more attractive or less attractive to be shown.

    Even without refusing to show a “lesser commission” house, any agent could “sort” the better offerings at the top of the list, and lower offerings at the bottom of the list.

    In the real world, buyers, when they identify a house they really like will put an abrupt STOP to the showings. In this market, an agent can have up to 20 different comparable homes in a neighborhood. While the agent may be willing to show all 20 homes (of various commissions), the buyer may elect to stop the process.

    The agent does not refuse to show lesser commissions and in fact is perfectly willing to show these listings. It’s also often the case where the best prepared properties are the properties offering better compensation. (The Seller is very motivated!).

    So ethics aside, in markets where sellers need an advantage, they can get more showings by offering more. A buyers agent never has to refuse to show, simply sort the order of showings.

    Is it unethical for the buyer’s agent to take the increased (market driven) offering of compensation? A question for debate, but I don’t think so. This is a sellers offering for compensation.

    Would I personally take the excess? I’ve worked under BAA’s for years. If I have a buyer slip through the crack and not get a BAA, I would take care of that buyer the same way I would have if they had entered a BAA.. I am a strong believer in both agent AND client understanding the terms of the relationship, especially when it comes to compensation. BTW, this frees me work hard on a buyer’s behalf….even aggressively look for FSBO’s, where I negotiate my compensation with the seller. I commonly put 3-4 or more FSBO’s a year together for buyers. But, again this is also market driven. So with many more listings available, it’s hard to see the FSBO’s these days.

  12. Greg — I have no problem with an “increased” SOC. The problem arises when the buyer’s agent fails to inform the buyer of this fact. If the agent stands to make more selling one particular property, then the client should know of this conflict of interest, as it may color the advice provided by the agent. Moreover, if the seller is willing to give a 5% SOC, then presumably the seller would reduce the price by 2% if the SOC were reduced to 3%. Since all money originates with the buyer, and since the agent works for the buyer, the buyer has a right to know of an increased SOC.

  13. Thanks, Craig. So, I would suggest to sellers that by offering a “sub-standard” selling office commission that, at the very least, you’re discouraging agents who may not already be in an agency relationship.

    Also, there may be a “grey” area – buyer’s agents may have the low-SOC listings “in the folder,” in the “if we have enough time to get to them all” pile … I’m not sure what a buyer’s recourse is unless they can demonstrate that the agent has shown them absolutely every property on the market that could meet their requirements . . . except for the low-SOC ones.

    Anyway, it’s small consolation to a seller with an unsold low-SOC property to think that it’s the fault of those criminal, unethical, buyer’s agents.

  14. Note, I am not arguing against being fair to the buyer. In fact I go overboard being fair to all my clients, including having an understanding of compensation, and how it works as we create an agency relationship.

    Also, note, as an agent I am not going to quote any compensation “percentages”. After all, to do so, would indicate there is a standard. Compensation is negotiatied.

    A couple of things in your comment 12.
    Again, is compensation and fiduciary distinct and separate issues? or somehow tied together? If not, how can “conflict of interest” be argued?

    It seems to me, you work under the same rules. You are a fiduciary, yet you are free to negotiate your compensation. The two are unrelated.

    Second, it is very difficult to “steer” a client toward a particular home in a showing of 10 different homes. They generally select, and often one we wouldn’t personally chose.

    Frankly last year, this may have been a much bigger issue than this year. This year buyers have plenty to choose and see.

    I’ll again end this comment that buyers at the very least know where they stand with a BAA. It’s a good idea. Agreed?

  15. How about “the envelope please?” It could be a total secret. The agent hands the escrow company a bill for what they are due from the BA contract, and there’s a sealed envelope with the check that the seller agreed to pay, and escrow can do the math.

  16. Craig, you seem to think that agents work with buyers without a compensation agreement. I don’t think that is true. You certainly have a compensation agreement with your clients, and good agents have the same with their buyer or seller clients. Most of the time I agree with your viewpoints, but this time, I must say that you’re spininng a tale your way …

    Agents who don’t have a written buyer agency agreement might well end up with a bad experience, however, I am a firm believer in trust. Most times, with an extended relationshiop, agents and buyers on the same page with their expectations, but to be certain, agents should have a signed buyers agency agreement (new or old).
    Don’t paint such a bleak picture of agents, and we won’t paint such a bleak picture of attorneys.

  17. I was told in my MLS Basics class that you are required as an agent to inform sellers that a reduced commission (that less than the standard 3%) could adversely affect them. Flat out, it was very likely that buyers agents would be less inclined to show a property without 3%.

    Seems to me if that is what the MLS is teaching in their classes they expect and accept that agents will not be showing and selling reduced commission properties. Maybe the problem is systemic?

  18. I guess I didn’t make it clear. Most agents have a buyer agency agreement that states they will show listed properties, where the seller pays a stated commission. Most of the time, that commission is a stated amount as a percentate of the selling price, and the buyer agency agreement states that buyer will pay agent either the difference up to that amount, or a % commission if no commission is paid by seller.

    Ardell, if you have a signed buyers agency agreement, per NWMLS rules, you can ask a seller to pay the selling office commission. It’s not blind, and it is quite legal. I agree that a short sale might be a ‘blind commission’ since you have no idea what a lender will agree to for every situation.

  19. It was a suggestion 🙂 I don’t look at the commission offered when I am the agent for the buyer, unless that commission affects my buyer client. Most of my clients find their own homes on the internet and they can’t see the commission, so commission issues have nothing to do with which homes we see together.

  20. As a result of the Distressed Property Law, we’re actually moving to buyer’s agency agreements. But the NWMLS agreements suck, so I’m working on my own.

    One thing in there is the client will decide whether they want to know what the SOC commission is. That deals with the issue that came up earlier, where I didn’t disclose lower than 3% commissions, but had a harder time determining whether I should disclose higher than normal commissions. Now the client will decide that, which is the way it should be.

    Chris, as to what the NWMLS teaches, I think it’s similar to my position. It would be extremely naive to think that a 2.5% commission wouldn’t affect some agents. Hopefully it’s a small minority, but it’s at least one. And one of those some might have the person that would buy your client’s house! This isn’t retail, where a different decision might result in 90 units being sold instead of 100. Instead the decision can mean longer on the market or no sale at all. I think seller clients do need to know that.

    Finally, Greg, you’ve obviously never read “The Official Lawyers Handbook” author White. Funny book that’s about 25 years old now. Anyway in one portion an associate hands a writing to a partner, and the partner jumps all over him because of a sentence saying “The sky is blue.” After many redrafts it comes back as something like: “In many parts of the world, during the daytime hours (which vary at different times of the year) if the weather is good, the sky is generally blue.”

  21. Ardell, true, I don’t bother to look at the commission for showings either. And I hate bonuses, to either agent or buyer – just drop the price, or give closing costs or something. Of course, if it is a builder offering an upgrade bonus, that’s a positive thing.

    Kary, the attorney joke book was clearly describing Seattle … we are the part of the world where the sky isn’t blue.

  22. The real issue here is not whether or not agents show property, it’s that all recommend that the offering be the same. Usually it boils down to 2.5% or 3%. When you weigh the pros and cons for a seller client, that .5% doesn’t seem worth the potential risk.

    If a seller says “Will offering less than 3% hurt my efforts to sell at the highest price and in the shortest amount of time?” The only honest answer is “it could”. Since the agent helping the seller with this issue is not the person who gets the commission, the only fiduciary level response is,”yes, it could”.

  23. Ardell wrote: “t was a suggestion 🙂 I don’t look at the commission offered when I am the agent for the buyer, unless that commission affects my buyer client. ”

    How do you know whether it affects your buyer client until you look at it? 😉 (I’m assuming you mean you have a client that is making up the difference.)

    That sort of hits on what we were discussing a few weeks ago. I don’t even look at it, so it would be hard to tell a client that a property is a 4% commission. If under my new form a client requests to be told, I’ll have to make a point of looking.

  24. I don’t get it, Kary. Why would a buyer ever NOT want to know what he is paying his agent?

    The only situation I can think of off the top of my head is a first-time buyer who doesn’t understand how the system works and doesn’t understand the question.

  25. Bili, the seller pays the buyers agent fee most of the time. the buyer agent agreement would spell out what the commission the agent expects to earn, and whether a buyer is expected to pay any/all of the commission in the event a seller doesn’t agree to pay it.

    I don’t think disclosing each and every commission a seller wants to pay while house-hunting is necessary. Just have an agreement in place, and if a buyer doesn’t want to pay out of pocket, you’ll accidentally see a few homes that might not have the buyers commission covered, but you can always present to the seller the buyers agency agreement which certainly can stipulate that the commission be entirely paid by seller.

    Just as often, high-end buyers don’t really want to be ‘bothered’ with the commission details. They want to know the agent is being paid, and that the agent is ok with the payment, but that’s about it.

    Relocation companies are another matter — some charge the buyers agent 50% of the commission, so the buyers agent is left with very little. Many buyers agents will not work with relocation companies due to this issue, which makes me wonder if the companies relocating people understand that their relocation employees may not be getting the highest and best qualified agents.

  26. Bili, 2.5 is a lot more common than 4.0 (I’m not even sure I’ve ever shown a 4.0, and I know I never represented a buyer on one). But the reason I don’t tell them 2.5 is I don’t want them to either: (1) Get the idea that the seller is a cheap SOB; or (2) Feel bad for me for getting a reduced commission (yes, my clients actually like me). I want their decision to be completely neutral of the commission.

    I’ve mentioned this one before, but a few months ago we had a buyer that liked two houses rather close together, and fairly close in price. The more expensive one was newer, and a lot better interior (which the buyer noticed), but was a 2.5 percent listing. I was actually hoping that he’d go for the more expensive one, even though it was 2.5%, because I liked it better. But guess what–he liked the other one better (due to the slight price difference, and perhaps other factors too). But anyway, he had enough things to think about without throwing the commission into the mix, because it really didn’t affect him in that particular situation.

  27. Kary — I am always leery of the argument, “Hey, the client just doesn’t need to know this information.” Clients are entitled to full disclosure of any fact that creates a conflict of interest with the agent. Here, you stood to make a couple of thousand dollars more if your client bought one house rather than the other (or a couple thousand less). How is that not a conflict of interest, where the client relies on your input in deciding which house to buy??

  28. Well under my new agreement they get to pick whether they know. But personally I just think it’s something that might affect them for no good reason. I don’t see how it being a 2.5% listing is likely to make them more likely to pick such a property, so I think it’s better to not disclose that. But again, if they want to know–fine.

  29. Kary — you’re missing the point. The SOC will not have any impact on the buyer, but it DOES create a conflict of interest with you — right? If you disagree, please explain.

    That said, even if you agree, you resolve the issue by having your client waive the right to know your commission. Now, I don’t see any benefit to that, and I don’t see why you offer that. In fact, I’m not sure that this “option” is consistent with your obligation to your client. What is the benefit? There is clearly a harm, in that the client waives the right to know of a potential conflict of interest. The only person who benefits seems to be you, as your client now can be kept in the dark about the fact that House A represents a signficantly greater payday to you than House B. What buyer would not want to know that fact, assuming they understood the issue?

  30. Three observations from a real estate customer:
    1. Ardell’s contention in #21 that most people pick what houses to see directly from the internet is exactly what we do. Same for our friends/relatives who are shopping for a house.

    2. Our St Louis agent said the real estate market was so rotten that no agent in his/her right mind would hesitate to show a house solely because the buyer commission was a little low. We went with 2.7%. As luck would have it, our neighbor across the street also had a direct view of a virtually identical house for sale at the same price as ours through a full service agent. Every time he chanced to look out his windows at the right time, he observed that a visit to one of the houses by a realtor car was followed minutes later by that same car visiting the other house. Of course, that’s totally unscientific and doesn’t necessarily prove a thing, but even so …

    3. Our contract also said that if the buyer was unrepresented, we did not have to pay a buyers agent commission.

  31. Craig, I do disagree. I sort of wanted the client to buy the house with the lower commission, because I liked it better. But one of the things you learn early on is not to let what you think drive what the clients should think. People have their own likes and dislikes, and so I try not to “sell” a client on any house. When they find one they like, they’ll know it.

    Oh, and let’s say I did steer the client to the house with the 3%, and he didn’t like it and didn’t end up buying anything. That would be very counter-productive. The 1/2% really isn’t that significant.

    BTW, clients really have to trust their agents to be willing to throw the entire 3% away, if a fair deal cannot be reached. If they’re worried about .5%, they really need to get an agent they can trust.

  32. And again, it’s not like I try to keep it secret. The subject might come up, especially if the house has been on the market a long time (as a possible explanation for why). More often than not I don’t even know what the commission is myself. It’s not a big deal to me, so perhaps that’s why I think it shouldn’t be a big deal to the client.

  33. Kary — I really don’t understand your explanation. Are you saying there’s no conflict because you don’t let the conflict influence you? Sadly, Kary, that’s not how a conflict of interest works. You don’t cure it by saying, “Oh, I won’t be swayed by the advice I give or the services I provide notwithstanding my own self-interest.” Where your self interest varies from the interest of the client, there is a conflict. Please — PLEASE — explain why greater or lesser SOCs do not create a conflict of interest?

    The only way to cure a conflict of interest is to explain it to the client and get his consent. Arguably, you do so, although like I said I question whether consent to be kept in the dark is really consistent with your ethical obligations. In this instance, I fail to see why you don’t just as a matter of course tell the buyer the SOC. That way, the buyer is aware of the conflict.

  34. I guess I’m saying I really liked my old system better, where I didn’t notice the commission, and I’d prefer existing/future clients check the box not to know. As I’ve said in the past, if you’re a listing agent some agents may consciously avoid your 2.5 listing, and some may unconsciously talk it down. I don’t think I do either, but if I do have to focus on the commission I might do the latter, subconsciously.

    In the example I gave I considered the 2.5% house superior, and I think I did talk it up as such (it was probably a contractor’s house and had a lot of upgrades for an entry level home). So I’m comfortable there that I at least gave the houses at least equal treatment. But what if the two houses were comparable? If that were the case I might have some nagging thought that I’d talked up the higher commission house, and that’s why my client bought it. The way it was I don’t.

    And again, that’s really the only example I can give of a 2.5% vs. 3.0 commission, not because I’ve not shown them, but because I’ve not really had a lot of clients show serious interest in any of them when also considering a 3.0 property–that I know of. We’ve done some 2.5 sales, but it’s typically something we notice after the client is interested in the property. I’ll admit we go “damn!” when we discover it, but It’s not something that I pay attention to early on in the process. It’s sort of like searching for whether they’re in foreclosure–we don’t do that until after they’re interested either..

  35. Kary,

    I think the problem is that when the buyer narrows it down to two or three houses, and there ARE inherent differences, I start second guessing myself to be sure it isn’t the commission swaying me, IF I have seen it. Converting the three houses to a flat fee removes that problem for me.

    Unlike Greg, I rarely have a client who buys something against my recommendation. I don’t choose what they should like, but I clearly tell them which is the better property to buy.

    I was out at 60-01 today and the price spread between some of them was unbelievable, even though the top 4 all had lake views. The low was $253,000 and the high was $295,000. I haven’t seen that kind of price spread for awhile for the same square footage with lake view. From $240 per square foot to $265 per square foot with almost no difference in assessed value. All still had the popcorn ceilings.

    Fine tuning the valuations of fairly like kind with that kind of price spread and 8 townhomes on market was fun, and I can honestly say I haven’t a CLUE what the commissions were. But I was looking there for my future son-in-law who gets the Buyer Agent Fee…so I’m going to have to look. Then we’ll compare the monthly to rentals.

    I’ll lay out all his options and we’ll do the after tax monthly on the purchase vs. rental and then calculate the resale value in 5-7 years after he makes some improvements that I suggest, like taking out the popcorn ceilings and some other things.

    Will be interesting to see when it is THE BUYER who gets the BA fee…if the amount of it sways him at all.

  36. Craig,

    I love a post like this, just makes for a great time!

    I guess I have a little bit of a different view here because I do not sell real estate and that growing up as a hick we did our math in the dirt with a stick a lot of the times, but with that said it is also true that when you do your work in dirt you can smell when it is not dirt any more.

    First, as a buyer I think I would want to know and the reason is because of the long term, but yet I understand what most in sales are saying because most buyers do not think in logic but more in emotions when buying or selling, real estate is very emotional and it is the agents job to keep it other wise. Anyway here is why as a buyer I would want to know.

    As mentioned above I think that it is possible to show the higher commissions only, I am sure none would think like that in today’s market, but the ability is still there and the key lays in the word ability. If I am buying a house for $100.00 and the seller is selling the house for $94.00 with the standard 6% commission factored in then that means I am financing $100.00 over the long haul.

    Should the buyer agent have the ability to limit my ability to buy a house for $2.00 less that I would have to finance over the long term, I would want to know. Besides, the agency states to act in my best behalf, it is my belief that the agent is to get me the buyer and (buyer agent principle/seller customer) the most in savings or as stated above the greatest value for the dollar. Sure as the buyer the final call is in my corner, but I would want to know the entire array of elements that are factored in the deal. Buying a house is a big step and consists of a lot of money. I wonder what the factored in commission above and beyond price would work out to over the course of 30 years in interest… it is only anyone’s guess.

    Second, I would say that I have a concern with such limitations on what is acceptable in commission before acting on behalf of the buyer because it sends a strong message in support of what the DOJ was in what I think driving at with the recent case with the NAR.

    In my market the standard commission is 6% which is split between the seller and buyer broker house. If half is always standard then I would think that by only accepting a 3% commission it is forcing a set 6% therefore limiting completion to some degree if not out right fixing price… that could be major problem as it is openly advertised with in the MLS. I do not know if I was the local MLS board if I would be encouraging such things in class, less not support the DOJ. Perhaps I am wrong in my thinking but it seems to make some logical sense.

    On the other side with the buyer agent being their own business, I would say that they do have the right to state what they will work for or not. Every business has its operational cost margins. I would think that common sense would dictates that those buyer agents would want to disclose all the houses that fall in the buyers wants and likes but do not qualify because of the set commission and at which point a referral could be made to a buyers agent that specializes in such brackets. I think I would want to also disclose that referrals are made in those situations.

    Would love to see what others think. Thanks again for the great subject and post.

  37. Kary — So we agree, there is a confict of interest. And thank you for admitting that, when you do learn of the reduced commission, you’re disappointed. I am sure that is universally true, but in this context I suspect many agents would deny it.

    Your method of dealing with it is a step in the right direction, but ultimately I would argue insuficient. A conflict can be cured only with the client’s informed consent. In my mind, every agent should speak with every buyer client about commissions generally and should inform the client — whenever the agent learns about it — of a greater or lesser than average commission. The client is then clearly aware of the conflict and can then continue with the representation by consenting to it. Anything short of that is less than complete disclsoure of and consent to the conflict.

  38. Well it will be informed consent because my new agreement requires that they make choices, and I’ll explain the options at that time.

    But I really don’t see the conflict as being that great of an issue. There are similar conflict with whoever you give money too, even if the person is just a salaried employee.

  39. Ardell wrote: “I think the problem is that when the buyer narrows it down to two or three houses, and there ARE inherent differences, I start second guessing myself to be sure it isn’t the commission swaying me, IF I have seen it. Converting the three houses to a flat fee removes that problem for me.”

    When it gets to that point I tend to be rather methodical, and give the pros/cons on each house. Since there are never any houses without cons (or at least I’ve never seen one), it’s really just the client’s choice as to which house has more pros and fewer cons that matter to them. A house with so many cons that I wouldn’t recommend buying it would be weeded out at the preview stage.

  40. Kary — again, whether you see it as a big issue or not, it exists and therefore the client has a right to know about it. In your case, it ISN’T a big issue because the SOC has virtually no influence on you (assuming you even know about it). Not every agent is like that, though. If I ever find a buyer who’s agent strongly encouraged them to buy a property, where the agent earned an “extra” commission but did not inform the buyer of that fact, I’ll have an excellent case.

  41. Well and that sort of gets to the problem I was having when we discussed this a few weeks or months ago. I didn’t think disclosing 2.5% was necessary, but I had a hard time coming to that same conclusion with 4.0%. And I couldn’t justify a reason for the difference.

    The thing is, the fact that I show 2.5% commission properties pretty well shows that I don’t let the lower commission affect me. But you can’t say the same thing for 4.0% commission properties. Is it being shown just because it’s 4.0%? In my case probably not, because I probably wouldn’t know it was 4.0%, but how would a client know that? They wouldn’t.

  42. Craig,

    I don’t think the commission issue kicks in at deciding what and what not to “show”. It kicks in when there are a couple of houses the buyer likes equally, and more at a subconscious level for most agents. But then isn’t that a case for having them be the same?

  43. Ardell, “Unlike Greg, I rarely have a client who buys something against my recommendation. I don’t choose what they should like, but I clearly tell them which is the better property to buy.”

    Ardell, of course if there are any issues such as functional or economic obsolescence concerns, delayed maintenance, house style or any other issues that affect value, I am very strong in making sure the buyer understands relative value and rarely do they move against my advice when it comes to relative value to the market.

    My reference to “selection” was toward the a buyer’s personal tastes and perceived lifestyle in the home.

    Today’s buyer has more selection. Often they can select between several homes, all with good and similar values to the market, keeping in mind their personal tastes and lifestyle concerns.

    What I do not do is force MY “will” on their lifestyle choice at this point. I allow my clients the dignity of their choice.

  44. Hey Greg — adversarial is OK! 🙂 I am unaware of such a precdent, although I hope to set one…

    First, an initial point: Other than in regards to Distressed Homeowners (per the new statute), agents are not fiduciaries here in WA. If you doubt me, revisit some of the classic “Battles Royale” between Ardell and Russ Cofano…

    That said, fiduciary duty and compensation are tied together in that some forms of compensation are inconsistent with a fiduciary relationship. An example would be the SOC. The SOC is paid by the seller, the adverse party in the transaction. Whenever a professional to one party is paid by the other party, there is a presumed conflict of interest that is inconsistent with the role of a fiduciary (although RCW 18.86.080 relieves agents of this conflict). Moreover, the SOC is a percentage of the sale price. Thus, the agent benefits from a higher price, which is obviously in conflict with the buyer’s interst. This too is a conflict and is inconsistent with a fiduciary relationship. Again, however, agents get the benefit of the statute (which specifically states that “compensation based on the purchase price” does not breach any duty to the buyer.

    However, and as I have discussed here, the SOC can vary from property to property, either above or below the “typical” 3%. In those instances, there is again a conflict, as the agent’s intersts diverge from the clients (if buyer buys House A rather than House B, agent will make more money, thus agent has incentive to “sell” House A and downplay House B). This is also inconsistent with a fiduciary relationship. In this instance, however, the statute is silent. I believe a court (whether judge or jury) would find that the buyer has a right to know of this conflict, and that failing to disclose it is unfair and decpetive (i.e. a Consumer Protection Act violation).

  45. Thanks, Craig
    I understand that when the last agency law was enacted we went from a fiduciary relationship to a statutory relationship with the public. The DHS law muddied this landscape.

    You say, “An example would be the SOC. The SOC is paid by the seller, the adverse party in the transaction. Whenever a professional to one party is paid by the other party, there is a presumed conflict of interest”

    By the letter of all current contracts, isn’t it true that the Seller pays the listing Broker a total fee. From that fee, it is the Broker, not the Seller that pays the SOC?

    So, in reality, isn’t the SOC is a compensation offering given by the listing Broker to attract cooperating real estate companies and agents to their Seller’s listing using free market forces?

    Of course, some argue against the entire concept, but in it’s current form wouldn’t it be very difficult to prove a conflict of interest (from a legal perspective)?

    Again,….the best way to stay out of the mud is for BA and Buyer to understand compensation in advance.

  46. Greg — an interesting argument that I think would be resolved with reference to the laws of agency. The broker is the “agent” of the seller (check the listing agreement, which creates an “agency relationship”) and the seller is the “principal.” These are legal terms meaning that the agent acts on behalf of and for the benefit of the principal, and the principal will be bound by the agent’s acts. So, the broker’s sharing of the commission is for the benefit of the seller, and the broker works only for the seller. Under those circumstances, there is a conflict of interest between the buyer and the buyer’s agent, as the agent is being paid by the adverse party (indirectly through the seller’s agent).

    Regardless, the argument misses the point. By statute, agents are relieved of this conflict of interest (again, the statute specifically allows compensation to be paid by the other party). So, this is NOT a conflict of interest by statute. However, where the compensation to be paid by the seller differs among multiple sellers, that is not addressed by the statute.

    Finally, and as you and I have now concurred on multiple occassions, you’re right, you stay out of the mud by getting your client’s informed and written consent.

  47. Let’s find out!!!

    Actually, what I’d like to see go before a judge is the whole SOC system.

    Imagine the breath of fresh air it would be to have the agent paid by who they are representing.

    Right now, in the fantasy-land that is the agent’s world the seller pays both agents. In reality, however, it’s the buyer who is paying both agents over 30 years, without any say in how much they are being charged.

    It’s like the system was cooked up by the white rabbit.

  48. Bili, it was worse before when both agents were deemed to be the seller’s agent just because that’s where the money came from. That was absurd, and I thought ripe for a lawsuit. I wasn’t an agent back then, but I’d guess less than 10% of clients realized how that system worked. Here at least the clients understand how the system works, and most of them are okay with it.

  49. I didn’t understand how the system worked when I bought my house 4 years ago. All 3 agents I interviewed, when I asked about compensation, said “don’t worry about it – seller pays us”. What a crock.

    Greg – why do you think so? Isn’t the current structure relatively new? Like the 90s?

    I’ve never seen any mention of litigation, but I’d love to see the cites if there are some.

  50. # 44, Greg, have you really ever had a buyer buy something you thought was a poor decision/poor property? I certainly tell my clients when I think something isn’t the best choice, and tell them you can stil buy it, but hear me out – and once we talk, they don’t move forward with that property. I guess it all depends too on how much time they have to shop … if they were in a hurry, my advice might be that ‘we can do better but not right now, what do you want to do?’.

    But if I think a buyer can do better, I tell them. I’d rather keep them in my car so to speak, than move them into a place I didn’t think was good enough.

  51. Why is it so hard for buyers agents to just get out a Buyers Agency Agreement, discuss the commission choices with the buyer, and put the commission choice buyer prefers into the contract, sign it around, and then go shopping? It’s not such a big deal. Just agree on whatever you agree on, get it in writing, and move forward.

  52. # 51, Bili, buyers always have a say, a real choice. They can most certainly pay their agent directly and not have the commission paid by the seller. All a buyer needs to do is discuss the options he’d like, find an agent who will agree, and the two of them put the agreement in writing. Nothing hard about any of that!

  53. Bili wrote: “I didn’t understand how the system worked when I bought my house 4 years ago. All 3 agents I interviewed, when I asked about compensation, said “don’t worry about it – seller pays us

  54. Kary — isn’t money flow an important consideration when analyzing any potential conflicts of interest? The Attorney Rules of Professional Conduct certainly indicate as much — see RPC 1.8(f): “A lawyer shall not accept compensation for representing a client from another unless the client gives informed consent[.]” To argue otherwise is to misunderstand the whole notion of a “conflict of interest.”

    Leanne — I agree, there is nothing inherently difficult about having a conversation with your buyer client at the outset of representation. Indeed, I think such a conversation is required by professional ethics. The problem is that many (most?) agents do not have this conversation. As I understand it (correct me if I’m wrong), they would rather not “rock the boat.” They don’t want to discuss with the client their anticipated 3% (and possibly more!) payday — any conversation will possibly lead to a lower commission, but I think it is safe to say that it would never lead to a highter commission. Given the current system, it is just too easy to skip that conversation entirely.

  55. Craig, but why is talking about how you or we get paid rocking the boat? I don’t see that discussing what my fee would be is anything but a normal conversation.

    You most certainly discuss your fees with your potential clients. The bakery posts their fees for their donuts, the plumber tells you what their service call fee is, and their hourly rate, the tv cable company tells you how much for a variety of services, we are all used to paying for things and services, and being quoted prices. Most real estate companies have a little flow chart that shows who & where the commission gets distributed to, which can also be given to any buyer or any seller.

    Agents are taught in clock hour classes how to work with all the NWMLS forms, including Buyer Agency Agreement (BAA) forms. They are taught negotiating skills in many classes, which certainly would include a segment of how to discuss commissions with a potential client, and in the legal update kinds of classes, they are taught again how important it is to use the forms created to keep agents from practicing law! :-).

    A discussion doesn’t always have to have a signed BAA, and an agreement between buyer and agent can be formally stated on the BAA, or informally verbally stated, but an agent must discuss with their buyer client fees and representation. And an agent must give buyers and sellers a copy of the Law of Agency Pamphlet (which can be emailed to the client from the NWMLS site). Right on page # 1 of our purchase & sales agreement is also a written statement of who the agent writing the offer represents: buyer or seller. Right there in black and white. Or blue and white if you have a blue pen :-).

    There isn’t an agent out there who hasn’t been taught the value and use of the BAA form.

    Nor would I agree that buyers out there don’t understand how commissions are paid. Buyers today have so much information available to them online, and a ton of that information is commission related, so to think that a buyer has no clue how their agent gets paid suggests that buyers are too stupid to know anything when they first meet up with an agent, which I certainly do not think is the case at all!

    Buyers today are smart, and pretty darned sophisticated. I happen to think that’s a good thing.

    The argument boils down to the fact that there are good agents and not so good agents, just as with attorneys :-), and buyers as well as sellers need to realize they are choosing a very important advisor to represent them for a very large transaction, and that they’d better feel comfortable with their choice of agent before proceeding into a contract to purchase or sell a home.

    Interview agents, ask questions, it’s all good. We like it.

  56. We’ve found that our BAA is takes care of most of the potential issues that might come up with a client. In my own business we have a typical fee that we expect to be paid and it is noted that our client is the one that directs where that fee comes from – first line is the seller but there are other options. We do note that the buyer may be able to pay our fee if they so choose. I also explain that we regularly take lower than what is in our usual agreement if that is what is offered by the SOC in the MLS but it is dependent on what that amount is and we’ll discuss it with them if there is ever an issue. We don’t ask our clients to make up the difference on lower SOC offerings or if we get them a price reduction on the sale, as I’ve seen other agents do. Also, we tell them that if what is offered as a SOC is above our usual fee level then we will disclose it to them (as is required) and if it is possible for us to provide them with a credit for that amount we will give it to them.

    What I mean by that is that, in the case of some builders right now, there are sometimes cases where SOC is as high as 10%. Now, most lenders won’t allow more than a 3% credit to a borrower so if I took my usual fee and we had the 3% max credit applied to the buyer, then there would be some additional funds on the table that are negotiable. We’ve had some clients split extra SOCs with us, and in other cases we’ve done the credit and negotiated price on the property too. There are lots of iterations that can occur here and they are all based on the willingness of the seller to appropriate the funds elsewhere. Some builders don’t want it to come out of price because they want it to look like their homes are selling for more but we fight that for our clients if they want – or they can sometimes apply those additional funds to free upgrades.

    Really, we all run a business so we have to determine what does or doesn’t work for the running of our own organization and what level of profitability we need to stay in business. I’ve successfully used my BAA’s to work with FSBO’s and get my fee paid from the house sale price. My client still pays the market value of the home (as they do in the MLS system) and they aren’t required to bring that much more cash to closing.

    While I hear a lot of people here complaining about the idea that buyers finance everything including all commissions – well, seriously, how many people after saving the money needed for downpayment and all their other closing costs want or expect to bring another $5,000 or more to closing? We’ve got a country where the kinds of financing we have available make it possible for most people to afford a home of their own. Most countries don’t even allow their citizens to own property. If you have an area like Seattle where the average sale price is around $450,000 then do you know lots of people who’d have an additional $13,500 laying around (assuming a 3% SOC?) to pay their agent directly? Probably not. Financing provides an opportunity for people to buy that they would not otherwise have and since the seller is the one who has likely profited over time from appreciation (something they have no absolute control over) the overall fee comes from their proceeds.

    If there is no profit on the sale then perhaps things would be different, but in general we see that sellers do benefit from the long term appreciation of their property.

  57. oh, and, Craig, I do agree that it’s unethical for agents to not show a property based on the SOC. I’ve actually had agents complain when they’ve seen a less than 3% commission and say that they and/or others in their office won’t show properties like that and I have to remind them of the Sherman Anti-Trust Act and tell them to stop talking about things like that in their office because it is illegal to do so.

    If an agent isn’t willing to help a buyer with viewing and/or purchasing a property that fits their requirements because of the advertised SOC then they are definitely creating a conflict of interest with their client. What you can do is to advise your client of the fee being offered and if it is below what you’ll accept – but still show the house anyway with the understanding that perhaps the buyer may need to assist in paying your fee if you cannot negotiate a better SOC from the listing agent or seller (depends on who is involved in the sale). Some people just add a fee on to the sale price to cover it so that the buyer can afford the additional cost.

  58. Reba — “Most countries don’t even allow their citizens to own property.” Uh, you may have overstretched there…

    Regardless of whether or not that is true (I suspect this was really a rhetorical device, not an actual factual assertion), you argue that the SOC should be paid by the seller because it allows buyer’s to finance the professional transaction costs incurred. This is, as far as I know, an arrangement unique to residential (and small scale commercial) real estate transactions. It is obviously to the very great benefit of real estate agents, in that they can charge a greater fee than what their clients could otherwise afford. I would argue that this is ultimately to the consumers’ detriment — after all, they still pay the fee, just over 30 years (or out of the proceeds when they sell and pay off the mortgage). Perhaps agents should learn to charge what people can afford, just like other professionals who assist with a transaction? That would provide significant downward pressure on agent fees, to the consumers’ benefit.

  59. Jillayne — can you flesh that out a little bit? After re-reading Reba’s first comment (the source of the quote) I’m not sure I share the horror.

  60. Sure.

    Homes (new or existing) with abnormally large selling office commissions must also appraise, unless the buyer is paying cash.

    The appraiser has access to the MLS and can view the seller concessions, and must address these in the appraisal. (I’m making this assumption, please correct me if I’m wrong.)

    On CLOSED sales, I have no idea if seller concessions show up inside the MLS. I suppose the appraiser (and also the real estate agent doing a routine CMA) would call the former real estate agent asking if there were any seller concessions.

    If the appraiser does not receive a return phone call or otherwise does not know of the seller concessions, then we have an artificially inflated comparable sale, propping up values in neighborhoods.

    The true value of the home is hidden from the home buyer.

    Unless the real estate agent for the buyer offers the buyer full informed consent as to what is happening with the home values in relation to these seller concessions.

    We artificially inflated home values on the way up by doing zero down loans + adding in Realtor commissions and also all the buyer’s closing costs.

    I fail to see how artificially propping up sales prices while the market is correcting is morally justifiable without the homebuyer becoming FULLY informed.

    This seems to be a Realtor lawsuit waiting to happen.

    Am I missing something, Craig?

    I am open to your analysis.

  61. Jillayne — to be perfectly honest, I don’t know whether appraisals take into account either broker commissions (SOC and LOC) or whether they account for seller concessions. I also don’t know whether there is any law that would require them to do so. I agree that, at least as practiced, the system does (or at least may) artificially inflate the true value of the asset by including transactional costs in the sale. If transactional costs can be included from a legal and ethical perspective, then I think the builders’ concern about sale price is just more of the same.

  62. Jillayne & Craig,

    Concessions do need to be taken into account and Fannie Mae requires appraisers to call and confirm sales information. Commissions are not normally considered as they show on the HUD statement.

    For appraisers the lack of reporting concessions is a major issue and if they can not disclose the items in the report then they must state the degree they sought the information also who they spoke with. Many seek to not report concessions for attempts to hold prices. The only way to really counter the lack of reporting concessions is to check with public records for amount of transfer that is actually taxed.

    The problem is that the sale is inflated and that can be a problem however I do not know how ethics may come into play. That makes for a huge post in its own! I would think that you are right that the real price is not disclosed also many times public records are not up to date.

  63. I agree 100% that it is unethical to not show a buyer a potential home based on what you as an agent would get paid.

    With that said, I know for sure of some agents that do do this and the analogy for them is simply this…if there are 2 different lotteries and they both cost $5 dollars and have similar odds at winning, but 1 lottery pays out twice as much as the other, which one would you enter?

    For me I can not understand this concept. 80 % of $10,000 is much better than 0% of 14,000. Plus, Being ethical is just what you should do and go and work for you clients!!!

  64. SBREV wrote: “For me I can not understand this concept. 80 % of $10,000 is much better than 0% of 14,000. ”

    Good point. I’m not sure if this has been brought up in this older thread, but a lot of people seem to think that agents will favor their own listings or listings by other agents in their firm. While that might be true for some, it really is a losing strategy. The goal of the buyer’s agent is to find a property that fits the buyer. If you limit your showings somehow, you’re reducing the chances of that happening, which isn’t good for either the agent or the client.

Leave a Reply