When does a “Buyer’s Agent” earn his compensation?
Craig on 08 31, 2010
As we grow our real estate brokerage, we regularly come across one issue in particular: the SOC (Selling Office Commission) and when it is “earned.” Our brokerage is based on a flat fee, and we rebate the commission we earn as a buyer’s agen– er, I mean as a buyer’s broker. Accordingly, our clients have a very direct interest in the SOC, because it goes to them, not us. But often times our clients hire us AFTER they have identified the house on which they want to make an offer. Thus, it is not uncommon for our clients to have been given access to the subject property by the Listing Broker or some other broker, typically employed in the same office as the Listing Broker.
And here is the crux of the issue: If a broker just opens the door for a buyer, has that broker become the “procuring cause,” thus entitling that broker to the SOC? Commission disputes are governed by NWMLS arbitration rules. Per Rule 26:
The Panel must determine a controversy in accordance with NWMLS rules; real estate customs and practices; and general principles of good faith and fair dealing. One of the functions of the real estate industry is to encourage good salesmanship. Therefore, the party who obtained the signed contract giving rise to an obligation to pay a commission is entitled to the commission in the absence of a serious violation of accepted real estate customs and practice, NWMLS Rules, or general principles of good faith and fair dealing.
Of note, the rule specifically references “real estate customs and practices.” The notion of a “procuring cause” has long been a part of the real estate landscape. Thus, the rule does not prohibit a broker from seeking a commission on this basis, regardless of how little work the broker actually did on behalf of the buyer throughout the transaction.
You may be saying, “So what? Agents pride themselves on providing complete representation to a buyer client from soup (identifying homes to purchase) to nuts (closing). No agent would seek a commission simply for opening a door when they have not provided any of these other services…” If you’re saying that, you are flat-out wrong.
We frequently must deal with a broker making a claim to the SOC under these circumstances. Does anybody else think this is crazy? If brokers have a “fiduciary-like” relationship with buyer clients, if brokers promote their services by touting the benefits of representation throughout the purchasing process, how can brokers turn around and claim that they are entitled to full compensation even if they don’t provide these services?
The reality is that the industry is still hung up on “salesmanship.” Its still hung up on the implicit notion that brokers work for the seller. This leads to all sorts of problems when the industry (or at least innovators within it) seek to move towards a truly buyer-centric approach. What sorts of problems? We have had brokers tell us that they expect the SOC under these circumstances (where they are a “procuring cause” only, and barely so). Accordingly, we have paid these brokers a referral fee — thus increasing the costs of our services to our clients by reducing their rebate — simply to avoid a commission dispute (given our model, we’re concerned about whether we’ll get a fair hearing, so we always seek to resolve a commission dispute voluntarily).
As the real estate industry matures in the modern, internet-based world, hopefully it will move towards a more rational way of compensating buyer’s brokers, one that compensates them for services peformed and value added, not just for “procuring” a buyer.
About the Author: Craig Blackmon
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How do you explain to your clients that you don’t have the authority to “give” them that SOC? How do you warn them that they may not get it, in whole or in part?
Ardell — pretty much by telling them just that. We don’t make the rules, we just have to play by them, and we make sure our clients understand the “game.”
Sorry, you’re not in the Real Estate business. I have given you the benefit of the doubt, but this is way out there.
Buyer Brokerage has been around for decades in Seattle. No one cares about your business model.
Do you also ask a client if they have been working with a Real Estate agent? Where do you draw the line? If the agent has been working with the client for a month? Two weeks? A couple of days? What if your client calls an agent to ask what they think about a property?
Any one with some typing skills, and a computer can ask the client boiler plate questions to fill in a form. Once you go off the form, it’s a problem for your client. Do you disclose that before you draft language?
I could go on, but you don’t get it. You don’t understand. Real Estate is a very small community. You and Glenn buddy can talk about how every body is against you, but that’s just paranoia.
David — in the interests of generating a dialog, any chance you could flesh out and refine your points a little bit? For example, what is it that I “don’t get”? How is this post “way out there”? What’s the connection between my post and the “very small community” of Real Estate? And finally, who the heck is “Glenn buddy”?
In the meantime, I will address those points I understand. Yes, we ask our clients if they have “worked” with another real estate agent, primarily to identify any possible commission disputes so that we can resolve them promptly. However, we are not concerned with “taking” clients from other brokers. We certainly don’t cold call potential clients and never suggest that they discharge their current broker, but we are happy to assume their representation if they want to discharge their current broker. I have the exact same approach to clients of my legal practice. It is not my business to preserve somebody else’s practice. If the clients of that other professional — whether lawyer or broker — want to discharge that professional and hire another, I am happy to assist. I do not think I have any obligation to my fellow professionals to turn down work and refuse to assist a potential client simply because they hired somebody else previously. Do you disagree?
Again, please clarify your comments so I can respond. Thanks David.
In the interest of intelligent discourse, I will interpret David Losh’s comment.
Craig asks: ” For example, what is it that I “don’t get”? How is this post “way out there”? What’s the connection between my post and the “very small community” of Real Estate? And finally, who the heck is “Glenn buddy”?”
“Glenn buddy” is Glenn Kelman, the CEO of Redfin. It is David’s generic reference to alternative business models that do not play by the 100 year old established, and often unwritten, rules of “the game” which are understood by the “very small community”, and hence not always written in the detail needed for new entrants to fully comprehend and abide by.
Your model, “Glenn’s” model, and many other new models that redefine the SOC, break an underlying rule that no members of the mls are allowed to interfere with the original contract (the listing contract), nor can they redefine its terms. It is generally against the rules to demand a higher SOC than that offered. The question is can that rule be applied in reverse or to any modification of the application of the SOC? Generally, yes it can. The agent for the buyer cannot ask the seller or the seller’s agent to do something different than what the listing contract provides. That is contract interference and against the rules of play in general.
Craig asks: “we are happy to assume their representation if they want to discharge their current broker. I have the exact same approach to clients of my legal practice. It is not my business to preserve somebody else’s practice. If the clients of that other professional — whether lawyer or broker — want to discharge that professional and hire another, I am happy to assist. I do not think I have any obligation to my fellow professionals to turn down work and refuse to assist a potential client simply because they hired somebody else previously. Do you disagree?”
It’s not a matter of whether or not David, personally, disagrees. The rules of the real estate world and the attorney world are not necessarily fully interchangeable. Mainly because when a client discharges the previous attorney, they pay the previous attorney for their work up to that point and pay the new attorney for their work from there forward. The real estate world is not set up on that basis. FURTHER AND VERY IMPORTANT is this statement of yours: “If the clients of that other professional — whether lawyer or broker — want to discharge that professional and hire another, I am happy to assist.” There is a $5,000 fine for “assist”ing a person in the discharge of their current agent.
An mls member cannot encourage OR ASSIST a person in discharging their current agent.
They CAN work with a person who has discharged their current agent, but they cannot assist them in the preparation of any forms required for them to discharge that previous agent nor can they participate in leading them to the conclusion that they SHOULD discharge their current agent.
While the real estate commission (as a matter of convenience) is tied to the property a person actually buys, the person who is being paid from the sale price of “that” house is being paid for all of their work for that buyer on any and all houses they have talked about from day one. So if the agent has been to 50 houses with that buyer client, and the buyer purchases house #48, the payment is for their work from day one to the day they are no longer needed, which usually is the day after the person takes ownership of a home.
So what you don’t “get” is that the agent who was working with “your” client may be the “procuring cause” NOT because they simply were present when your client saw THAT house. They may have provided all of the information and comparisons of value and properties and areas and schools and neighborhoods and, and, and…all the things the buyer learned with them, in order to make the choice of “that” house.
The bottom line, the actual line of demarcation BY COMMON PRACTICE over the years, has become if a buyer has seen the house they are making an offer on, with someone else. Generally that has been a “hands off” area. If a buyer saw 50 houses with someone else (but did not sign a buyer agency agreement) and did NOT see the house they are making an offer on with any agent, the issue was gray enough for the “new” agent to “write it”.
BUT if the agent has ANY inkling that the buyer has seen that house before. Like they walk in and say “I want your opinion on this” and run up to something they obviously would not know about unless they had been in the house before…that is a big red STOP sign for the agent. Even if the buyer says they never saw the house with another agent…if they show signs that the HAVE been in the house before, you have to stop and figure out what the heck is going on here.
That’s the part you “don’t get”. Over the years many proposed new rules have tried to clarify this “procuring cause” issue without success. The original rule was defined as “the threshold rule” or “the threshold test”. Basically it meant whomever crossed the threshold first with that buyer was deemed to be the procuring cause. In recent history some local state governments have tried to eradicate “procuring cause” in favor of whomever holds a Buyer Agency Agreement. That move was unsuccessful in any state to the best of my knowledge. (CA was the only one that tried it, to the best of my knowledge.)
For the most part in CA and many other states, there is a common practice of “he who writes it gets it”. The first “it” being the offer to purchase and the 2nd “it” being the SOC. That appears to be your line of thinking.
BUT here is the example that blocks the “he who writes it gets it” method as a potential hard and fast rule:
1) Buyer offers $500,000 on a property listed at $550,000 with a 3% SOC
2) Seller counters at $510,000
3) Buyer fires the agent who wrote the offer
4) Buyer hires a new agent who agrees to work for $5,000 instead of $15,000
5) Buyer and seller agree on the sale price of $500,000 with the $10,000 shortfall coming via replacement of a $15,000 SOC with a $5,000 SOC
So the buyer kicks his agent to the curb to meet the shortfall between what the buyer wants to pay and what the seller wants to get. OR the buyer brings a new offer using Craig, and gets the house for even less, without reducing the seller’s net proceeds.
So…that is what you are missing in the big picture and why David asks “WHERE DO YOU DRAW THE LINE, CRAIG?”
If someone came to you who already made an offer on the house, as a means to bridge the gap between his offer and the seller’s counter offer via a reduced commission…would you “write it”?
There’s a line…and it currently exists at the point where a buyer has seen THAT house the agent is writing an offer on with someone else. You are moving that line. Question is, where are you moving it to? Is there no limit to where it can go?
Personally here in WA, I WILL write an offer IF that someone else was the listing agent (not ANY agent with the listing company) because I think every buyer has the right to separate and equal representation. BUT I take the risk that I may not get paid. I still support the right of a buyer to have a representative of choice, that is not the agent for the seller. Likewise if there is a breach in trust, I will consider stepping in, as I don’t think any home buyer should be forced to use someone they no longer trust to represent them for some reason.
BUT the reason can NOT be “merely” to save commission dollars. The REASON they leave the other agent can not be cost of service…and that is where you pretty much are on the wrong side of the line…wherever you may draw your line.
Procuring cause means the person who led them to the conclusion to purchase THAT house. If you meet them AFTER they make that decision via using another agent to make that decision, you can’t be the person entitled to the SOC, even if you do not intend to KEEP it for yourself.
The Listing Broker is the one who has to pay the SOC to “the procuring cause” NOT the seller. So you can’t bypass the rules on that one with seller and buyer consent. The Listing Broker is the one on the hook to pay the SOC from HIS total contracted commission…via whatever was promised in the mls offering. So if YOU give it to “your” buyer client, the Listing Company may still have to pay it to “the procuring cause”, and has the right to take it back from you after you have given it to the buyer…months later…if it is later deemed to belong to someone else.
This is not new. The original Exclusive Buyer Agents have at times had to return the 3% they were paid, even if they gave that 3% to someone else in the interim and before the Procuring Cause claim was even made.
It is the Listing Broker’s duty (and any member’s duty) to understand that the SOC is there to be paid to “the correct” agent, AS DETERMINED BY THE LISTING BROKER AND THE COMMITTEES IN PLACE TO ASSIST IN THAT DECISION.
The mls is NOT a place to look at homes for sale. It is NOT merely a place with data and pictures. It is a system by which a seller can get many agents to view and show their home, and not have to determine which one of those agents is to be paid. The company who PUTS the info in the mls has to pay that SOC to the “right” person. And that right person is not necessarily the person who “wrote the offer” OR the one who has a Buyer Broker Agreement.
I agree the words “procuring cause” are outdated and even repulsive. But the concept that the Listing Broker has to determine who the rightful recipient of the SOC is, is NOT an outdated concept.
PS…Technically the FULL commission paid by the seller is to be paid to the Listing Company. The Listing Company is then the one who should cut a check to whomever they deem to be entitled to the SOC, if anyone. If NO ONE is entitled to the SOC, the Listing Broker keeps the whole thing (unless the Listing Contract states otherwise). IF the Listing Company gets a claim for the SOC from someone other than who they paid it to, there is a hearing. Whomever GOT the SOC has to bring it back, if that hearing determines that a different Company is entitled to the SOC, so it can be paid to the “right” Company. IF the dispute is between two people from the same Company, then the Listing Broker usually has to decide without calling in the Committee, as the committee usually stops at “which Company” not which individual IN that Company. Internal disputes are handled by the Designated Broker.
Over the years the closing agent cuts two checks by direction of the Listing Broker, as a convenience to the transaction. But the Listing Broker has to confirm the amount and party to be paid the SOC, in order for escrow to pay that “other” company a portion of the total commission.
Consequently ONLY the Listing Broker can determine where the SOC is to go, and not the Agent for the Buyer, or the buyer, or the seller.
Ardell:
First, you changed the facts on me. My post focused on a broker who opened the door ONLY (with maybe a comment or two thrown in), generally a broker working out of the listing office. That broker did NOT work with the buyer in any capacity prior to that time, and for that matter did not work with the buyer at any point thereafter. Rather, buyer never speaks with broker again and instead hires us. EVEN ON THOSE FACTS we still have to deal with a claim for a commission by the broker as the “procuring cause.”
Second, you are mistaken in regards to MLS rules:
It is true that MLS rules prohibit the solicitation of a LISTING (and thus assisting in the discharge of a listing broker). In fact, I believe the fine for doing so is the $5k you reference. But there IS NO MLS RULE in regards to soliciting BUYERS who are already working with a broker. The only rule that even addresses the issue is the arbitration rule I quote above. Don’t believe me? Provide the rule and I’ll admit I’m wrong.
Since this is a fundamental misunderstanding of yours, I will hold off on responding further until we reach agreement on the issue. I look forward to your response.
Craig,
If you asked me why the sky was crimson red today, I might have to modify the facts slightly before responding.
The SOC is due to the person (actually Company of the person) who led the buyer of the home to the decision to purchase THAT house, by the chain of events leading to the point of making an offer. The chain of events is different in every case. That is why there is a claim process, and a committee to study the chain of events and render a decision.
If you only write an offer AFTER the person did something to decide to purchase THAT house, then ipso facto you can’t BE the person who “led them” to that conclusion upon study of that chain of events.
The industry has tried in many ways and places to impose a rule that no house can be shown to someone who does not have a Buyer Agency Agreement with an agent. That has not worked. So we are left with the “old” rules that may not make sense…but they are all we’ve got. Many have tried to eradicate or replace “procuring cause” with something else…but no suitable something else has been found over the last 15 to 20 years.
See my earlier comment regarding the price of service being built into the price of a pair of shoes the same way it is built into the asking price of a house. That is the system we have at present. Maybe the rules will change some day because there are new models like yours. But so far…not. You cannot “give” what you did not “earn”, and the current rule for “earning” (which was your question) is determined by the chain of events leading to the buyer’s decision to purchase.
What do you do if the buyer has signed a buyer agency agreement with an agent before they come to you? In my “Truliaboy” scenario that I have written about a couple of times, that buyer DID have a written buyer agency agreement with a different agent. That agent refused to show the house the buyer wanted to buy 3X before hiring me (likely because it was a short sale and/or the price he wanted to offer was substantially less than the asking price). I ignored the buyer agency agreement to assist that person in his purchase. BUT I also took the risk of not being paid.
Anytime you write an offer on a house the buyer has seen with someone else, or on a house with a person who signed a buyer agency agreement with an agent whether they showed that house or not, you take the risk of not being paid “via the SOC”. The method for years has simply been to reduce the offer price by that amount. NOT to ask for “it”. The solution for years has been to “take it” via the offer price reduction. The seller may still pay “it” out of that reduced price, but that is between the seller and the seller’s agent to decide, not the buyer and the buyer’s agent.
The last time I saw a lawyer try to do what you are doing, he also tried to change the law to “whomever has a signed buyer agency agreement gets paid” the same way whomever has the listing contract gets paid, regardless of effort. He almost succeeded in that law change in CA…but didn’t. His name is Leopold A. Rodriguez and his company is Blackstone in Marin County. You may want to compare notes…
His website at present says this: “However, the manner of compensation has not changed since Nero burned down Rome…” so my guess is he has not yet accomplished any changes of the type you need.
In fact I personally know almost everyone in the Country who has tried to change the rules regarding “procuring cause” since the late 80s, and how that has turned out in each case. I would be more than happy to outline their efforts and range of success and failure in that regard, to assist you in being the next in line to try to change it. I will even personally introduce you to them all to assist you in knowing how they tried and where it failed (though I’m not 100% sure that Leo and Tom are still alive).
In our area, Craig, you have TWO different bodies to enforce Procuring Cause. Most areas only have one. The only change made in the last 10 years that I know of is for NAR to impose a guideline that the buyer agency agreement is to be heavily weighted by the committee when making a decision. I think that was in 2002 or so. But that guideline only applies if the agent making the claim does so through the Board of Realtors vs the MLS. In most areas there is only one…the Board of Realtors. Our area is the rare scenario of the mls NOT being associated with the Board of Realtors. So we have TWO options as to making a procuring cause claim, when most areas only have one. So the NAR guideline technically does not hold for our mls, though they may have adopted a similar or even identical guideline.
So we’re in agreement: there is no specific restriction on soliciting a buyer from another broker. Thank you for confirming that fact. And I accept your apology for accusing me of being unfamiliar with “the framework of the system.”
Now onto the next issue, since it is not answered by the MLS: Where is “the line”? I’m not sure its my business to identify any particular “line.” If a client wants to hire me, I want to respect that desire. The client should not be “forced” to work with someone who he does not trust, or dislikes as a person, or whatever reason that underlies the client’s decision to hire somebody else.
That said, of course I need to be cognizant of a possible claim to the SOC, first and foremost because I may be liable for it as you note. I need to address and resolve that issue, or alternatively run the risk of liability arising out of my MLS membership. But I don’t think professionalism as a broker requires me to refuse to work with a client simply because that client worked with another broker previously. That in my mind puts “professionalism” above the interests of the consumer and client — which is backwards. “Professionalism” exists to insure that the system of representation works effectively for consumers/clients. “Professionalism” is NOT an end unto itself, certainly not at the expense of the consumer.
Ardell, I appreciate your “long term” perspective on formulating a system better suited to the modern role played by buyer’s agents (fiduciary-like representative who will protect the buyer’s interests). I think the very first step in that process is to educate people about the flaws and drawbacks of the current system. And other than Mr. Losh, does anybody really believe that “procuring cause” is consistent with “buyer’s representative”?
Ardell — thank you! It’s great to have a Loshian translator on hand!
You’ve addressed a lot and I do not have enough time today to respond. I will do so tomorrow.
Craig,
I almost asked the same “where do you draw the line?” question as David. But didn’t want to open that huge Pandora Box. But now that it is open…I think it is an important topic for all buyers who don’t understand that when they ask to SEE a house…they may be choosing an agent when doing so.
Ardell, I’m sure MOST people don’t appreciate the significance of asking the listing agent to “see” the house. And as I stated in the comment above, I query whether that is even legal. It strikes me as an unfair practice.
But here’s the good news: Thanks to RCG and our conversations, people are learning…
I would read all of that, but it’s not to the point, any point for that matter.
Glenn buddy doesn’t have a new business model. redfin is a rebate Brokerage advanced in the 1980s, determined to be harmful to the consumer.
The point, the only point is what benefits the end user. Craig likes to play aw shucks, I just don’t understand why the world is against me.
Both Craig, and Glenn are trying to reintroduce the same old business models that have been around as long as I have. It makes no difference to me.
I think Real Estate sales is hard work, and a tough way to make a buck. I admire the people who contribute to the business, and the Real Estate community as a whole.
I don’t like people who put down my industry. Real Estate has been very good to me. I know a lot of great people who give a lot of value to the consumer, much more than the commission.
David:
I am not “putting down” your industry just for kicks. I am trying to change a flawed system. And change comes about only with discussion and education.
You can remain rooted in the past if you wish. But your obfuscations are not helpful and only confuse the issue (perhaps that explains your blogging style). For example, you claim that commission rebates have been “determined to be harmful to the consumer.” You are wrong. Just the opposite, per the U.S. Dept. of Justice:
Are rebates bad for brokers? You bet. But be up front about it and don’t disingenuously hide behind “the consumer.” As noted by Curt, the times they are a-changin’. You should not obstruct progress, and you should not disseminate misinformation. When you do so, it reflects poorly on your industry.
When does a buyers agent earn their commission?
When I cut the check. (sorry, couldn’t resist)
As a potential buyer, this post makes me somewhat uneasy. It seems that there is more concern around agents getting paid than serving customers – meaning the seller and the buyer. Remember that nobody gets paid if deals don’t happen…
It almost sounds like you are saying that someone could send a monkey to turn the doorknob on a home for sale and that instantly makes the monkey the buyer’s agent.
Let’s say a buyer (currently not working with an agent) contacts an agent and asks to see a home. There is no discussion or agreement at that time stating that this agent is now the buyer’s agent. The agent lets the buyer into the home and the buyer likes the house, but the buyer feels that agent is incompetent or there is a personality conflict.
Let’s also assume that the buyer’s unease with the agent has nothing to do with how much commission the agent would be getting. It is simply that the buyer feels uncomfortable letting that particular agent handle their half million dollar home purchase and would prefer to work with an agent they trust.
Two Questions:
Since there was never a written or verbal agreement that this agent would represent this buyer, how does this constitute “choosing” an agent? If it does constitute an agreement, then how would a buyer terminate it?
Also if the buyer walks away because they’d rather look at something else than be obligated to work with an agent they distrust, this ultimately hurts the seller. So, is this really the message that your industry wants to send to your clients?
Stillwatching:
I will answer your questions.
Because the agent who “procures” a buyer is entitled to the commission. The commission, in reality, has NOTHING TO DO with the services provided to the buyer by the agent. The commission is paid by the seller via the listing broker because the selling agent (i.e. buyer’s agent) brought forth a buyer. Of course, nothing prevents you from hiring an agent out of pocket, but that is pretty difficult to swallow since 3% of your purchase price is going to be paid to “your” agent.
How do you “terminate” that relationship? Well, you can’t, because once the agent brings forth the buyer, the agent is entitled to the commission. Again, you could always hire another agent out of pocket, but the one you first “chose” may get the commission.
No, they don’t want to send this message, even though it is in fact the reality. Instead, the industry simply does not talk about these sorts of issues. You have to go to extremely high-quality blogs (:-) ), where non-traditional brokers contribute, to get this sort of information. You don’t get it from “traditional” RE brokers because its not in their interest to raise these issues — but it is in mine.
Stillwatcher,
It is important for a buyer of a home (and new business models like Craig’s) to understand the framework of the system (mls system) they are entering. It is not unlike walking into a store to buy something…is it? The only difference is “the store’s” inventory is spread out, and not all in one place inside a building.
You found the home by looking in “the store’s catalogue” on the Redfin site or the Windermere site or a site of your choosing. You are looking at the catalogue of homes for sale, which appear there via an agreement with the sellers of those homes to pay a sales commission that was already in place before the home could get into “the catalogue” of choices on the market. The mls is not Craigslist
The agreement which allows for the home to appear there on the brokerage sites via the mls system contains the provision with regard to whom will be paid IF someone buys one of those homes. Without it…the home could not be on display.
When you buy a laptop, someone in that store may get a commission just for pointing you to the section of the store that sells laptops. If you leave the store without buying anything that you saw there, you don’t owe anyone anything and no one gets paid for “selling you” anything. If you talk to one of the company people in the store, and also buy that laptop, you can’t leave a note saying “Please do not pay the person I spoke with, and send me a check for his commission”. In fact the person on call while you are in the store may get a commission whether you talk to him or not. If you just walk up, grab the laptop, go to the front counter and buy it, the person on duty may get a % of anything sold between noon and 5 p.m. They don’t need your permission to do that, and you don’t need to agree with what they pay to him.
The idea that someone wants to leave a note saying, please give me the customer service person’s commission, is a new concept that the industry doesn’t yet know what to do with, besides nothing.
Let’s say you look at laptops inside the store a few times, in and out on various days. You can’t show up one day with an expert laptop consultant that you found in the yellow pages and demand the store pay him (your choice of consultant) vs the person they agreed to pay in the first place. You can pay him IN ADDITION, and you can hire an expert consultant of your choice. You just can’t demand that the store pay him.
The mls system is not really about buyers and sellers. It is about brokers and brokers. It is a mutual agreement to cooperate on the inventory of the combined sources of that inventory, and a promise to pay for that cooperative effort. If you are seeing a home on the internet via the mls system…the seller has already signed an agreement to pay all the someones before you even knew that home was for sale.
Say you walk into Nordstrom’s to buy shoes. You love a certain shoe, but they only have it in an 8 and a 10 and you need a 9. The person gets on the phone and arranges for the Bellevue store to send it over to the Seattle store, and they tell you that you can come back tomorrow and buy it at the Seattle store. You don’t know if the salesperson in the Bellevue store who had the shoe is going to get paid or the salesman in the Seattle store is going to get paid, or if they are going to split the commission between them. You don’t even care. You just want that shoe in a size 9.
That’s what happens when you look at homes with Windermere and the house you buy is listed with John L. Scott. The Windermere agent found you your size 9 at John L. Scott. How each gets paid is the same as the Nordstrom example, and the buyer of the shoe cannot necessarily change that, except to not buy the shoe. The person buying the shoe would not demand to be a party to who gets paid from the money he paid for the shoe. That is what is happening today. The buyer of the shoe wants to cut out or direct the portion of the shoe price that is the service fee. Unheard of, and frankly all of the rules of play have not changed to accommodate that “new thinking”, nor does anyone really know how to have “shoes” for sale without the current payment framework.
Looking at property for sale via various brokerage sites is like pressing your nose up to the glass to look at shoes in a store window when the store is closed. You see shoes you may like in that window…but to try them on and to buy them, you have to physically go inside that store. Once you go in and try on the shoe…you do not get to tell the store who to pay or who not to pay with the money you pay for the shoe.
Simple stuff…pretty much the same as buying most anything. If you want a great consultant when you buy that laptop, you find the most knowledgeable person in that store to talk to about buying one. If YOU don’t take that extra step, and just talk to anyone who will show you the laptop, you don’t get to tell the store not to pay him because he wasn’t “good enough”.
YOU have find the person you deem to be “good enough” before beginning the selection process. Maybe you go in and talk about a laptop you know is crappy, so that if the person says it is great, you know they are not “good enough” for you to continue talking with. I don’t know how you do it…but I do know you can’t stand around with Mr. Not Good Enough until you choose the laptop you want to buy…and then tell the store not to pay him when you buy it.
How do you get a knowledgeable person to help you? The same way you do that when buying any product in the world that already has the sales commission built into the price of that item.
Lets build on your “Best Buy/Nordy’s” analogy. You’re right, you walk in, and maybe talk to a salesperson, maybe not. In either event, somebody gets the commission if you buy the product, and the price of that commission is built into the sales price.
Here’s the distinction: RE agents are NOT shoe salespersons. Has anyone ever claimed that you should always buy shoes by using a salesperson? Or that the salesperson has your best interests at heart and is there to protect you? Have the terms “shoe salesperson” and “fiduciary” ever been used in the same sentence? Is a shoe salesperson your “agent” who can act on your behalf? Is buying shoes a legal transaction that must be in writing? Do shoes cost hundreds of thousands of dollars?
Of course not. You’re right that brokers are paid like salespersons, but that’s the very issue I am trying to address. Brokers are distinctly different. In the “modern” view, they are more similar to lawyers than salespeople — you don’t dispute that, do you? But by compensating them as salespeople, we impair their ability to fulfill this modern role.
In the final analysis, as noted by Stillwatching, this system of compensation makes no sense. Buyers should not be “bound” to the agent who opens the door of the house they eventually buy. Indeed, I query whether this current system is even consistent with the Consumer Protection Act, which prohibits unfair or deceptive acts in business. Do agents explain to potential buyers the implications of using them to open the door? Absolutely not. And given those implications, thats not fair.
What’s the solution? Buyers should pay their agents directly. How do we get there? I don’t know exactly, but the first step is for consumers to understand and appreciate the problem.
Craig,
It’s not so much that the brokers are paid like salespeople. The issue is more that the payment structure has to be determined in advance of the house being put up for sale. That means the seller has to control it, since the buyer is an unknown entity. The cost has to be in the asking price, much the same as costs are built into the price of the shoes before anyone knows who will buy them or how they will be buying them. That has to do with the financing of commissions by the buyer’s lender, so “divorcing the commissions” has not worked…to date. Lenders won’t let the buyer agent fee show on the buyer side of the HUD 1…that is the big holdup. On a cash deal, you would not have that issue.
I don’t know the overall answer, but I can give you the benefit of how I have resolved the issue. It really is fairly easy to correct IF enough people were behind the effort to make the correction, which unfortunately is not the case.
In the meantime, a key factor is IF the buyer knew they were not going to use the agent at the time they asked to SEE the house, and if they disclosed that when they called to see the house, or when they were in the Open House. So absolutely YES, buyers must understand that when they ask to SEE a house, they must make it clear that they have not yet chosen (but will be choosing) an agent at some point in the future. Maybe the agent won’t show them the house if they do that…but it’s the only honest way for the buyer to approach this.
There used to be a one line disclaimer in FL we gave to buyers saying “I do not represent you, until and unless you hire me to do so” before seeing any homes with them. Maybe your buyers can have a reverse disclaimer saying “You do not represent me until and unless I hire you to do so” before seeing a house.
Good idea, Ardell, but I think it still misses the mark. Per Rule 101: “Selling member shall be entitled to receive the selling member’s share of the commission whether the selling member represents the seller, buyer, seller and buyer, or neither party.” Thus, even if the buyer tells the “other” broker (the one who opened the door, not the broker consciously and specifically hired by the buyer to assist with the purchase) that he is NOT working for or been chosen by the buyer, that broker would still have a claim to the commission as the procuring cause.
I think the ONLY way to avoid the problem is for a buyer to avoid EVERY OTHER BROKER like the plague. Do they want to assist in any way? Tell ‘em “no thanks.” Otherwise the buyer risks losing a some or all of the SOC rebate that would otherwise be paid to the buyer by the buyer’s chosen, hired, and utilized broker.
Craig,
I think it’s against the rules to quote a rule
Pretty sure there’s a Proprietary Information Rule #justsayin
You are hitting the nail on the head there, Craig. ANY site, and there are many, that says “click here to SEE this property” is not required to disclose what that REALLY means! That is where to hit this monster in his one eyeball.
On Trulia Q & A agents are always saying “Do you want me to show that house to you?” when someone asks a question about a property, without disclosing that it costs that buyer big bucks to answer “yes” to that question.
I wrote some posts on that when I first started blogging in 2006…back when you thought I was the enemy.
I have been lurking on this site for a long time, but have decided to speak up.
The whole argument about the catalog, in this day and age, seems faulty. We are in the age of “disintermediation” when consumers now are able to find information that previously was available only to experts.
In my case, I like Redfin’s site and the tools on it. I use it to manage my current shopping for a home. Redfin provides access to the MLS through the site with no fee or obligation. Many traditional brokerages do the same the same, all for free.
However, I am not using Redfin’s services as an agent. I am, in fact, one of Craig’s clients. But I don’t like his website as well (sorry, Craig). By your argument, Redfin is actually the “procuring agent” since that is how I access the MLS to find properties of interest. But they, and other brokerages, put that information out for free for anyone to access. And they do it by their own choice, and with no apparent violation of MLS rules. I would argue that alone renders the argument about the catalog null. If you put information out in public for free, you can’t really complain when people use that information to their advantage. Whether or not you, the RE broker with the website, paid for that MLS access. You are still handing it out for nothing. But if you didn’t someone else will (and has).
RE brokers who cling exclusively to the old business model are fighting a rear-guard action they are destined to lose. Ask your local travel agent all about that. Disintermediation is one of the strongest forces today. Standing in the way of it is like standing in front of a frieght train.
In my case I was very careful not to have any agent open doors for me, with the sole exception of some regular open houses. I did not want to pay someone thousands of dollars for that priviledge, so I avoided.
I have purchased real estate before, and find the entire concept of an agent truly representing a buyer laughable. Been there, done that. The agent is compensated on a commission basis with commission tied directly to the amount of the sale and the success of the sale. That is an inherent conflict of interest. The buyers interest lies in getting the best possible value in the purchase of a property in the best possible condition. This is not to say that some agents do not provide good representation for a buyer and keep the buyer’s interests at heart. But the compensation scheme itself is rigged against it, and a buyer has little way of knowing that agent’s heart. And, after all, isn’t promoting “salesmanship” one of the objectives of various RE professional associations?
So business models, such as Craig’s, that promote genuine professional representation for the buyer, at a cost commesurate with the actual value of the services performed is very appealing to me, and, I think to many if not most reasonably thoughtful and moderately knowledgeable buyers.
As a lay person, I say no, opening a door is not worth thousands of dollars. And I won’t pay it.
Slight clarification. I should have said I have not had any agents, other than WaLaw’s, open doors for me. Craig and his folks opened the doors, so who did what could not open for dispute.
I see where Ardell is coming from, but I’m with Curt. I also think comparing a laptop or shoe purchase to a home purchase is not an adequate/accurate comparision. If I end up indirectly paying a laptop salesman $50 for pointing me to the aisle where the Macs are and maybe for ringing the transaction, so what?
With a $500K home purchase- the buyer is paying both agents $15,000 apiece. And if I am getting a mortgage, I’m also paying interest on that $15K. So I absolutely should care where the $15,000 for the buyer’s agent commission is being allocated and they had better be doing serious work for ME.
If an agent has searched for properties on my behalf, sent me listings and fliers, ran around with me for hours on several Saturdays showing me homes, prepares the offer and then negotiates earnestly on my behalf, then sure I think they’ve earned their $15K. Slam dunk.
But,if I do my own research and then ask an agent to simply let me into a single home; that is a ‘job interview’ and the only way I can ascertain the agent’s level of knowledge and professionalism or determine if we are a good fit for each other. I certainly can’t glean that from a website profile or a telephone conversation.
If it works out, then sure they would move ahead with the deal and get their commission.
But if the agent is a complete fool and has only been the monkey that opened the door (and I’ve met several that fit this category), then I think it is fair (and a buyer’s obligation) to find more competent representation elsewhere.
The person who does the Lion’s Share of the real work should be entitled to the commission. If the person who does that amount of work is me, then I don’t see any reason why I shouldn’t be entitled to that money. I guess if the monkey wants a $200 fee and some gas money for an hour of work to open a door, fine. But they shouldn’t be getting anywhere near $15K for that.
I think many agents have slipped into a contented cocoon of entitlement and have forgotten that if you want to make $$, you’ve gotta hustle and take care of your customers.
Customers have options today and are becoming increasingly aware of that. So if you don’t hustle and proactively demonstrate your value, then people like Craig and entities like Redfin are going to start taking business from you.
Instead of “people like Craig” lets say “entities like Redfin and WaLaw Realty” because its not just me, by any stretch. WaLaw Realty is a real estate firm that just so happens to have a unique business model where lawyers provide comprehensive legal counsel along with the services of a real estate broker, all for a LOT less money. So its not “Craig,” its WaLaw.
I don’t disagree with you, Stillwatching. But you still need to know that you do not necessarily get a say in the matter, since there is already a contract and system in place signed by the seller saying something else. That is what Craig is finding out, and why he has to “pay off” the people the buyer didn’t want to hire…but “used” in part of the home buying process. It’s not a shoe BUT the agreement to pay anyone who helps you buy that shoe is already built into the price of the shoe, and you as the buyer of the shoe do not necessarily have the authority to change that agreement. In that regard a shoe is not different from a house. All monies needed to pay all agents, and who is to get that money, has already been decided before the home was put up for sale in the mls system.
The seller does NOT agree to pay “the agent for the buyer”. The seller ONLY agrees to pay BOTH fees to the agent for the seller, who agrees to share that with “the selling office” not “the buyer’s agent”, as determined by the system in place. As long as you see the house with the agent who makes an offer for you, there is usually not a problem, and you and your agent can work up a separate agreement regarding that fee. BUT if the person you hire is NOT entitled to the commission via the system in place (as in Craig’s post) you as the buyer cannot do much besides not buy that house.
Some house listings add “The selling office commission is reduced by 2/3rds IF the agent who writes the offer was not present at the first and all subsequent showings”. So if you see the house and then decide to buy it without the person you saw it with, the amount to be paid may be automatically reduced per the original contract with the seller.
These commission contracts between the seller and the seller’s agent are never shown to the buyer or to the buyer’s agent. If there is an automatic reduction if the buyer did not see the house with the agent who writes it, that info I believe is only visible to agents with access to the internal system.
So you can think all that you think and be absolutely correct…but that does not change the way things are by contract before there is a buyer in the room.
MLS rules REQUIRES that any reduction in the SOC be identified in the remarks, per Rule 101. Don’t worry, Ardell, over time you’ll get familiar with the rules and be certain of these sorts of things…
Other than that, I’m in complete agreement. You summarize my point nicely: The buyer “does not necessarily get a say in the matter” as to the professional who gets paid for purportedly representing the buyer in the transaction. And THAT is just plain crazy. Again, I understand how it works, and I understand how this system evolved. But it needs to evolve further.
I know more about Rule 101 than I want to…in fact I was going to warn you about Rule 101, so am glad you have a handle on it. I have seen an agent try to put a referral fee to the agent who showed the property IN the offer to purchase. HUGE Rule 101 issue, given they did not have the agreement of said agent and company before doing so. If you can get agents to walk off with only the referral fee, you are lucky. That is not the normal process result, and the claim can come in after you close escrow. In fact, it is supposed to come in after you close escrow, so that the non-member parties are not impacted by the claim and resultant decision.
Ardell-
The point that I am trying to make and the point that the real estate industry is missing in general is that we’ve been firmly in the “Information Age” for some time.
Buyers are more informed than ever and are realizing they have choices. They’ve learned that the current system forces them to pay big money for antiquated “services” that they either don’t want or aren’t even receiving – and they sure as heck don’t like it.
Just because the system works a certain way today doesn’t mean that it must continue on that path. There’s no law of nature here. Particularly if buyers begin to flex their economic muscle and pressure the system to change by utilizing entities like WaLaw, Redfin, etc.
Another scenario is that a large subset of people could decide to not buy at all- I believe we’re seeing evidence of that today. The myth of American home ownership as a stable path to building wealth has been clearly exposed. And at the moment (in the Seattle region anyway) you can still rent in your neighborhood of choice for less that you’d pay to buy that home AND you can keep your $100K down payment in your pocket.
If buyers refuse to play the industry’s game anymore, then what they think is fair will absolutely begin to matter. There are currently no forces forcing anyone to buy homes but there are certainly strong forces driving people to sell.
Again, nobody gets paid if nobody is making any deals.
Sure, the economy will pick up sometime in the future and at some point the math will fall in favor of buying versus renting, but currently that gap is fairly wide. And most people perceive that the economy will improve on a “long” time-line versus a short time-line.
By refusing to change and be more accommodating to the concerns and desires of the people who drive its business, the ’status quo’ real estate shark appears to have stopped swimming. And we all know what happens to sharks that stop swimming.
Stillwatcher said: “Just because the system works a certain way today doesn’t mean that it must continue on that path.”
I totally agree with you, and have supported many people around the Country for the last 15 years who have tried to change it, AND even know one person who literally DIED trying to change it, from a hemorrhagic stroke!
I love models and people that lead to good changes with regard to Buyer Agency in this Country…and they all know it. But that doesn’t mean anything is going to actually change in my lifetime. In the meantime, many a company has been fined out of business by not knowing the current rules, and operating via naive or wishful thinking.
So David is right…most DO go out of business. But WHO forced them out of business is more the question.
Another who/why/when/what for pays a “buyer’s agent” post on the RCG blog.
Please indulge me, as I take a shot at the basics.
Q1 Who Pays the Commission?
Answer: If you are the seller, you believe that you pay the commission, because you believe that money would have otherwise gone into your pocket. If you are the buyer, you believe that you pay the commission, because you are the only one who brings any money to the closing table (unless, of course, the seller is a tad underwater and actually also puts some of his own money onto the table to close the deal, in which case the seller is also paying a part).
Q2 Why Pay a Commission to Anyone?
Answer: Rightly or wrongly, a majority of sellers continue to sign listing agreements with brokers that require a seller to pay a commission to said broker. Some sellers sell without a broker and as a result do not pay a commission.
Q3 How much Commission should be paid?
Answer: As little as possible, recognizing that sometimes (but certainly not always), you get what you pay for. A seller agreeing to only a small commission (e.g., 1% total), may get someone to list his house on the MLS, but won’t get much help beyond that, and will need a self-guided buyer using Redfin (but not using Redfin agent) to find his home. Maybe it will work. Maybe not.
Q3 Can a buyer make his offer look “better” by not bringing another agent/broker to the table who will want to share the seller’s broker commission?
Answer: Yes. Their offer will at least look better to the seller’s broker, since they don’t have to split the commission with another broker. Maybe the seller’s broker will agree to reduce the amount of commission that the seller owes them under the listing agreement, in which case your offer will look better to the seller, but that is up to the listing broker, a buyer cannot force them to change their contract with the seller. The seller’s broker may risk losing the sale by not agreeing to lower their commission, and then losing the listing if they do not find another buyer, but such is business.
Q4 and (related) Q5: How does a buyer know if they’ve been tagged by a buyer’s agent who will demand that the seller’s broker pay them a split of the commission? How can a buyer avoid being tagged by a buyer’s agent who will demand that the seller’s broker pay them a split of the commission?
Answer: You cannot know for sure, you can only be very careful to try and minimize the risk by avoiding any misunderstanding that would lead said agents into thinking they have a claim to a commsion on your purchase, unless this is what you intend, e.g., you are purposefully “working” with an agent. If you do not want to be “working with an agent,” do not ask for any information regarding any property from any agent unless you are prepared for that agent to later claim they were/are your agent. Do not let any agent open a door for you, or show you a house, unless you are prepared for that agent to later claim they were/are your agent. IMO, this includes avoiding open houses, unless you are absolutely certain that the agent(s) running the open house is the seller’s listing agent (some/much/most/nearly all of the time, they are not), or you otherwise make clear when you first show up that they are not your agent for that home, and they agree.
None of the above is intended to suggest that listing a home with a broker as a seller, or “working with an agent” as a buyer, are good or bad ideas. That’s up to you.
OK Ardell, how did I do?
PG,
Q1: The Seller believes he is paying the commission because he is the only one in the room who actually signed a legal contract obligated him to do so. He agreed to pay ALL commissions to HIS agent. His agent agreed to POSSIBLY share it with an agent IF one of the agents who shows that seller’s house, shows it to a buyer who buys it.
There is NO property in the mls system, and available to be seen by buyers on the various broker sites, where the seller did not already promise to pay ALL commissions to be paid to ANY agents responsible for that home getting sold, by paying the total to HIS agent. It’s a B to B system. If the seller did not sign a contract to do that…the property would not be in the mls and available to be seen on the various broker websites. So ASSUME it will be shared, unless the buyer has no agent. If the buyer has no agent, the contract (unless modified by the seller) calls for the full amount (both sides) to go to the seller’s agent.
Q2: Because they want their house to appear on all of the Broker websites where buyers are searching for homes.
Q3: The minimum amount needed to accomplish his objective. Generally the objective is the highest price possible in as short a time as possible and with the least inconvenience to him, the seller.
Q3 #2: (you have two Q3s LOL!) That often backfires at the buyer in many different ways.
Q4: The contract the seller signs usually gives the seller’s agent the total commission for all agents, whether the buyer has an agent or not. So the buyer can “pay” the commission and have an agent or pay the commission and not have an agent. His choice. In other words, if the house is IN the mls…it’s TAGGED!!!!
P.S. Q5 The house is tagged. Your advice to buyers is correct, though Open Houses are generally an exception. But the buyer should make it clear to the agent in the Open House that they have, or intend to have, a buyer’s agent who is not them. In WA (vs where you are which I believe is CA) if the agent in the house is not the listing agent, they are supposed to answer questions as if they are the buyer’s agent, unless they disclose that they are agent as a sub-agent for the seller’s agent (which they don’t). In WA Agency Law, all agents who are not the seller’s agent are representatives of the buyer by default.
Craig, I take your personal attacks in stride.
You’ll notice the dates on the Department of Justices web site seem to correspond with one of the biggest spikes in Real Estate pricing the world has ever seen. I, of course, was talking about the 1980s when rebate brokerage was first introduced by Sears and Roebuck, but you have seen me write that before.
Let’s address WaLaw instead. Washington is an Agency State. You may want me to get long winded, but there is no need. It is, what it is. Agency provides that agents use a boiler plate form. If the form is modified then we all need attorneys. It’s that simple.
You can advise your client for hours on end, but the bottom line is, the boiler plate form, and the meeting of the minds.
What I object to is that great agents, long standing with high skill sets, are constantly bashed by these same old tired Real Estate business models that contribute nothing to the consumer, but a reduced, or rebated commission.
Craig, this is an Agency State. Unless you know something about Real Estate, or you are planning on going to court, then you don’t have a business model.
I’m sorry, but people would be better served by going to redfin, or zip, but probably much better served, from what I can tell, by going to Ardell, or Ray at 500 Realty.
David — thank you for calling me out as to the tone of my prior comment. In retrospect, I crossed the line into the realm of “personal attack.” Inappropriate, and I apologize.
Now onto the substance: First, you conflate “Agency” law — resumably RCW 18.86 — with use of forms. These are two separate issues. One relates to a broker’s obligations to clients and consumers, the other — set forth in Cultum v Heritage House — relates to a broker’s legal authority to practice law. They are separate and distinct.
I am not “bashing” anybody. I am simply pointing out the flaws in the modern brokerage system as it has evolved. Yes, I am criticizing, and based on the absence of responses to my comments, and in light of comments from consumers such as Curt and Stillwatching, my criticisms seem to have merit.
Finally, you claim that consumers are better off using Redfin or 500 Realty, rather than my brokerage. Yet a large part of the services provided by Redfin and 500 Realty is “representation” of the buyer and the ability to engage in the limited practice of law (by completing preprinted forms drafted by an attorney, per Cultum). In contrast, I am an attorney. The very foundation of my job is “representation” — hey, in my profession I cannot act as a dual agent. What does that say about the representation you get from a lawyer compared to a broker? Plus, there is no limitation whatsoever on my ability to practice law, unlike a broker. Given these facts, why EXACTLY are consumers better off with Redfin? I am curious to know.
Finally, what date are you talking about on the DOJ site? I could not find any date specifically, but I did find this citation:
That seems to disprove your contention that the DOJ info is 25 years old. Its not. It is current.
2005 to 2006 was the change in commission legislation, I think, that allowed rebates.
Huh? What legislation are you talking about? Citation, please…
http://www.justice.gov/atr/public/reports/223094.htm
In the DOJ site there is a long list of legislation paving the way for rebate brokerage.
My reference to 25 years ago was when Sears Roebuck first introduced the rebate brokerage business model. They owned Coldwell Banker, and Discover Card, and some insurance company. They wanted to be able to give you a Discover Card, or a credit at Sears, if you bought a home through Coldwell Banker.
At the time it was thought that these rebates would be an unfair advantage to deeper pocket National Brokerages.
Have fun hitting that iceberg, David. WaLaw’s model of disinterested advice and value are way ahead of the traditional model for the buyer. Over the long haul, buyers will realize that and flock to such alternative models, especially those that have been burned by traditional agents. Your ad hominum attacks (”Glennie”, etc) notwithstanding.
Sing a chorus of “Nearer My God to Thee” for me.
These business models come and go in good times and bad. It’s all the same. My attacks are against people who attack me, and my profession as a way to advertise themselves. Is that kind of negativity in advertising what you want to align yourself with?
It’s like Hyundai bashing Ford as an advertising campaign. “Ford is bad, so buy a Hyundai, we’re cheaper!”
David, I encourage you to separate your personal feelings from your rational analysis and discourse. Don’t let the former cloud the latter.
Again, I “attack” your profession only to the extent that there are systemic flaws that are detrimental to the consumer. News flash: Its not just me. See the DOJ site. I have always said, and continue to say, that there are great agents who do a great job for their clients. The problem is the SYSTEM, not any one person.
I actually came back to address this one comment about fixing the system.
Right now Real Estate is big news. For the past 12 years, since 1998, Real Estate has become this big deal that everybody wants to be a part of. Everybody is an expert. I’m not sure, but it’s my opinion that the banking laws, or the transfer of funds globally, must of started off this excessive price appreciation. It is outside of the rate of inflation, or the Consumer Price Index.
What I have been saying is that Real Estate is an over all business. It’s not for everybody. It’s hard work. Owning property is hard work. Real Estate is a 24/7 business, and even when people “retire” from Real Estate they keep working.
Buying, and selling property may be a thrill, but it’s a constant. Property needs care, and attention.
What we need right now is litigation. People who bought with the idea that they were building an estate, were mislead. People buying property today, many of them, a great many of them, are not getting the advice that, in my opinion, they should have. Some people are buying absolute liabilities. Some others own property that is totally wrong for them.
Where is all of this liability to the Brokerages? Why are Brokerages given a free ride to mislead the public about the risks of Real Estate? If we want bankers to be held accountable, how about those Brokerages?
That’s not a case I want to take. I don’t think the jury will be too sympthetic: “My broker told me the house would triple in value and required no maintenance or other costs!” Does that sound like a victim? Or a fool who made his own bed and now must sleep in it…
I do have to hand it to you, David: You are one of the few brokers who advocate widespread litigation against brokers.
If you read some of the other stuff I write you would know I’m a firm believer in the Constitution. The Judiciary is just as powerful as the legislation it enforces. In many cases the only way to clarify the intent of the law is to litigate.
I have made the distiction between Real Estate professionals and Big Brokerages because the two are seperate. You wanted to make the case against the “system” rather than the individuals so we just carried on that theme.
Focusing on the the commission is something large brokerages, and mortgage companies want. You don’t get in front of a Congressional Committee because it’s what the consumers want, or that it’s good for the consumer. It takes the big bucks to get Congressional, or DOJ action.
Having listings, and sales, or building a business model on listings, and sales is a tough way to make a buck. Real Estate brokerage is a variety of services. Residential, commercial, property management, business oportunity, leasing, and repair. Right now property management can float the boat of well run brokerages. Listings, and sales are added income.
We’re not in the business of selling Real Estate, we are in the business of buying it, for ourselves. Along the way we help other people, because we are in the market place anyway.
My career, in Real Estate sales, started in 1984. There were a lot of changes to the system, at that time. Number one was Jim Stacey who promoted Buyer Agency. The second change was John Demco, at Demco Law who had Windermere as a client. Your business model is Dead On Arrival, because of Demco Law, more than anything else.
The slow, grinding turn to Buyer Agency was a struggle. Getting agents to give up drafting phrases for the Ernst Money Agreement, in favor of the boiler plate, was another hurdle.
The biggest change, and the change that is repeatedly addressed, is the arrival of the NWMLS book. Each area had a book of house listings that came out once a week. It replaced the 3X5 cards that arrived daily. A photographer was hired to take the pictures of the houses for the books.
The book, and being able to share the book with the clients was a big change. John L Scott, Lennox, was at a forefront for making the information more available.
None of this is new. Prices have risen far beyond any economic value, so the listing commission went down from 7%, to 6%, and 5% for over a million dollars.
Microsoft, the internet, and websites all made Seattle the Real Estate Mecca.
So, here we are. Three decades later, and it’s all the same about who has the NWMLS book, rebate brokerage, discount brokerage, and consumers fighting to buy over priced properties.
The only winners are the banks, and mortgage companies. Nobody ever says that higher home prices mean higher mortgage fees, or bigger mortgages, they just want to focus on the Real Estate commission.
Regular buyers and sellers focus on the commission, because it is THE BIGGEST SINGLE COMPONENT OF THE TRANSACTION COST. 6% of hundreds of thousands of dollars is a big chunk of change.
Duh.
Oh, and by the way, you no longer have to deign to assist me in my spotty and trivial real estate activities as a poor benighted consumer. Feel free to go about your main activities investing and managing on your own behalf. Thanks to WaLaw, Redfin, 500 Reality and other innovators, I neither need nor want your over-priced assistance, and I think it will become very clear over the next few years that I am not alone in that.
Note that that very statement indicates you do not feel much of a fiduciary responsibility to your clients. And feel no little amount of contempt for them.
The biggest single component cost, currently, of a Real Estate transaction, is the mortgage. You pay twice the price of a property by having a mortgage.
That’s what gets lost, here, in these discussions about a commission. It’s funny, also, that people discuss the loan origination fees without looking at the over all cost of the money.
Real Estate is a business. You need a cohesive business plan to make a successful purchase. The paper work, and the commission is nothing in the over all strategy.
The way I would have a fiduciary relationship with a client is by signed contract. Blogging is free information.
Millions of people have lost billions of dollars by the go it alone approach to Real Estate purchases. Big Brokerages, banks, and mortgage companies encouraged you to do that. Real Estate professionals consistently advised you against being foolish, but hey, the customer is always right.
So “Real Estate professionals” consistently advised buyerss against being foolish, but “Big Brokerages” encouraged buyers to make foolish purchases? Who, exactly, worked at the “Big Brokerages”? Apparently NOT “Real Estate professionals”.
Also, while the mortgage is indeed the biggest cost, it is (1) spread out over 30 years, and (2) unavoidable, as the vast majority of people canot buy a home with cash on hand. In contrast, the commission is still a significant cost, as pointed out by Curt, but is a lump sum paid at closing. A buyer can realize a significant savings by getting some credit against that commission. To ignore the commission is to ignore a very real, very substantial cost incurred by the parties.
Craig:
Why do you expect someone who makes their living (at least in part) off of “buyer” commission splits to agree that the buyer should try to reduce how much commission split is paid???
Are you expecting David (or any broker/agent, for that matter) to agree with you that buyers pay way too much for the service received (at least on high end homes), and would be better off trying to pay less commission?
You’ve got some big, expensive law firms in Seattle. If you were to engage them on a public forum like RCG about how ridiculous their billing rates are, would you expect them to they agree with you (in writing, in public) that their clients pay way too much? No amount is too much when you need “the best” they will say …..
Patent Guy — Oh, I guess I’m just an optimist. I expect people to engage in rational, reasoned discourse. If that rational, reasoned discourse leads to a conclusion that is counter to self-interest, then I think integrity requires one to recognize that conflict and to justify it — in a rational, reasoned way — to the extent possible.
High legal fees and high commissions can both be justified by: “What the market will bear.” Along with “You get what you pay for.” Those are legitimate arguments. But they are not dispositive, IMO. There are other factors at work, such as “control of the marketplace” (in the case of brokers), or “obstacles to entering the profession” (in the case of lawyers). I think its healthy for professionals in their respective fields to assess their businesses and their methods for providing client services and being compensated for doing so.
The discourse is beneficial, not only to the concerned professionals (who may appreciate a new perspective or two) but also to consumers who must decide who to hire and at what cost. So yes, I do expect David and every other broker to engage in rational, reasoned discourse on this issue — big props to you, Ardell
. THey don’t need to waive the white flag and surrender — unless, of course, they realize I’m right 
— but they do need to do more than spout platitudes in defense of their system.
In the case of WaLaw, I’m sorry, but the system says boiler plate form, meeting of the minds, any one can do that. That’s the law.
What we are talking about is value. What do you get for your fees? Fees have always varied as long as I can remember.
I started at a company called Advance Properties, owned by Dick Metzner. We took in a motor home as a commission, then a boat, then traded the two for a duplex in South Everett, so I know the commission is always negotiable.
Most of my career is at low desk fee brokerages. I had my license at Coldwell Banker for about a year, for the training, and a couple of times at Windermere. Most of the people I have known have been in the real estate business, and let me tell you 6% is not enough for what agents go through.
The fortunate part about my “sales” career is that I had a core group of about six investors. A couple of times they would stray away and do deals with other agents, before coming back to me. Real Estate is all numbers. Most agents are more focused on the next “deal” they can do rather than the big picture.
For ten of those years I had a painter, and carpenter that I kept busy. I have a half dozen businesses related to Real Estate. I was a big advocate of home inspections and had Aardvark Home Inspections. At the time the inspector was allowed to correct the work orders, until that changed. Some of the top Real Estate professionals have used our services, and we have worked on literally thousands of homes.
So when I tell you, you can move that wall three feet to the East, I would be speaking from experience. A small niche I have, from forty years in the trades, related to Real Estate, is distressed properties. My company A Spring Cleaning has been on the preferred service provider list of a great number of banks, as well as HUD, and FHA.
Our little group for a while bought houses for resale, until I began doing it on my own. I pride myself on a reasonable product for a reasonable price. My guys are the best.
So 6%, or only 4%, is all negotiable, always has been.
I think it needs to be said. I don’t think David is an active broker or an active agent at this time. To the best of my knowledge, he owns a cleaning business and is not in “the real estate business”. He can of course correct me if I am wrong. He may have reactivated his license since that information was correct.
It needs to be said because it is against anti-trust laws (at least in spirit if not more than that) for someone who is actually IN the profession to be speaking as he is speaking here.
He is a past holder of a real estate license, but as far as I know was never fully “in the business” of representing other people, and he is clearly not the “poster boy” or “spokesman” for “traditional agents”.
In a hot market you have no choice but to pay full price, or over. In a cool market you have to make offers less than asking price. Today’s general concensus in the Seattle area is that your offer needs to be 10% to 20% lower than current market pricing. That means making a lot of offers, more than a couple usually. You also need some one to scout for you, because Real Estate is a snap shot in time.
On any given day there are X number of houses on the market that fit your criteria. Some are over priced and need an offer constructed to make sense to the seller, and the listing agent. If you hire some one using today’s Case Schiller, or Market Data reports, you are out of luck, because you have to come in at least 10% below market to break even.
Most Real Estate professionals are pricing 10% below, or lower to get properties sold. You want to compete for those as well as making offers. Ray at 500 Realty disagrees, but I know that good agents can influence a sale, get thier offer accepted, because they have credibility. You can cry foul, but the Real Estate community is actually very small. The same people do the majority of deals. They all want what’s best for the client, so having a transaction with a reputable broker means more than some one who may or may not be able to close.
A Real Estate transaction is only a sale when it closes.
I am the poster boy of Real Estate. The people I work with make money. That’s why you buy Real Estate. Even if it is the personal residence, it is the single most valuable asset most people will ever buy.
People should get the same level of care, and concern in buying the family home, as they would in buying a shopping center, in my opinion mom, dad, and the kids deserve a higher standard of competence.
“People should get the same level of care, and concern in buying the family home, as they would in buying a shopping center, in my opinion mom, dad, and the kids deserve a higher standard of competence”
Which is why I chose WaLaw, which provides disinterested advice, not having a commission stake in the transaction, brokerage and legal services. I know they are MY representatives, not commissioned salespeople.
Thanks for making my point, David.
But that’s not the point.
You can make a deal with any agent you chose for whatever the fee. What you want, and are going to need, is the detailed analysis of the purchase you are making.
You’re the buyer, you have options, and the possibility of getting better advice.
What advice do you think WaLaw can provide that others can’t?
It would be my opinion that an attorney would be bound to stick with the contract portion of a Real Estate transaction. Once an attorney begins puffing a property, or giving out advice about a property, they would need to be very careful. It may be construed that the opinions they offer would be rooted in fact. Some people may think an attorney is held to a higher standard of practice.
It would further be my opinion, based on experience, that attorneys tend to stick to legal advice. That is what they are educated for. They are educated to offer legal advice.
There again in the State of Washington, which is an Agency State, with Real Estate agents doing Real Estate transactions, they are bound to a boiler plate contract. Once you go beyond that boiler plate, then yes, everybody needs to get legal advice from attorneys.
You can probably represent yourself with much better results, for far less, than having an attorney involved.
I’m sorry, but that’s the way I view the current laws in this State.
Frankly, David, you simply do not understand what WaLaw offers.
First, they do use the standard forms, with one additional form 35 expanding definitions on a few issues, like a little bit more diligence in ensuring emails and faxes are delivered, and a clause handling the SOC rebate.
The two main things I get from WaLaw are complete legal advice on ramifications of certain things that are out of the ordinary (implications of using a short sale negotiator for one). But the main thing WaLaw provides to me is objective advice, not limited to legal advice, when I KNOW their duty is to me. Based both on the formal relationship of my being their legal client, and on the informal basis of “follow the money”; they have no interest in the amount or success of any given sale.
That has already proven its worth to me in various ways, including their strenuously advising me to not proceed with a certain property.
On the other hand, my experience with actual, plain vanilla RE agents in the past includes the following:
The real estate agent that represented both me as the buyer, and the seller, advised me that I did not need an inspection because that property was new construction, and what could be wrong?
That property turned out to have been badly infested by rats. The professional exterminator hired stated that, because there was no evidence of ingress/egress by the rodents, that the house was built around them. There were fruit trees on the property behind mine, and he hypothesized that they were living there, and came up during construction to enjoy the fast food the construction workers probably left around.
An inspection probably would have revealed the rats. Possibly an inspector could have caught the improperly installed LP siding, too.
But I was naive, and depended on the advice provided by “my” agent — I was going to save the inspection fee, right?
And, she also really “sold” that particular property. Think there was a possibility that she pushed it because she’d get both commissions? Maybe she wanted to avoid the inspection contingency, too, so as to avoid the possibility of not getting her double payday.
Follow the money.
With WaLaw, on most properties they showed me, the WaLaw agent immediately started pointing out the potential issues with the property. No salesmanship involved, just things that they noticed, because they see many more properties than I do. That alone confirmed my judgement to use them.
Would an ethical agent have advised me to get an inspection regardless? Yes. Are there ethical honest agents? Again, yes. But I apparently did not have one.
The compensation model itself makes that iffy. With WaLaw, I know they represent ME. Could they have turned out badly, certainly. But their compensation model removes the salesmanship and self-interest from the equation, so I think the odds are better.
So I am all for these alternative models that inherently provide more robust and reliable representation for buyers, with the costs tied to the services actually provided (I pay hourly for showings beyond a certain, set limit.) And also provides for the agent, because they get paid for the actual work done, and do not have to make up for the failed sales and clients walking with the transactions that do succeed.
I may have drunk WaLaw’s Kool-Aid, but only because I had already made up my own batch all on my own. WaLaw simply came along with a business model that matched what I already decided I wanted.
And my trust in traditional agents had been completely eroded. By those agents themselves, long before there were any such things as blogs.
Thank you for that well reasoned response.
I do understand the business model of WaLaw. Real Estate brokerage is something I’ve messed around with for twenty four years. Everybody wants to “fix” the system.
Windermere was founded on the idea of fixing the system, and elevating Real Estate brokerage from plaid jackets, pearly teeth, and big hair. John L Scott was the elite Brokerage of the day.
Jim Stacy introduced Buyer Brokerage to the State of Washington, and the Brokerage Pamphlet dated about 1996 mentions Buyer Agency prominently.
Michelle Martineau was a Prudential Broker who advocated a Brokerage Menu of Services.
Let’s not forget Jim Sorenson of John P. Nagle, the flat fee Real Estate company, that actually was fire bombed.
Many people have tried to “fix” the system.
My objection is when a person uses a phrase like “We frequently must deal with a broker making a claim to the SOC under these circumstances.” Those circumstances being procuring cause.
The 6% structure is for the whole lead generation process rather than transaction specific. What has happened is that people look on line, talk with agents, some time the listing agent, some time agents they know, or are referred to, then after they have settled on a house they go to a discount Brokerage.
It’s happened to me, even with a signed Buyer Agency Agreement. What are you going to do?
The second part is that the advice most people need is what to buy. I deal with, mostly, how to sell, but have had people, who are referred to me, come in with a stack of properties they are “watching.” I’ll listen, up to a point, but there is a point where it’s no longer cost effective for an agent, or me.
I don’t know what you do, but I have the same conversations with my auto mechanic. If I go in telling him his business he’ll listen, up to point. There’s a point though when a six cylinder won’t do what an eight cylinder will do. The catalytic converter has to have a certain ratio of oxygen. The computer regulates the fuel consumption, and no we can’t adjust that. I may know something about cars, and yes I have more than six, but there’s a point where I listen.
The “new” business model has you, the buyer of a quarter, to half, million dollar property, or seller, doing the leg work. My contention has been that you can run around all you want, but I started running forty years ago, and you aren’t going to catch up.
There again, you had bad experiences, and so have I. One of the main reasons I have had a Real Estate is because some very good agents, who I have known, and trusted with Real Estate transactions, couldn’t get the job done. I’ll be the first to tell you that the level of incompetence is very high with real estate agents, and I hold the Brokerages responsible.
So I don’t have the answers, but you have presented a lot of food for thought.
Thanks for your response, David.
I appreciate your analogy to auto mechanics, and to get a solution, you need to describe the symptom, and let the mechanic diagnose the problem. I work in IT and I have users try to tell me what the problem is all the time.
I do want to point out one thing about the “legwork.” Yes, the discount brokerages, including WaLaw, require that I do my own legwork. I see the value proposition of a traditional agent when one moves to an area one is unfamiliar with. In moving long distance, I would use a traditional agent myself, because I would be unfamiliar with the areas, the schools, the general values in an area. A discount model would not work, because of my ignorance of the area. However, I have been in this area for 20 years now, am familiar with all the neighborhoods I am considering, and, having lurked on Redfin for about 3 years, a reasonable feel for prices and trends in the areas of interest to me.
The MLS has been “disintermediated” and is longer the sole province of the members of the real estate “guild.” I felt and still feel that data, combined with an area I am long familiar with, gave me the information necessary to do my own filtering on properties of interest. I don’t need to catch up with you, I just need to find a house at a good value. I recognize that you are almost certainly faster on the uptake on the value of a given property than I am.
I have enough information to find a short list of candidate houses to investigate further. In fact, I have to be pretty diligent about that filtering, because I am not only spending my own time, but I am spending my own money to get those tours to do that investigating.
WaLaw’s business model gives me more confidence in them than I would have in a traditional agent, for what I need them for. I actually did not want a strong opinion on what property to buy from them, for the most part. I would not trust such a recommendation from regular agent, in any case, because of all the reasons I outlined previously. When WaLaw agents have had an opinion about anything, it has usually been in the negative, what I shouldn’t do, rather than what I should do. I am using their services to show me properties I am interested in, negotiate the sale and advise me in those negotiations, handle the mass of necessary paperwork, and provide legal services in conjunction with the purchase.
In short, I am using their professional services to effect the purchase of a property that I, alone, have chosen. And also to guide me through the intricacies of that purchase. One thing that we very well might agree on is that if a person needs significant help in finding and choosing a property, that person should not be using the services of ANY discount agent. And to use the services of a traditional agent in a traditional way to search for and choose a property, then snatch the rug out from under them and use a discount agent to purchase the property is flatly wrong. But Craig’s original post did not posit that scenario, but merely using the listing agent to open the door of a chosen property, and in that case, I don’t think the listing agent “deserves” the SOC, although I recognize the rules currently in place seem to run the other way. But in my own case, I knew about that potential pitfall and avoided it. And, personally, I think anyone thinking about using a discount brokerage of any type should avoid using the listing agent for anything as well. At least until the rules change to specifically cover this situation.
OK, these are interesting ideas that reflect many of the things people get caught up in. Some catch phrases are true, such as the family home is the single most important investment you will make.
Real Estate, and the purchase of the family home, has gone way beyond any reasonable price, compared to value. Fine, you want to spend 15% to 25% more for the family home than the property is currently worth. That is your choice. That’s just this year.
Thousands of people, since 2004, have paid millions of dollars more for properties than those properties are worth. People look at sales data without having the ability to analyze it.
A lot of people also get caught up with the boiler plate forms, when in fact, you are drafting instructions to close, and record a Real Estate transaction. Are you getting what you want? Let’s leave that for a minute, because the paper work may grow for a Purchase and Sale, but those loan documents may be tricky.
That loan is the enemy. That loan then doubles the price you pay for the property. That loan is what you are trying to beat. That’s currently where you will be making your money, because people don’t want to trade up. People want that picket fence around those good schools with a swing set out back no matter what it costs.
That’s the problem. People are paying way too much rather than having an investment strategy for “owning” the family home.
I would address the idea that some how the internet has unlocked the secret of what properties are for sale, but all properties are for sale, it’s a matter of price.
Last, but not least, let’s put the procuring cause to bed.
A buyer can do whatever they want. Even with a Buyer’s Agency Agreement it’s between the Brokerages to settle the dispute about commissions. It’s an arbitration matter. Brokerages will usually settle for whatever. Demco Law, are the only ones who consistently pursue commissions, but that is what they do.
I’ll give a couple of my personal examples. One is from a guy who met an agent who showed him a property he liked. The buyer worked in the sheriff’s office and didn’t like the “vibe” of the guy who showed him the place. He came into our office and approached one of the new agents to write it up. She asked me, I said of course, but the listing agent had already started working with the other agent by answering questions. The listing agent was reluctant to present the offer without the other agent saying it was OK. The listing agent, rightfully, didn’t want the seller bogged down in a dispute.
I talked with the agent who had shown the property who felt comfortable he would get the commission because the new agent hadn’t even seen the property, so I had her go with the buyer to look at the property. He wanted it, she wrote it, and there was nothing the other agent could do. As a matter of fact the buyer was very upset with the other guy who interfered with the process.
Now about me, maybe you can imagine a couple of people have chosen to have offers written by others, even though they had been working with me. On one occasion I did pursue, and got the commission, but on a couple of other occasions I realize that there is always more to do.
Procuring cause is what the Buyer wants to do. It’s all about the customer. Agents, on the other hand should be mindful that Real Estate is a very small community, with a very long memory.
David,
1) I think it’s against the law to act as if you are a licensed agent if you are not. Don’t mean to pick on you, but you need to disclose that.
2) I absolutely agree that there should be no disputes raised that impact the buyer or the seller. Traditionally claims were made after closing, and not before, so that no buyers or sellers were in any way inconvenienced or involved in internal “disputes”.
3) If the person who showed it was the listing agent, no buyer can be forced into dual agency or non-agency. So I don’t think a Listing Agent should ever make a procuring cause claim. EVER.
The agent who showed the property was the buyer’s agent.
As far as the law, I think maybe, no offense, but you should leave that to an attorney.
As far as a disclosure, I do currently have a dispute with a Brokerage that has my license inactive in Olympia. My clock hours are complete, but the question is how best to provide service to my clients.
As you may know I own a domain name of Jet City Real Estate, and a set of domain names that correspond to that. I have asked a couple of people to be a Broker for that name. I have some web sites that have been converted to Word Press blogs.
My interest is in how to best elevate the experience of Real Estate brokerage. What being a Broker means is that I would be broker than you. It’s one of my favorite catch phrases.
Real Estate is a tough way to make a buck. My cleaning business nets more than most of the top Real Estate agents make. If we were doing Rot Work, or House Painting, foget about it, that’s almost as much as some plumbers.
My Buying Seattle site states that in a few months it will be time to start making purchases of property. In the next five years fortunes will be made by people who kept thier heads in the past five years. My goal is to provide a full range of Real Estate services.
I just answered a comment on the Seattle Bubble to Jonness who brought up something that never occurred to me. In my forty years of working in the Seattle Real Estate community it is easy for me to know who is good. Some agents are much better than others. Some, who are prolific, are skeezers with no moral compass.
How would a person, doing the one, or two little deals in a life time, ever have a chance at high end quality representation?
You can talk commission into the ground, but there are agents worth more than 6%. How would the consumer ever know the difference?
This is a longstanding debate and I have enjoyed reading each person’s input. I’ve been a Broker for 12 years and have long thought the solution is fee for service on both the sellers and buyers side. As a real estate agent, I should be compensated for what I do in service for my client- whether they complete a buying or selling transaction or not. Agents would have to do a better job and clients would pay for what they receive. Problem is, the current system is so entrenched in the public eye, that buyers are not willing to pay out of pocket for representation since they’ve gotten it for “free” (I know, they are paying for it indirectly through the sale) and do not want to write a check as they would have to for an attorney or CPA.
Dave — yes, it is difficult to change an entrenched system, in no small part because the beneficiaries of that system (RE brokers) will resist change tooth and nail. Plus, as you point out, there is an educational component: Until people realize there is a better way, they will continue with the old way.
That’s where my brokerage comes in. We are in the process of refining our marketing efforts to do a better job of educating the consuming public. They pay us directly, and in exchange (a) they get an attorney, not just a broker who can only engage in the limited practice of law, and (b) for buyers, a refund of the commission we are paid as agent. To date, we’ve rebated over a HALF MILLION DOLLARS! So don’t give up on changing the world just yet, Dave…