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

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

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

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

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

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

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

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

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

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

Buying without an Agent: How to get that 3%

[Updated 3/2016]

This post is not legal advice. For legal advice, consult an attorney in person and do not rely on a blog.

I’ve written elsewhere about the practical steps in buying without an agent. The Big Question, of course, is this: Will that save me any money? If it does, then every buyer should at least consider using a real estate attorney rather than a real estate agent to buy a home.

As an initial matter, you must understand where the money starts and where it goes in a typical transaction. It starts, of course, with you, the Buyer. It’s not uncommon to hear someone say, “Oh, sure I used an agent to buy my house — he was free! I didn’t pay him anything!” As a practical matter, that is just not true .

Remember that, of all the parties involved in the transaction (seller, buyer, listing agent, buyer’s agent, title insurance, escrow, lender, mortgage broker, etc.) only one brings money — you, the Buyer. Everyone else gets paid from the Buyer’s money. So while you may not pay your agent directly, you most certainly do pay him out of your pocket (or, more accurately, out of the money you have borrowed from the bank, and which you must repay, with interest).

And exactly how does your agent get paid with your money? Well, the seller previously signed a contract with the listing agent where the seller promised to pay a certain percentage in exchange for the agent finding a buyer. The “typical” percentage paid is 6%, although there is some degree of variability with figure. Per the rules of the MLS, that commission is then shared with the buyer’s agent when the house is sold (or, more accurately, with the buyer’s broker, but I won’t get into that for simplicity’s sake). Most sellers and listing agents agree to give 3% to the buyer’s agent, on the theory that anything less will attract less interest from buyer’s agents (I’ll get into the ethical issues of that dilemma in a future post).

The listing agent has a contractual right to the full commission. If you go without an agent (e.g., drafting the offer yourself (discouraged) or using an attorney), then the listing agent will not need to share any portion of the commission. While the agent has no legal obligation to accept anything less than the full commission as set by the listing agreement, the agent is free to accept less than full payment if he is so inclined. So, the buyer can structure the offer such that, if the listing agent cooperates, the selling price is reduced by 3% (or whatever percentage was to be shared with a buyer’s agent). The seller will presumably lean on the listing agent to reduce the commission, as everyone gets what they expected out of the transaction.

All that said, clearly the seller and not the buyer pays for the buyer’s agent – suggesting otherwise is simply a helpful analytical approach. But equally true, the buyer can benefit by reducing the seller’s anticipated and already-accounted-for costs. When the buyer does so, the seller is likely to pass most if not all of those savings back to the buyer in the form of a reduced price.

So regardless of the perspective, in the final analysis a buyer can pay less by reducing the fee paid to the buyer’s agent. So smart buyers do so by skipping an agent and reducing their offer by the 3% to be saved by the seller.

Finally, what about all of the extra work for the listing agent? Yes, there may be a more work, such as being there for the inspection since there is no buyer’s agent. But don’t forget that, in any one transaction, a listing agent makes a very fair fee. What is the average amount of time a good listing agent invests in a listing? And, assuming a 1.5% commission to the agent (after the broker’s cut), what is the average fee? Given a median home price of $400k, the agent will make $6k. Assuming 50 hours of time, that’s $200 per hour. A little “extra” work (it is, after all, all part of the job) is not unreasonable if necessary to secure that amount of compensation.

So, if you’re thinking of buying a house, consider ALL of your options and figure out what is best for you. If you want to save a lot of money (we’re not talking pennies here), consider using an attorney instead of an agent (you should absolutely use a professional given the value of the transaction, and realistically these are your two options).

Using an agent to buy a house? That is soooo 20th century…

This post is not legal advice. For legal advice, consult an attorney directly (i.e. not via a blog).

This is Part I of a multi-part post.
Part I: Visiting the Property
Several months ago, I authored a post about buying a house without utilizing the services of an agent. It generated quite the conversation (concluding with this tasteful comment from our friends at Bloodhound Blog: “Entirely self serving, badly argued with serious errors of omission, it generated some pleasant acrimony in the comment section…”) and eventually led to the promise of a “blogging death match” between me and Ardell — okay, Ardell, it’s ON!

It used to be, way back in the 20th century, that a potential buyer had no way of searching the “market” for the perfect home. There was no single “market” (as in marketplace) for consumers because properties were invariably listed on the MLS, and MLS data was private and accessible only through an agent. Thus, to search the marketplace, the buyer needed to hire an agent who could then search the data for the perfect home.

The advent of the internet changed all that, of course. Today, while agents (or more accurately, brokers) still control the data, it is available publicly through innumerable search engines . Thus, a buyer can now find the perfect home without ever speaking with an agent — until it is time to actually visit the property before making an offer (buying a home sight unseen based on pictures on the internet is only for the very brave and the very foolish). As a result, most buyers at that point simply contact an agent (we’ve all got family, friends, friends-of-family, and family-of-friends who are agents and who would love to assist) who can then provide them with access to the property.

But that service (and perhaps others! Good agents are a veritable repository of helpful information concerning property) comes at a significant cost. The typical buyer’s agent expects to be paid 3% of the selling price as a fee for his or her services (with some portion of that going to the buyer’s broker). This substantial sum (do the math yourself — it is a lot of money for even an “affordable” starter home) travels a circuitous route from the buyer to the agent. When listing the property on the MLS (still the de facto marketplace) the seller signs a contract with the listing agent (more accurately, the listing broker). That contract entitles the agent to a certain percentage of the sales price (typically 6% but there are many exceptions). That commission is then shared via MLS rules with a buyer’s agent, with 3% usually going to the buyer’s agent. Accordingly, at closing, 3% of the purchase price is paid by the buyer to the seller, who then pays it to his listing agent/broker, who then pays it to the buyer’s agent/broker.

So if you want to see the property but don’t want to hire an agent because you don’t want to pay such a significant sum, how do you get in to see the property? Easy: Contact the listing agent. Way back when property values were skyrocketing, some listing agents felt that they should not have to assist a buyer in seeing the property. Those days — at least for now — are over. As TJ commented on my last post:

I think the time when sellers and sellers agents have the luxuary to pick and choose buyers on petty criteria’s like if they have a buyer’s agent or not is soon going to be history.

Contact the listing agent, let her know you want to see the property, and schedule a mutually convenient time. In this market, the listing agent should be more than happy to show the property to a prospective buyer.

[Part II coming soon: “how to get that 3% back into the buyer’s pocket” which will further discuss the services that might otherwise be provided by the agent.]