The Impact of Cooperation

Most of you have (or should have) read the recent article by STEPHEN J. DUBNER and STEVEN D. LEVITT (Freakonomics) in the NY Times. As may be expected, there were plenty comments on the Freakonomics Blog. As I was reading the comments, one struck me. It was from a very sincere sounding broker who, in defending the broker’s role in the transaction, said:

As an agent on the buyer side or the seller side, I have a fiduciary responsibility to prosecute the interests and goals of my clients……If you want to succeed in this business, become a fierce advocate for your clients, give them all the data they can handle, use your sales, negotiating, and analysis skills to their advantage.”

I pondered this a bit as it sounded like a legitimate strategy for success. I then recalled an article on Inman the other day about a company called RealtyLegacy. The company promotes a program where it will connect buyers and sellers with agents from other companies and those agents will agree to rebate a portion of their commission to their client after closing. The story was interesting from several angles but it surprised me that one such agent did not want to disclose her name because of fear of reprisal to her and to her clients (i.e. other agents would not show her listings if they knew she was discounting).

I then thought back to the NY Times story and the analogy of the real estate brokerage world to stock brokers and travel agents and the author’s forecast of the impending doom to the industry. The real estate brokerage industry has a major advantage that the stock traders and travel agents did not have. To buy a stock for a client or to purchase an airline ticket, there is no need to cooperate with another stock broker or travel agent. Those brokers deal with the principal to put the deal together. In real estate, cooperation is at the heart of the industry (some (the DOJ?) would say that this cooperation has artificially upheld commission rates and traditional business models).

I then remembered the above quote from the broker. He believes that diligent representation of his buyer will preserve his relevance. What happens, however, when he comes to a home that he knows his buyer client will love and he looks at the SOC (selling office commission) in the MLS and sees 1%. If I understand the theory, do what is best for your client and you will have value. It is without argument that this buyer client will value this “perfect” home over and above the amount of commission that the broker will receive? However, it is commonly understood in the industry that if a seller wants their home shown, they will pay the “going rate.” They are told that if they don’t, other agents will not show it. If this was not an issue, why did the RealtyLegacy agent have to hide her identity? Why was she so scared to let people know that she was discounting? If buyer agents in fact act this way, what does this have to do with “prosecuting the interests and goals of the client.” Why should a buyer get short-changed on seeing available inventory when the seller has refused to pay the standard SOC?

It then hit me like a brick upside the head: A major strength of the real estate brokerage industry is at its core a major weakness.

12 thoughts on “The Impact of Cooperation

  1. Our office uses NWMLS Form 41A, the Buyer’s Agency Agreement. In that, it spells out the Buyer’s and Agent’s obligations and responsibilities. Item #6 addresses compensation. There is a blank for the agent to fill out with the dollar amount or percentage that they require for their services. Our office, for instance, requires that we charge 3%. If the Seller of a house is not offering compensation or is only offering 1 or 2%, the Buyer is required to make up the difference.

    This is a required form in our office. If we do not collect this amount, the agent is required to make up the difference.

  2. Marlow,

    I remember teaching Buyer Agency seminars in the ’90s and actually drafted one of the first Buyer Agency forms in the state. The usual reaction by agents to the use of the form ranged from curious amusement to downright disbelief that I could suggest that they get a buyer to sign something similar to a listing agreement. The comments usually were “It’ll never work” Obviously, it does for you and other CBBain agents. That is great!!!

    Couple of questions for you?

    1. What percentage of agents in the region regularly use Buyer Agency Agreements that have some form of commission structure?

    2. What percentage of agents let the SOC alter their decision to show a property (including those with Buyer Agency Agreements like yours)?

    Not looking for exact numbers, just your guesstimate.


  3. Russ, as an agent my focus or niche is about providing insightful analysis that caters to the investor mindset. It leverages my financial analysis background and I work hard at it. But my focus isn’t for everybody.

    When I work with buyers and sellers of high-end (often second home) properties, they seem comfortable and appreciative of the benefits of research. Other clients meanwhile, particularly those buying a first home, really don’t seem to value thoughtful analysis, keeping up with upcoming developments , or knowing about upcoming community/infrastructure improvements. At least not in the same way as a client with an “investor mindset.”

    Of course, there are other benefits a good agent can bring to the table. Buying a first home can be a stressful, high tension situation. Taking the energy level down a notch or two and calmly guiding people through the process is usually very much appreciated.

  4. Russ,

    Excellent article. I commented on the Freakonomics issue on our blog,

    I think the issue of showing listings with discounted commissions is very relevant. In fact, Pat Grimm, Windermere’s Exec. VP of operations said,”It doesn’t make sense for a full-service agent to work in a partnership with a company that also offers a discount service.” See the article quotes on our blog.

    Pat’s assertion is a complete 180 of Windermere’s & others business practice–So why do their very own real estate agents (and other firms) let the builders get away with lower commissions? Why can’t escrow charge full fare for builders? Tradition? Just because it’s that way? While I’m on the subject…Why do many of our competitors in escrow charge consumsers stupid junk fees? Like e-mail fees upwards of around $200? For what? Getting loan docs over e-mail??

  5. I do not like NWMLS Form 41A, specifically, the second clause because it asks the buyer to consent to dual agency. Why whould a buyer agree to such a thing, when hundreds of thousands of dollars are at stake? Real estate is not a small ticket item. Real estate is a significant purchase with no room for imposed risks, such as, those risks imposed by Form 41A. Dual agency is a conflict of interest that should be avoided.

    Here is the language contained in clause #2 of NWMLS 41A:

    “Buyer agrees that if Broker locates a property that is listed by one of Broker’s salespersons other than Agent, then Buyer consents to Broker acting as a dual agent. Buyer further agrees that if Broker locates a property listed by Agent then Buyer consents to Agent and Broker acting as dual agents.”

    It is unwise for buyers to consent to dual agency in any sense, because it is a conflict of interest. A well-informed buyer would be wise to draw a line through this language.

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