Things Are Not Always As They Seem

It certainly is no secret that real estate agents are often paid a commission for their services. Some people don’t realize it’s a fee typically paid fully by the Seller and covers both the listing agent as well as the Broker representing the buyer. More often than not, what “fee” that is being charged is a discussion that takes place during the interview process. Each agent and brokerage are free to charge whatever is agreed upon between them and the seller. Our industry prohibits discussion of the specific percentages and there are no industry-wide “set” fees.

In the last few weeks some interesting situations have presented themselves related to commission structure, negotiability, etc. Specifically, whether the fee is negotiable if the listing agent happens to also secure the buyer for the home or if the Seller finds their own Buyer. These situations made us realize the general public is often left in the dark about this. The short answer to this question is “It can be.” The longer answer is, “So long as you disclose that from the beginning.” Any broker who says they will reduce their fee if they represent the buyer and seller in the same transaction must openly advertise that in the listing they post on the Multiple Listing Service, this is sometimes known as a variable rate commission. The same goes for a situation when a Seller is allowed to secure their own buyer and save the buyer representation fee for that half of the transaction. If the Seller has the option to save the Buyer Broker fee by securing their own buyer, the type of listing contract is actually called an Exclusive Agency agreement versus an Exclusive Right to Sell. Typically agents and brokerages don’t want to invest time, money, and energy marketing a property and then be faced with competing with a seller to find a buyer, which is why the vast majority of listing agreements are taken as Exclusive Right to Sell listings.

About ten years ago, I was on the receiving end of a scenario that involved a variable rate commission agreement and let me tell you – it left a terrible taste in my mouth. I had worked with these buyers for months and had literally shown them more than 50 properties. Many evenings and weekends were spent driving them around helping them to find the most perfect house – or so I thought. A new listing had hit the MLS, in a neighborhood they were particularly fond of. I immediately scheduled an appointment for them and was looking forward to showing it. On “paper” it looked perfect. In their excitement, they did a “drive-by” and hopped out of their car to grab a flyer. While outside of their car, they were quickly approached by the Seller who eagerly volunteered to show them the house. They politely declined and mentioned they already had an appointment set for the next day with me. The seller quickly replied, “Well, if you buy the house through my agent, I can give you a better deal because I won’t have to pay as much in commission.” Ouch.

Understandably so, my Buyer was in a pickle because they knew how much time I had spent with them. If I didn’t represent them on a purchase then all that time was for free because I am only compensated when they buy a home (not to mention the fuel cost, wear and tear on my car, etc). This house was at the very tip-top of their price range and if there was an opportunity to save a few bucks, they were going to welcome it. It goes without saying the only loser in this situation was me and I lost. It also left me with a lasting impression of the negative light any listing with a variable commission structure can be viewed within our industry. I am not saying that a listing agent can’t do their part if it helps to put the deal together, particular if the Buyer and Seller aren’t able to come to mutually agreed-upon terms, but if they go into the contract with their seller having already established that they’ll reduce their fee if they (or the seller) brings a buyer, it’s imperative they are open about it. Plus, they have an ethical responsibility to the professionals in our industry to “warn” them if they are going to be in competition with either the listing broker themselves or the Seller.

In this case, the listing agent openly promoted the variable listing fee – good on her. And to be honest, it never crossed my mind that 1) my clients would be solicited by the seller to go around me in an effort to save money or 2) the agent wouldn’t have my back after learning how much time I had invested in my clients. The fact that I had already told them about the home and even had an appointment scheduled was just another grain of salt in the wound. Other than prohibiting them from driving by, I really don’t know how else this experience could have been avoided but it has certainly made me more aware of the variable commission structure and how that can impact a property and how other brokers receive it.

As a Buyer, if you are approaching listing agents directly and thinking you will be saving a fee you are mistaken. The terms of the listing agreement, including the commission being paid, has already been established and the listing agent isn’t under any obligation to reduce their fee when representing you too. If they say they will do it and they haven’t disclosed it, they are in violation of our Realtor Standards of Practice. If they give you the impression you are getting a better deal because of it, you’ll have a heck of a time proving it. It’s difficult to know if you would have gotten the same deal (or perhaps even a better one) if you worked with the broker you have a long-standing relationship with. There is certainly no objection to participating in a Disclosed Limited Agency representation where the same broker represents all parties but if the primary objective is to save money, it may not be the end result.

Each agency has its reasoning behind its fee structure as well as justifications as to why their fees are what they are. Negotiating them is also their prerogative but if a discussion isn’t taking place regarding the pros and cons, I think this is a grave disservice to a prospective seller. Knowing first hand that Dyan and I sell anywhere from 80-120 homes per year, I think it goes without saying that honoring agency relationships between buyers and their brokers should be a top priority for any listing company and seller.

Let’s go a little deeper regarding reduced fees. The natural assumption is often that the person who charges the least amount of money will be doing the most business. But in fact, the exact opposite is true in almost any industry you can think of including real estate. The brokerages and agents who are the most sought after because of their selling skills, marketing, negotiation abilities, experience, reputation, and ability to produce consistent results often don’t negotiate their fees. Just like the most trusted doctors, attorneys, architects, photographers, and tradespeople don’t as well. These skilled professionals know their value. They also respect and value their colleagues who represent buyers and encourage their sellers to offer fair compensation for their time and efforts. When buyers agents know that they aren’t competing with the seller or the listing agent, they are much more likely to be excited to show and sell a listing.

Dyan and I are known within this industry to hold our colleagues in very high regard. We know how much work goes into being successful in this business and we also know agents will often work with someone for years (literally) and then they leave the area, never buying a home. When selling our personal properties we never discount the buyer’s agent commission. I sold a piece of land a few years ago and actually doubled our normal Buyer Broker commission simply so agents would see their time and effort to show the vacant land was being acknowledged. The value of my land didn’t change because the fee was higher. My bottom line was reduced but that was fine; I felt that strongly about the marketing approach. If ever the listing fee is discounted, we are also known for giving the larger split to the Buyers broker and keeping less for ourselves. We feel strongly that our primary objective is to shed the best light on our seller’s properties and that includes fairly compensating the agents who will be trying to sell it. Our track record of sales shows that this marketing approach pays off in the end and more often than not our sellers end up with more money in the end.

How agents run their business, the fees they charge, advertising they do, etc. is their prerogative. After all, we are our business and there is so much more to it than the properties themselves. When interviewing different brokers (and we highly suggest you do) take care to really compare apples to apples. What marketing will you receive, what services will you receive, what technology will be deployed, what negotiation skill does the agent have, what is their reputation in the industry, and what reviews and recommendations have they received? What about their track record? What difficult deals have they held together when the odds were against them? All these factors should play a part in who you hire. The old saying that you get what you pay for is still true. Also carefully weigh the pros and cons of a variable rate commission structures or an exclusive agency agreement – the risk may not be worth the reward. As uncomfortable as it can sometimes be, having tough conversations is the only way to do it. And we encourage you to do it from the beginning.