July 17, 2007
Does the pope condone Divorcing Commissions?
There is an ongoing debate over divorcing commissions in the real estate blog world that hasn’t yet jumped into the mainstream media. Divorced commissions doesn’t refer to the consumer divorcing the agent of their pay and it will certainly need a better name to get any traction (pay for representation?). In a word, it means you as a consumer pay your agent for representing you as a buyer or as a seller.
As it stands, sellers pay both their own agent and the buyer’s agent. They typically pay 2-3% to the agent who helps them put their house on the market, advertises it, advises them on offers, and negotiates on their behalf at closing. They then offer 2.5+% to the agent of the person who wants to buy the property. That’s to pay the “buyer’s agent” for dragging you to a bunch of properties, helping you figure out what’s right for you, advising you about each property, helping you put together an offer, and negotiating on your behalf through closing.
I’ve been racking my brain trying to find an appropriate analogy for this. Maybe it’s like bringing your lawyer to a divorce hearing (real divorce, not commission divorce) and having your soon-to-be ex-spouse pay your lawyer’s bill.
But it’s not really like that, because you as a buyer end up paying the commission. Say you just paid your agent yourself: The seller would probably pocket some of that 2.5+% they were offering your agent, but they’d probably also reduce the price of the house somewhat, leaving you with a choice about how much service you wanted from your agent and how much you wanted to pay for that service.
So when will commission divorce be just as common as the marital variety? Probably no time soon: banks are not used to it, so they would be wary of paying your agent from your end. Additionally, no one is going to go first: if you’re selling your your house, you don’t want to be the cheapo who offers $0 commission to buyers agents (because some of them will discriminate against you).
Jeff Kempe cogently argues that the perception of free buyers commissions makes consumers lazy about finding a good agent. Since divorced commissions are really an academic discussion in the short term, buyers should focus on finding good agents who will work on their behalf regardless of who is paying. Like in any industry, there are good real estate agents who focus on the long-term business and there are not-so-great agents who focus on the best buck today.
Interview a couple of great agents who can meet your needs and really know their stuff, describing what you need from them and what you’re looking for in a property, ask to talk to previous clients, and figure out if they are someone you would want to work with. Ask questions and ask more questions.
July 17th, 2007 at 10:52 am
>The seller would probably pocket some of that 2.5+% they were offering your agent, but they’d probably also reduce the price of the house somewhat,
When I list a non-relo home, I tell the sellers up front that the total commission I will charge will be 2% less if the home is purchased by an unrepresented buyer. I have never seen a seller regard that extra 2% as the buyers’ money.
My experience is sellers not using agents have the same listing price (or higher) than the MLS-based comps would suggest, and all of the MLS comps have a commission eating away at the sellers’ net.
I’ve not seen anything to indicate a seller having to pay less in total commission will lower the price by the amount of the reduction. It strikes me as a real estate urban legend.
One other note … many FSBOs do offer zero to buyers’ agents currently. No one right now can have a home in the MLS with a zero co-broke, not because no one wants to be the first but because the MLS rules don’t allow it.
One more change that would need to be made.
July 17th, 2007 at 11:09 am
Jonathan, I think you’re right - the price of a home is what people are willing to pay for it, not what sellers want to get for it, so wherever the seller is spending their money on selling their home, the price is probably the same. I don’t think divorced commissions would result in everyone paying 2-3% more for homes (because they would pay their agents too) though, I think the costs would be shifted from seller to buyer. If everyone did it that is.
That said, if I were the seller, I too would be happy to get that 2% back and I would definitely consider that money mine if it was presented as mine. But those buyers aren’t the savviest, are they? They’re walking in unrepresented by a buyers agent.
It’s all a moot point though, right? Government intervention is the only way I see this changing in the next few years.
July 22nd, 2007 at 11:05 am
“buyers should focus on finding good agents who will work on their behalf regardless of who is paying”
Buyers should refuse to hire any agent who doesn’t wholeheartedly AGREE that the buyer is paying them, and the seller is NOT paying them.
If the “buyer’s” agent thinks for one second, that the seller is paying them to “bring” a buyer, somewhere…somehow…the buyer will suffer.
July 24th, 2007 at 10:50 am
Ardell - Agreed. I meant to say that buyers should focus on finding good agents regardless of what other say about who is paying.
October 11th, 2007 at 8:16 am
[…] The DOJ released a website all about real estate commissions yesterday (beware the Inman paywall tomorrow!). We can argue all night and day about whether agents as a whole are “worth” 2.5-3%, but I’ll tell you this right now: some Realtors are and others are not. The DOJ says that an amazing 70% of home sellers negotiated the commission with their agent. Maybe the DOJ should set up a site on divorcing commisions or the frickin’ health care system, where rates have gone up a lot more than a few percentage points a year. OK, maybe this warrants its own post. […]
May 6th, 2008 at 9:09 pm
I have never had a buyer or a seller wonder if my services were worth 3%. Buying real estate is not rocket science but it can be very dicey depending on the circumstances. I agree that there are alot of agents out there - especially in the past few years when Seattle was really in a boom market - that were in it part-time and only for the short-term. I feel that these are the kinds of agents that give the rest of us a bad name. These are the same agents who are constantly getting fined by the MLS for rule violations because THEY DON’T KNOW THE RULES. They also don’t provide much in the way of service and often don’t really have their client’s best interests at heart. What baffles me most are the people who come to open houses unrepresented and want to make an offer on a house without the help of an agent. The listing agent, if they are writing up the offer for you, will receive the commission for both sides of the transaction if you do this. It is no benefit to the buyer as they are unrepresented. If you are going to buy a house you should have a professional guide you through the process. The listing agent will be representing the seller and has an obligation to tell the seller anything you tell them so there is no confidentiality between a buyer and the listing agent if they are writing up the offer. Buyers should feel lucky if they get the right agent on their team as they will benefit by having a professional negotiator on their side who is working hard to get them the best price and terms to fit their budget and lifestyle. The fact that this is all rolled into the purchase price for them and that they don’t have to come to closing with cash to pay for all these services and months of work is a huge bonus.