The murky world of broker commissions
US homebuyers and sellers should be aware of the commission split issue: OPINION
It’s one of the dark corners of American real estate that doesn’t get much attention from consumers: When realty agents representing potential buyers don’t like the commission split offered on a particular listing, they might boycott it — simply not show the house to clients.
The net result: Houses get less exposure. They sit on the market longer than they would otherwise and the seller may end up with a lower price. The practice — known as “sell-to-the-commission” — has surfaced recently as discount brokers in major markets advertise low fees on both sides of the transaction, and home sellers increasingly ask: Why am I paying 6 percent to agents when I know my well-priced, well-maintained house will sell quickly?
The issue bubbled up earlier this month during a frank discussion among agents across the country on the industry website ActiveRain.com. Some agents described the practice as commonplace or even “rampant” in their areas. One, Eve Alexander of Buyers Broker of Florida, in Orlando, said “It is a fact that when the co-op fee is peanuts, less agents will show it and it will more than likely take longer to sell.” In a subsequent interview with me, Alexander deplored the practice, saying “sellers usually don’t know” that their property is getting fewer showings because of the low fee-split to the buyer-side agent. And buyers don’t know what they’re not being shown.
Real estate commissions are all about splits. If you agree to list your home for a 6 percent total commission, frequently that means the listing agent and brokerage will take half at closing — 3 percent — and the buyer’s agent and brokerage will get the other half. Both brokerages split their fee with the individual agents involved, who may get half or more. If the listing agent offers the buyer-side agent what is seen as an inadequate split — or especially if there is a discounted fee involved — agents representing buyers may be much less interested in showing the property.
All real estate commissions are negotiable, so fee splits can vary widely. Some discount brokerages offer cut-rate fees to list and sell, and they tend to bear the brunt of agent boycotts. Joshua Hunt, broker and CEO at Denver’s Trelora realty agency, told me he has “filed over 100 complaints” with real estate regulatory authorities about “agents who said they will not show” Trelora listings. Trelora charges a flat $2,100 “service fee” to list a house for sale and offers $3,000 in compensation to agents who bring in buyers, though fees can be adjusted in negotiations.
Some agents staunchly defend such selective showings. Bill Reddington, an agent with RE/MAX Southern Realty, in Destin, Fla., said on ActiveRain, “the real question is how willing are you to work for free?” With discounted fees on the rise, he said, he “prefer[s] not to show those.” Other agents argued that low splits to the buyer’s agent suggest that the listing agent did not explain the potential consequences to the seller of offering too little. Others said stingy sellers tend to be difficult in negotiations.
But what about the ethics of not showing houses based on commission splits? The National Association of Realtors’ code of ethics prominently states that when representing a buyer or seller, agents must “protect and promote the interests of their clients.” If you’re not showing homes appropriate for your buyer, that doesn’t sound like good representation.
But hold on, things get more complicated. I asked the industry’s widely acknowledged ethics guru — Bruce H. Aydt, senior vice president and general counsel for Berkshire Hathaway Home Services Alliance Real Estate — about the issue and he said there’s considerable “gray” area here. Without a formal written buyer-agent agreement that specifies compensation and creates a fiduciary duty between agent and client, no one can reasonably expect an agent to work for little or nothing, Aydt believes. But “at some point,” he said, “the failure of a buyer’s agent to show properties because of a perceived ‘low’ commission” could violate a Realtor’s ethical duties “and perhaps state law.”
Bottom line: Whether you are a seller or a buyer, be aware of the commission split issue. If you are a seller and tempted to lowball the buyer-side agent commission, be aware that your house might not be shown as much. If you are a buyer looking at what’s available with the help of an agent with whom you have no written agreement, consider nailing down compensation in advance with a formal agreement.