Act I — Why Realtors hate discount listings…
People think ordinary on-the-ground Realtors hate discount listings because of the discount. That’s may be true of many real estate brokers, but real-life Realtors have two much better reasons to hate discount listings. First, the Buyer’s Agent will have to do all the work for both the buyer and the seller. And, second, in so doing, the Buyer’s Agent might well inherit the liability of being an Undisclosed Dual Agent. The Buyer’s Agent has the choice of either answering every question from the seller by saying, “I do not represent you” — thus causing the transaction to grind to a halt (which is a violation of the Buyer’s Agent’s fiduciary duty to the buyer) — or by saying, “Even though I don’t represent you, here’s what you do.” If the seller later decides he was ill-advised, it won’t be the discount Listing Agent who gets sued.
Act II — The hidden secrets in MLS listings…
Given that IDX systems (like ours) are ubiquitous, precisely what is it that the NAR and all the brokers are fighting so hard to keep secret in MLS listings. I’m sure things differ among MLS systems, but the two big secrets the NAR wants to keep from non-MLS-members are these: 1. The number of Days on Market. That’s the Listing Agent’s secret. And 2. The contact information of the Listing Agent. That’s the Buyer’s Agent’s secret. In the latter case, you might think what is implied is that Buyer’s Agents in general believe that they stink so bad that their clients would betray them in a heartbeat if only they knew how. That’s only half the issue, though. The other half is the fear that, if the buyer knows how to approach the Listing Agent directly, the Listing Agent will make a sweetheart deal with the buyer in order to double-dip on the commission while disintermediating the Buyer’s Agent. This is why MLS systems have rules regarding Variable Commissions, since, in that circumstance, the Listing Agent is disclosing to Buyer’s Agents (but not to their clients; this is another secret datum) that the buyer might do better by going directly to the Listing Agent. It is a common practice for Buyer’s Agents not to show listings offering a Variable Commission, or to show them last. I think this is an agency violation, but nobody asked me.
Act III — Going in for the kill…
A Redfin.com buyer is much alike to a seller represented by a discount brokerage. Redfin shares the super secret contact information for the Listing Agent with its buyers, telling them to go out and hector the Listing Agent into doing the Buyer’s Agent’s job. The Listing Agent thereby acquires the liability risk of an Undisclosed Dual Agency — again alike to a seller represented by a discount broker. There is a difference, however. A discount Listing Agent is a cowbird who expects to be paid a discount commission for defaulting on his fiduciary obligations to his client. When Redfin.com acts as a Buyer’s Agent, it expects to be paid full fee for laying its liability egg in the Listing Agent’s nest. The entire marketing plan of the company consists of shifting the burden of its fiduciary duties to the Listing Agent, then rebating the resulting cost savings on its end to the buyer.
As I have said before, the Redfin.com business model is a procuring cause action waiting to happen. By directing its customers to contact the Listing Agent directly, the Listing Agent becomes the initiator of an uninterrupted chain of events leading to the close of the transaction — the legal definition of procuring cause. Redfin.com does not effect anything resembling agency — representation — until this chain of events is well established. Absent the DOJ busy-bodies, this would be settled art by now: The procuring cause of a buyer’s transaction involving Redfin.com is the Listing Agent — at Redfin.com’s own behest.
But taking account that this is true, Listing Agents have the kind of opportunity that Buyer’s Agents never have with discount brokers: They can cut Redfin.com out of the picture with impunity and alacrity. The fact is, Redfin.com is a bottom feeder, just like all the other discount brokerages. Their appeal to buyers is the promise of two thirds of the Buyer’s Agent’s commission going toward their closing costs. So if the Listing Agent makes them that same offer when he shows the house, he has the opportunity to sign them on the spot. If the home is listed at 5% commission, with a 3% co-broke, the Listing Agent can concede 2% to the buyer’s closing costs and still keep 3% — where otherwise he would have gotten 2%.
You could argue that this is a Variable Commission — even though the amount of commision deducted from the seller’s proceeds is exactly the same. My take is that it is a type of concession from the Listing/Buyer’s Agent, which have been held to be lawful — and which are very common.
In any case, it puts Redfin.com in two ugly spots:
First, it can try to sue a buyer it has never met for violation of whatever they use as a Buyer Broker Exclusive Employment Agreement — if they even have such a thing. This will make for fun headlines.
Second, it can bring a procuring cause action against the Listing Agent, again attempting to argue that it was the exclusive fiduciary representative of buyers it has never met — nor advised in any measurable way at all.
The Listing Agent will have to be ready to step up to the plate if the buyers get sued. But this is battle that will only have to be fought once. Redfin.com will either take on its full responsibilities for Buyer’s Agency — splitting its commissions however it wishes — or at least one species of cowbird will become extinct.
Truly it’s all one to me. We don’t do dual agency. But if any kind of discount brokerage is foolish enough to let us get close to its buyers — we’ll be the Listing Agents on that home the next time it sells, too…
Technorati Tags: arizona, arizona real estate, disintermediation, phoenix, phoenix real estate, real estate, real estate marketing
Tim says:
I’ve never closed a Redfin transaction to learn first hand how the involved parties feel about the deal. Procuring cause–I think Redfin would argue quite effectively that they are the procuring cause. They got the ball rolling. The buyer would not be the recipient of saving serious coin without Redfin, therefore it seems to me Redfin is central. I think that opponents arguments would find it difficult especially in light that so many buyers (working with traditional agents) do end up finding the house they want on their own: drive by’s, online, etc… I know when I was looking for a home, we were fortunate enough to find it on our own.
If I were the listing agent, I don’t care where the buyer comes from, I’d open the door for anyone. Further, if I were a seller and I learned my agent didn’t open the door for a prospective buyer (Redfin buyer or otherwise), regardless of how the commission pie is split or how they arrived at my front door, my agent would probably be asked to work for someone else. It would show that the agent is agent/commission centered vs.consumer/client centered.
Is procuring cause defined as who opens the door for the buyer? If so,then both the agents in my parents sale should not have been paid anything.
🙂
August 24, 2006 — 8:28 am
Greg Swann says:
> Procuring cause-I think Redfin would argue quite effectively that they are the procuring cause.
I don’t know how this works in Washington. Until recently in Arizona, a Buyer’s Agent who did what Redfin.com does would not have been regarded as the procuring cause. There were bright-line standards. The first acts of agency — representation — would have been taken by the Listing Agent. Redfin.com might have had a claim against the buyer for violating a Buyer-Broker Employment Agreement, and it might have had a Code of Ethics complaint against the Listing Agent. But it cannot claim to have initiated representation the buyer while having done no more than could have been done by a classified ad in the newspaper. Now, with this DOJ mess, I think the arbitration process is in disarray. We’ll see how it shakes out.
> buyers (working with traditional agents) do end up finding the house they want on their own
That’s the easy part, though, and it has nothing to do with procuring cause.
> if I were a seller and I learned my agent didn’t open the door for a prospective buyer
That’s not the issue. First, Redfin.com is demanding half or more of a pie it did not bake. Second, the Listing Agent is losing half or more of the pie he did bake. Third, Redfin.com’s cowbird tactics have the potential to double the Listing Agent’s liability.
The interesting part is that practices like those being pioneered by Redfin.com may result in the reduction or elimination of the cooperative commission altogether. If Listers stand to lose either way by offering a co-broke, why do it? In fact, the buyer pays every cent transferred in the transaction — but almost always with borrowed funds. If buyers don’t have “free” representation, many will have no representation at all. Redfin.com figured out how to be the Cowbird of The Commons after all these years of successful co-brokerage. Good for them. But their celebration may be short lived…
August 24, 2006 — 9:01 am
Todd Tarson says:
Tim, it is more than opening a door for a buyer. Much more. It’s the unbroken chain of events that leads a buyer to purchase a property. Otherwise, I’d be a doorman.
August 25, 2006 — 7:11 am
Greg Swann says:
I thought of a way of thinking about this, but I didn’t get to it yesterday. I have a class today, so this will be brief.
Tim walks into Lowe’s and almost bumps into employee Greg, who is lounging around by the cash registers.
“Where are the refrigerators?” Tim asks.
“Over that way,” Greg says, pointing vaguely.
They weren’t, but Tim found them anyway. He had come prepared with a copy of Consumer Reports and the Lowe’s circular. He was standing in front of the refrigerator he wanted when employee Todd stepped up.
“We have that model,” Todd says. “My wife loves it.”
Tim says: “Write it up.”
So Todd does all the cash register machinations, warranty paperwork, etc. He arranges delivery. He is still working long after Tim has gone off to his next errand.
From Lowe’s point of view, who is the procuring cause of that sale? Lowe’s pays sales commissions on big ticket items, so the answer to the question matters.
Greg might argue that the commission is his, since he made first contact with Tim, directing him to the ultimate purchase.
Tim might argue that the commission should be his, since he came in to the store fully prepared, with no need of a salesperson.
Lowe’s would certainly determine that Todd was the procuring cause, insofar as he did the sine qua non work leading to the close of the transaction.
Now, in that circumstance, Tim might well say to Todd, “C’mon, partner, I came in on a silver platter. Tell me what you’ll do to keep me from going to Best Buy, where they don’t pay commissions?”
But even if Todd were to concede every penny of his commission to Tim, he would still be the procuring cause of that sale.
August 25, 2006 — 7:29 am
Todd Tarson says:
If Tim played hardball with me and instead of going to a Best Buy, he went to another Lowes — then I’d be filing an arbitration for my commission because there is no break of the chain of events that leads to a purchase.
I’m more easy going than that though. I discuss my terms for employment up front with my clients. If the client is looking for a kickback from the commission, he is free to hire a different agent.
August 25, 2006 — 4:54 pm
Simon says:
Very well written article, thanks Greg. Regarding RedFin, the online auto buying industry went through the same evolution. In the end, car dealerships matched Carsdirect.com’s price and almost drove it out of business. Now Carsdirect makes money from referral fees, ads, and car loans. The listing agent is analogous to the dealer in the example above, and the future for RedFin is not bright. Nevertheless, the consumers benefit in the end. I welcome Redfin as a disruptive force to the current monopoly, although I don’t see many competitors coming into this market once they see that listing agents can undercut them and there is little profit to be made.
Buyer agents won’t go away because there will be some buyers out there who don’t trust the listing agents. After all, sellers chose the listing agents and buyers don’t have a choice.
September 12, 2006 — 7:15 pm