This is an excellent question:
Do buyer’s agents have to disclose ALL compensation he receives from all sources to his client? It would be important to know who’s filling his lunch sack. Example: Builder pays a bonus above the commission listed in the MLS to the buyer’s agent if his client purchases.
What does a buyer’s agent have to disclose about his compensation? In Arizona, the answer is crystal clear:
It depends.
A buyer’s agent is not required by law to disclose the amount of the co-broke commission or finder’s fee offered by the real estate broker of the seller. On the other hand, both RESPA and state law require the disclosure of bonuses, rebates, referral fees or any other sort of non-commission compensation.
This is ARS R4-28-1101-G:
A salesperson or broker shall not accept any compensation, including rebate or other consideration, directly or indirectly, for any goods or services provided to a person if the goods or services are related to or result from a real estate transaction, without that person’s prior written acknowledgment of the compensation. This prohibition does not apply to compensation paid to a broker by a broker who represents a party in the transaction.
There are a lot of things that reek about this, in my professional opinion. First, a bonus is just an attempt to induce a buyer’s agent to betray his fiduciary duty to the buyer. But second, a lot of bonuses are being paid right now in the form of commission. If I take you out to buy a new home tomorrow, the builder will pay me at least 6% of the purchase price, all of it of your money — and I do not have to disclose this to you.
In fact, all commissions and fees paid will be disclosed on the HUD-1 form — which you will see for the very first time at Close of Escrow. Wonderful…
My take on the subject: Buyers need to learn the five little words that sellers mastered long ago: “How much do you charge?” The agent may not be required by law to disclose commissions, but you can condition your working with that agent on his willingness to negotiate his compensation with you.
If you’re buying a new home and you intend to shop, offer 2%, with the rest of any builder’s commission coming to you. If you’re going to one subdivision only and you intend to write a deposit check that same day, 1% or 1.5% is more than adequate. You don’t need vigorous representation, at least in Arizona. The builder won’t let your agent do anything anyway. So why should you take an agent at all? In order to get the rest of the sales commission — really a finder’s fee — applied to your down payment and closing costs.
If you’re buying resale, or buying from out-of-state or something like that, you will need to negotiate to a higher fee. But in all cases, you should negotiate a fee that compensates your agent for the value you receive — not an arbitrary traditional sum and certainly not to have your agent actively betraying your interests.
But those five words — “How much do you charge?” — will be your key to a whole new world of buyer representation. You will learn within seconds who can work for you — and who thinks you exist to be milked. By negotiating compensation, you establish who is the boss in your relationship. Won’t that be a pleasant change…?
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Nathan Hughes says:
Is there not a clause regarding broker compensation and splits in the standard residential contract?
I don’t sit down with my buyers and detail how much money I am making on the deal. BUT, it is in black and white on the contract that we go over and sign. We use our own contracts (not the fill-in-the-blank forms), though, because we are dealing with commercial properties and business brokering.
September 15, 2006 — 5:10 am
Greg Swann says:
> Is there not a clause regarding broker compensation and splits in the standard residential contract?
Not in the Arizona Association of Realtors Residential Purchase Contract, the de facto standard of care for resale homes.
September 15, 2006 — 9:12 am
Nathan Hughes says:
Interesting. I bet there isn’t one in the standard VAR Residential Purchase Contract, either.
It sounds like it should be added. Why hide what the buyer is paying? It’s just another item that could cause the deal to jump off the tracks at the last minute (granted it’s not likely, but still).
September 15, 2006 — 9:21 am
Greg Swann says:
I can think of two reasons.
First, the AAR is all over the idea that compensation issues should not be raised in the contract, since the brokers aren’t parties to it (despite being released, indemnified and held harmless three times in nine pages!).
Second, if you operate from a sub-agency/seller pays mind-set, an attitude we still have here even though sub-agency is a dead letter in residential real estate, then the disclosure is made — in the Listing Agreement.
In principle, the compensation for the buyer’s agent should be negotiated through and disclosed in the Buyer Broker Exclusive Employment Agreement, but, typically, compensation is discussed there in the vaguest possible terms: Whatever the seller is paying. Even then, a buyer probably won’t see this document until the moment of truth, when they’re about to sign the Residential Purchase Contract.
September 15, 2006 — 9:30 am
Jeff Kerr says:
I really enjoyed this post. Made me realize my thoughts in one of my earlier posts, “Why I Hate Buyer Agent Bonuses” was right on target. We all negotiate, so why shouldn’t buyer clients. As a buyer, agent if you add value throughout the transaction and beyond there is usually no issue. Had to dig into the archives for this one.
http://www.chitownliving.com/blog/2006/08/14/why-i-hate-agent-bonuses/
Jeff
September 15, 2006 — 5:47 pm
ardell dellaloggia says:
Greg,
Do both the buyer and seller see both sides of the HUD 1 where you are, or just their side? I have worked half my career on the East Coast where both sides were shown to both parties. The other half on the West Coast where the buyer does not see the commission.
Perhaps it is not about geographics, but time. Maybe the East Coast holds private the commission from the buyer now also. I’ll have to check that.
What does AZ do at closing, to disclose the buyer agent fee to the buyer?
September 15, 2006 — 9:30 pm
Greg Swann says:
> What does AZ do at closing, to disclose the buyer agent fee to the buyer?
Top of page two of the HUD-1. Both columns are there. Everyone gets the same form. How could it be otherwise? RESPA requires that every amount in the transaction be recorded on the HUD-1. This doesn’t happen in Washington?
September 15, 2006 — 10:07 pm
Greg Swann says:
> Had to dig into the archives for this one.
> http://www.chitownliving.com/blog/2006/08/14/why-i-hate-agent-bonuses/
Jeff, I went and read your post. That was great.
Years ago in a GRI class, I explained this case to the instructor, who was also the recuriting broker for a huge Phoenix brokerage. “Well,” she finally conceded. “I suppose you could always offer the bonus to your buyer…” Ya think?!
September 15, 2006 — 11:11 pm
Jessica Giannasca says:
What are the law in Arizona regerding referral fees to out of state realtors?
January 14, 2008 — 11:13 am