Part IV: Divorcing the real estate commissions will result in benefits not just for buyers but also for their agents and for the real estate market as a whole
The National Association of Realtors is embroiled right now in a protracted anti-trust suit brought by the United States Department of Justice and the Federal Trade Commission. The case in a nutshell: The NAR has been attempting to use MLS rules to stifle lower-priced competition.
Recall that the NAR is a conspiracy against consumers. Its purpose is artificially to limit access to real estate representation, so that consumers will have to pay more than they might otherwise for real estate advice. The cause of action in the DOJ/FTC suit is a move by old-line brokers against young-turk brokers within the NAR. The trade organization stands accused of deliberately frustrating the objectives of its own members.
What is the essential data field in an MLS system — do you remember? It’s the co-broke. Everything else is just details. Every true MLS system exists so that real estate brokers can communicate — in presumptive secrecy — how much they will pay when a co-operating broker procures a buyer for a particular listing.
Can you think of one simple thing the NAR could do to make the DOJ/FTC anti-trust suit go away in an instant?
How about… divorcing the real estate commissions…?
Do you think that might work?
Remember that the MLS system is a vestigial engine of sub-agency, designed from the outset to advance the home seller’s interests — at the expense of the home buyer’s interests.
If we were to divorce the real estate commissions, the co-broke field would go away and with it the entire edifice of the top-secret MLS system.
Does this mean homes would no longer be listed? Of course not. But home listing would become a free-market business — with no anti-consumer rules on what material facts can and cannot be disclosed to buyers.
Without doubt there will be a shake-out period, with conflicts among vendors, errors of judgement, etc. — just as in any competitive marketplace. This will occasion much lamentation — before, during and after — starting with “yeah, but” and proceeding from there to “if it ain’t broke”, “the Tower of Babel” and on and endlessly on. In fact, we could not be undertaking this change at a better time. Data-processing technology has advanced to the point that any problems of coordination among listings vendors will be resolved in short-order.
And when the listings marketplace shakes out, we will have the most comprehensive real estate listings databases ever devised. All of the represented listings will be cataloged, but so, too, will all of what formerly would have been unrepresented listings.
Except that there might not be any unrepresented listings. The low-cost, limited-service brokerages — another target of the NAR — face one nearly-insuperable objection right now: The co-broke. Do away with the co-broke and you may also do away with the For-Sale-By-Owner marketing plan.
Even if not, buyer’s agents will no longer need to fear FSBO sellers. Their compensation will be paid by the buyer, no matter what the seller might be doing.
In the same respect, buyer’s agents need not fear short sales. In a true short sale — the seller can’t pay what he owes — the seller’s lender will often try to limit the real estate commissions to be paid at close of escrow. The listing agent might still have to bite the bullet, but the buyer’s agent’s compensation will be totally unrelated to the seller’s obligations to his lender.
The flip side of this is that listing agents will have nothing to gain from unrepresented buyers. The listing agent’s compensation will be the same no matter how the buyer comes represented. There is still a peril of dual agency — a lister talking an unrepresented buyer into a dual representation. Divorcing the commissions will not by itself do away with dual agency, more’s the pity, but I would consider it a true expression of ethics if the NAR were to forbid it in its Code of Ethics.
But even if buyers do enter into a dual agency, they will have acquired the right to negotiate compensation. As much as I might think dual representation is a poor idea, it may well be that a savvy buyer will negotiate a dual agency that advances his interests better than any other arrangement could.
And buyer’s agents will no longer have to worry that their clients might wander off the reservation. More and more, buyers are taking matters into their own hands. Interesting looking structure? “I’ll call the number on the sign.” Open house? “Let’s just take a quick peek.” Model homes? “I want to see the kitchens.” These are a buyer’s agents nightmares, right now. The doctrine of procuring cause says that the real estate agent who was with your buyer when they decided to buy gets paid for procuring their patronage, even if that agent doesn’t represent the buyer. If the true buyer’s agent is scrupulous, he will now help his wayward clients complete their transaction for nothing.
What if the agent is not scrupulous? In our current circumstances, he will either abandon the client or try to sabotage the transaction, neither of which are in the buyer’s interests. With luck, divorcing the commissions will drive most of the unscrupulous agents out of the real estate business, but the way we do business now encourages and rewards unsavory behavior on the part of both buyer’s agents and listing agents.
But how will buyers even know the difference? This is a common objection, one that is not without merit. As we discussed, buyers are often swept up by their emotions. They care about their future home, not mundane details. So how will they even know that the commissions have been divorced?
Because their agents will tell them, that’s how. The way things are done now, a buyer’s agent’s pecuniary interests are best served by buyers being drunk on emotion. The buyer’s agent wants to pick you up, show you some houses, get you to fall in love with one, and only then start talking about agency, representation, fiduciary duties — and compensation. Why then? Because you’re not listening. You’re in love with your new home, and you’re waiting for all this “blah, blah, blah” to wind down so you can sign a big check and move in.
This is not in your best interest as a buyer, but divorcing the commissions will induce your agent to have that “blah, blah, blah” conversation before you ever see a house. Why? Because your buyer’s agent will not have established that he is getting paid until he has worked out with you how he is to be paid. Will this cause buyers to be as serious as sellers already are about how much they are being charged? We can hope. But it is certain that it will cause buyer’s agents to induce buyers to talk seriously about agency, representation, fiduciary duties — and compensation — before any other work is done.
It seems likely to me, in the long run, that as buyers become aware that they are paying for their own representation, they will become much better informed about what they are paying for. A skilled investor, for instance, may want an experienced agent to double-check his math and to supervise the inspections and repairs. Is that worth 3% of the purchase price? Not likely. Owner-occupants, on the other hand, may want — and will need to pay for — far more service. A party relocating from out-of-state may need and may be willing to pay for the kinds of concierge services most agents don’t even offer right now.
In a truly free market — no secrets, no lies, no sleight-of-hand accounting tricks to dupe buyers into thinking that buyer representation is “free” — many variations of services and compensation plans will arise. This is already the case with seller representation — just as it is already the case in every other sort of business, for goodness’ sake!
In due course, buyers and agents will learn to create compensation plans that align the agent’s interests with the buyer’s interests, providing incentives to the agent to deliver the best possible service to the buyer.
And, best of all, there will no longer be buyer’s agent’s bonuses paid by the seller in order to induce the buyer’s agent to betray his fiduciary duty to his client.
Divorcing the real estate commissions will be a wrenching change. It’s really nothing in bookkeeping terms, as we have seen. But people fear change, and this is a change that will almost certainly result in a loss of income for real estate brokers. But, amazingly enough, it turns out that people don’t buy and sell homes in order to enrich real estate brokers — or mortgage lenders or title companies. Divorcing the commissions is beyond all possible doubt the best thing that can done for consumers, and that argument alone is sufficient reason to have done it already.
But nothing is that simple, alas. Socrates knew that chattel slavery was evil, a fact not one human being in all of history needed to be told. And yet it took us 2,500 years to eradicate most — not even all — human slavery. If the respondent in a lawsuit were paying for the plaintiff’s attorney, I think each one of us might be able to sniff out the injustice. I don’t think anyone can miss it in real estate, either, particularly not when I’ve gone through everything in so much detail, from so many different directions.
But, just to be sure, in our next installment, we will take up some objections I have heard to divorcing the real estate commissions. And just to make things fun, we will talk about some positions I think opponents of divorced commissions would have to take in order to make their case.
In Part V: Objections to divorcing the real estate commissions — and how to overcome them
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Brian Brady says:
Among the many benefits to agents are not fearing the FSBO seller and the establishment of an agency relationship.
Advocacy demands compensation. If provided correctly, an agent has little to fear from this recommendation
November 10, 2007 — 5:52 pm