With a continually slowing market, sellers and their agents are using agent bonuses and other incentives to move their properties. But is this an ethical way to do business?

RealEstateJournal.com published an interesting article on Friday “Do Real Estate Agents Have a Secret Agenda?”

Here’s an excerpt:

Home buyers have a new reason to be wary in this weakening housing market: Real-estate agents increasingly have lucrative incentives to push one home over another.

Slow sales have prompted builders and some individual sellers to offer unusually generous incentives to agents whose clients buy a home. Sellers normally pay the buyer’s agent 2% to 3% of the home’s price. Now many are offering thousands of dollars or other rewards, such as travel vouchers, on top of the normal commission.

Such incentives have long been used to sell some homes. But they have proliferated and become more generous recently as a glut of properties on the market makes it harder to sell homes. “These guys are desperate,” Ivy Zelman, a Cleveland-based housing analyst at Credit Suisse Group, says of home builders.

While the concept is not new, the extent is quickly becoming legendary. Before sitting down to write this article, I pulled up our local MLS to take a look at commission anomalies. Much of what I saw was shocking and disturbing.

The biggest co-op commission I saw was an incredible 20%.

Let me repeat… I saw a co-broke commission of 20%. It was not an error – it even stated as such in the remarks section of the listing. In the public area, no less. The home is new construction with 4 bedrooms and 2.5 baths, listed for $270,000.

I don’t know how a buyer’s agent could show up at closing and face his/her client when they see an unexpected $54,000 commission on the HUD statement.

There were quite a few higher-than-usual co-brokes, as well… but nothing like 20%. I did, however, see quite a few agents offering ridiculously low co-brokes. Some as low as 1/4 of 1% ($750 on a $300,000 home)…. and many of them less than 1%.

None of these co-broke low-ballers put the seller’s phone number in the listing – they all had instructions to call the agent. Many were vacant properties.

Then it dawned on me – these agents are obviously misrepresenting the interests of their clients. In Georgia, the exclusive-right-to-sell listing agreement includes a section that outlines the commission offered to co-op brokers… and I find it hard to believe that any seller in their right mind would knowingly offer a co-broke as low as some of the ones I saw.

At first, it might seem like these are modern-day pocket listings… but I have another angle to consider. I believe these agents are using the MLS to get their listings on the Internet where the vast majority of buyers are searching.

When these buyers see a home they like, they might go drive by and check out the neighborhood. Let’s say they like everything they see… so they call their agent to arrange a showing – love the property – and want to write an offer.

At that point, the agent is stuck in the awkward position of representing the best interests of their clients – while trying to earn a living. Although most seasoned agents are smart enough to have a buyer’s agency agreement that specifies their compensation prior to showing properties – most fail to do so until it is time to write an offer. And therein lies the rub.

If the agent waits to draw up the buyer’s agency agreement until they draw up a purchase offer – the buyer will obviously ask how much commission is being offered on that listing. The question is – what do you think the buyer will do when they are asked to pay the difference between the co-broke commission and the buyer’s agency agreement?

In the interest of transparency, I can not stress how important it is for sellers to review their listings. If your agent is not uploading pictures, inserting good ad copy in the remarks, offering the agreed upon co-broke commission, and accurately describing the property… maybe it’s time to fire that agent and find someone else.

In the past, I have received higher-than-usual compensation as a buyer’s agent – but before I wrote an offer, I disclosed the bonus. The last thing I want is my client to think that I steered them into a property because of my compensation.

By the same token, I always have a buyer’s agency agreement with my buyers… even a one-day agreement to show one property. If they want to purchase a home with a low co-broke, we submit an offer that is contingent upon the seller paying my fee as specified in the buyer’s agency agreement.

To me, it’s not an issue of being greedy. It is simply compensation for my time, effort, knowledge, and experience. I advise my clients to walk away if I believe it is in their best interests to do so. I never hype a property for a quick sale – that’s not what I am paid for.

I am working with a client right now that thinks I don’t want him to buy anything. The truth is – I don’t want him to get taken… and everything we have seen thus far is plagued with issues… or overpriced. I am not out for a quick buck. I am there to earn my commission – and I will defend my right to claim it as earned.

As a listing agent, I have offered a higher-than-market co-broke on some of my listings… but it has come out of my side of the equation. If I have a client that wants to move up to a new home (whereby I will represent two transaction sides) I think nothing of taking the listing for 6% and offering 4% to the selling agent. If I can step up the traffic and sell their home a little faster – so be it.

But I think we can all agree that a 20% co-broke is overkill.

 

Posted by Doug Quance on Sunday, November 12th, 2006 at 12:29 am.