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Commissions, Incentives and Ethics

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.

13 Responses to “Commissions, Incentives and Ethics”

I enjoyed this post. Balancing ethics and making a living should not be a balancing act but often appears to be. Clearly the duty is to act in the best interest of the client, even if it means you make less. Where the problems often arise, as you point out, is when a broker takes on a client at time of offer without an agreement on commission being in place.

Incentives also tempt many a broker, especially in lean times, to steer clients to these properties almost exclusively. As long as you are fair to the client and don’t overweight to exclude other properties they should also consider, the incentives are not necessarily a bad thing. It comes down to whay you do with them. Maybe turning the incentive into a sharing proposition with the buyer, ie. rebate, can help both the client & the broker. Full disclosure (transparency)is usually the best way to go. It will keep your client informed & help the industry’s public image.

You also give great advice to sellers—see what your broker is, or is not, doing to promote your listing for sale.

The 20% is mindboggling—could it be a misprint or did you call the lister? We found a 10% commission in NYC but 20–OMG.

PS Excellent blog

Left by jf.sellsius on November 12th, 2006

20% ??? That’s unbelievable.

Are you sure it’s not a typo? We agents are notoriously careless with little things like, oh, decimal points and trailing zero’s. Sure it’s not 2%?

Left by Kevin Boer on November 12th, 2006

JF: If the 20% was a misprint - it would have had to be misprinted more than once. It was not only in the commission section - it was in the remarks. Oddly enough… only the beds, baths, and commission are in the remarks… go figure.

Thank you for your kind words.

Kevin: Yep… it’s 20% - but I think I might call the agent tomorrow (he’s with my brokerage) and find out what the motivation is…

Left by Doug Quance on November 12th, 2006

I just got off the phone with the listing agent… and, as suspected, the 20% is legit. Well legit in the sense that its appearance in print is true.

This commission was not the hare-brained idea of the agent. (I never really thought so, as you would have to be a pretty good salesman to put that one over)

It was the idea of the builder. An experienced builder, no less. Someone who has been building houses for 35+ years.

The agent said that he told the builder to just lower the price, because while the house had the square footage to justify the price - it lacked the features. (approx. 2800 sf)

I quickly put 2 + 2 together, and realized who the builder was. I had spoken with him, and had looked at some of his houses years ago. I couldn’t understand how he was selling these homes… I thought they were poorly designed, and overpriced.

Last month, an investor called me about a resale home this particular builder had built a few years prior. When I did my analysis, I realized that every single one of his homes in that area were subjects of foreclosure - bar one.

Then I remembered my conversation with the builder from years ago… he said something about him holding back an 20% second mortgage so that the buyers could get qualified - but he never intended this mortgage to be paid. A ghost second, if you will. At that point, I terminated the call.

So now I understand the 20% commission. It’s just another unethical idea from another unethical builder.

Left by Doug Quance on November 13th, 2006

Good detective work Doug. Thanks

Left by jf.sellsius on November 13th, 2006

Wow..I was reading and freaking out over the 20% co-broke…thinking it had to be a mistake. Creative as instead of a big reduction increase the cobroke. Has it worked do you know?
Yikes…20% !!!

Left by Monika on November 20th, 2006

Pornography is difficult to define but I know it when I see it.

An excessive co-brokerage commission is difficult to define but I know that 20% is too much.

Left by Brian Brady on November 20th, 2006

Monika: It hasn’t worked, yet.

The link I provided is to a live IDX feed on my website. It will show a pending listing when it goes under contract - then will disappear after it closes.

It has, however, generated many phone calls according to the listing agent.

Left by Doug Quance on November 21st, 2006

Brian: Good analogy.

I agree… 20% is just too much. How much too much? I guess that depends upon the property… but for a $270,000 home, I think anything over 5% co-broke is insane.

But that’s just me.

Left by Doug Quance on November 21st, 2006

Though 20%, 30%, 40% commission may be legal (and they are) they certainly would raise the eyebrow of the lender. No, not the mortgage company… the lender. If you want your files, your seller’s files, your loan officer’s files, all inspected by the “powers that be,” go ahead and enter into an agreement to accept 20% commission, and make sure it’s in bold letters on the HUD. This advice comes from one of Georgia’s foremost authorities on mortgage fraud. Don’t let greed control your decisions.

Left by Georgia Broker on December 19th, 2006

It is interesting to see that this listing is still active - and still offering a 20% co-broke.

Left by Doug Quance on January 11th, 2007

Hmm wonder what that means…still active even with a whopping…20% co-broke! Is the place a pit?

Left by Monika on January 11th, 2007

I haven’t actually seen it… but I have seen others like it, I am sure.

It is new construction - but if it is like others I have seen from this builder… it is not a good floor plan.

Maybe they should go for 30%??

Left by Doug Quance on January 11th, 2007

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Commissions, Incentives and Ethics

13 Responses to “Commissions, Incentives and Ethics”