The highs and lows of parenting and real estate.

A Bit About a Taboo Subject…

Realtors discuss commission amongst each other constantly. Usually the numbers, assertions and claims are vague and inflated, but that doesn’t stop us from talking about it. Bizarrely enough, however, commission is a taboo subject between agents and the rest of the world. In fact, lots of buyers have no idea how or what their agent is going to be paid.

I have a dear friend who bought her first house before I was a Realtor and she used another friend of ours as her purchasing agent. When we were discussing real estate years later I discovered that she was carrying a load of guilt about how this friend had helped her and she hadn’t paid her anything. When I explained that the seller traditionally pays the commissions to sell the property, she was so relieved that her agent had been compensated for her time. She’s a sweet-hearted person to think that a real estate agent, of all people, would help anyone out of merely the goodness of her heart (ba-dum-dum, ssss!).

It goes the other way, too. Sellers, especially, do the math on what they think we walk away with and decide that it is just way too much. Sometimes I just want to sit down with them and break it out to the hourly rate; but I don’t.

So I’m going to tell you a story about one of my most recent closings and the commission breakdown. There are probably lots of Realtors who are going to disagree with the fact that I’m posting this story, but the point of my blog is to give you a look into the wild world of a real estate agent, ups and downs, pros and cons (and by that, of course I mean: professionals and convicts). There’s a ton of confusion on the part of the general public about what agents are paid, and I’d like to clear a bit of it up.

Right now our market is flush with short sales. They’re a little bit like dog poo in the park around the corner from my house, and my clients are like my two year old. When we’re out together, he’ll go running off to play in a bit of longer grass and come back with a handful of doo thinking he’s brought me a treasure. I don’t want to break his heart and tell him what he’s actually got in his hand, but at the same time, I don’t want it to make him sick. It’s often a lose/lose situation. Occasionally, though, we come across a short sale property that really is just too good to pass up, so my clients and I take a deep breath and dive in to a stinky situation.

All listings on the MLS (multiple listing system) have a section that tells the buyer’s agent how much commission is being offered to the agent who bring a buyer into the property. The listing agent generally negotiates a commission with the seller and then offers part of that commission to the buyer’s agent. We are a free trade business, so the commission to sell the property can be anything. It can be a fixed dollar amount or a percentage of the sale, but whatever it is, the listing agent is required to pay the buyer’s agent at the successful close of escrow.

Now a short sale is a slightly different story because the owner of the house is underneath the loan, and therefore, it is assumed that he won’t have cash to pay for closing costs and commissions, so the commission will be paid by the bank who is servicing the loan. However, the bank will not negotiate anything about the deal or the house without an offer on the table. So most of the time, the listing agent has to list the property and offer a commission to the buyer’s agent without knowing what commission the bank is going to be willing to pay.

Because a listing agent is held to what he advertises on the MLS, if an agent offered X to a buyer’s agent on the MLS and then asked the bank to pay 2X, but the bank only agreed to pay 1.6X, then the listing agent only received 0.6X, which seemed a bit unfair to most of the listing agents working short sales. So lots of agents started employing the technique of offering 0.8X to the buyer’s agent on the MLS, but still asking 2X in commission for the bank, so that when, inevitably, the bank was only willing to pay 1.6X, everything still worked out pretty evenly for everyone.

Most buyer’s agents have also been listing agents at one time or another, so when we all started seeing commissions at maybe a little bit less than we’d seen before, we understood this was part of the market, part of the game, and we didn’t want the listing agents to have to end up taking the short end of the stick, so we went with it.

Here’s where things get a little ugly. On the last short sale I closed, I was offered that 0.8X I’ve come to expect with short sales in the MLS, but when I received the settlement statement at just before close of escrow to go over to ensure that my client was paying what we had agreed to, I discovered that the bank was actually paying 2X in commission, but I was still receiving my 0.8X. So the listing agent was making 1.2X.

Now the listing agent is under no legal or ethical obligation to pay me an equal half of the commission the seller is paying. The only obligation the listing agent has is to pay what is advertised in the MLS. That’s was a bit of a knife in the back, though. Up to that point the agent had come across as sweet and easy to work with. I’ve never been in the position, as the listing agent, where the bank has agreed to pay more than I’ve expected them to in commission, but I know agents who’ve had it happen to them. One of my close friends actually, has had it happen to her twice, and I know for a fact, that she called up the buyer’s agent and offered to split the overage with them (which they joyfully accepted).

In this case, I contacted the listing agent and pointed out the unequal split (just in case she didn’t realize it) and asked if she was willing to split it with me. She was not. She cited expenses (she had apparently hired a professional negotiator to handle the short sale, had trashed out the house and had had it rekeyed) and apologized. I let it drop because legally, there’s nothing I can do, but I can’t say I was mollified by her excuses. We all have expenses. I spend tons of time driving clients around and spend money on gas (at a time, gas that cost in excess of $4/gallon). It’s ridiculous to nickel and dime the process with the other agent. Who spent more time, energy, money, etc? It’s going to be a close call, regardless.

But like I said, she’s under no obligation, and them’s the breaks. You can bet, however, that I’ve learned my lesson on this one. On future short sales I will have a conversation with the listing agent at the time when we are writing the offer about where she stands on the ‘splitting the overage’ issue. At least at that point I’ll know where we stand, and sometimes agents are a little bit more willing to split the difference at the beginning of a transaction when they haven’t counted all of their pennies just yet.

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