“Divorced Commissions”

By Sean. Filed in UnREALTOR  |   
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“There is no such thing as a free lunch.”

I’m sure you’ve heard that line hundreds of times and, generally speaking, don’t doubt the truth of it. Yet, we are forever hoping we might… just this once… maybe… find a free lunch.  That’s alright when it comes to shopping for something small like, oh, say: lunch!  But what about something large?  What about a purchase so big, it will probably be the largest investment you ever make?  Any chance that transaction is going to be free?

Listen to enough buyer’s agents and you might just come to believe it.  “I’m happy to help you find a home.  I’ll do lots and lots of research, I’ll pick you up and drive you around, I’ll assist with the contract and I’ll suggest various professionals I know and trust to help you along the way.  Oh, and I’ll do all of this for free!” To which your reply might be something along the lines of: “Huh?”  From there the agent will go on to explain how the seller is going to pay his or her commissions.  Isn’t that grand?  No, it’s not.  And if you were someone who bought and sold homes more than a handful of times in your entire life, it might occur to you to ask the agent: “Why in the world would the seller pay you to represent me?  Aren’t you going to try and negotiate the lowest price with the best terms on my behalf?  The seller is going to pay you to do him harm?”  Yeah, that sounds like a hell of a system.

Before we discuss this further, let’s get a few technical aspects out of the way.  The seller isn’t actually going to pay the buyer’s agent, the seller’s agent is going to pay the buyer’s agent.  (Actually, let’s back up one further step; for purposes of this article, I’m going to use the word agent when I should actually use the word broker.  Everything that happens, happens between the brokers; the agents are simply extensions of the broker.  This is an unimportant distinction until we discuss why the entire brokerage system is set up to steal from the agents… which is another article.)  Okay, so the seller’s agent (aka the listing agent) is paying the buyer’s agent. That’s called a co-broke – it represents how much of what the listing agent has negotiated in commission from the seller, they are willing to share with the buyer’s agent.  Wait a minute, this makes even less sense now.  The seller has agreed to pay a commission to the listing agent, and the listing agent turns around and offers to split that commission with anyone who will come in and try to not only negotiate price and terms detrimental to the seller, but act as a contra party in opposition to the listing agent and their stated purpose for collecting the commission in the first place?  Yeah, that sounds like an even better system.

Not that many years ago, it was understood that the listing agent worked for the seller… and so did every other agent who brought a buyer to the door.  Why?  Because those buyer’s agents were being paid by the listing agent.  They were sub-agents of the seller by definition.  This all ended with some really big lawsuits wherein the buyers felt ripped off because all this time they thought their agent represented their best interests AND the sellers felt ripped off because they were paying sub-agents (buyer’s agents) and yet many of those agent were in fact representing the buyer’s best interests.  Would you like to know how all of this was fixed?  We changed the name of the commission to a buyer’s broker fee and created a concept called “buyer’s brokerage.”  Here’s how it works: by entering into a buyer’s brokerage, I will double-secret, pinky swear that you and I have a fiduciary relationship (unlike in the past when I didn’t double-secret, pinky swear and it turns out my fiduciary responsiblity was to the seller).  But… I’ll still get paid by the listing agent… who has negotiated a commission from the seller… which he will split with me for coming to the table and… trying to not only negotiate price and terms detrimental to the seller, but act as a contra party in opposition to the listing agent and their stated purpose for collecting the commission in the first place…  Oh yeah, that sounds like we fixed the system.

The simple truth is this: the buyer is paying for everything.  Think about that for a minute… The buyer is paying for everything; even the agent working on the seller’s behalf!  Wait a minute, I think we just discovered the free lunch!  Actually, that’s not completely accurate.  Let’s look at a standard transaction through the eyes of… a gallon of milk.

When you go down to grocery store, you purchase a gallon of milk and pay whatever the price on the shelf is.  Do any of us believe the price on the shelf simply reflects the cost of milk itself?  No, it includes costs (and profits) for the dairy, the packaging company, the transportation company and of course, the grocery store itself.  Everyone who has a hand in that transaction has added a cost and that cost has been accounted for in the price. So, you are technically paying costs associated with the seller, but we understand that to be a normal part of the market place.

Now, when I said everyone who has a hand in that transaction has added a cost, I meant everyone except you.  You’re not shopping for milk with a professional advisor, it’s simply not a complicated transaction.  But let’s say you did have a professional advising you on your milk purchases.  If you were the only one to avail yourself of this fantastic new service (“As a professional milk-ologist, I recommend you buy… the red carton.”) you would expect to pay that milk-ologist out of your own pocket, wouldn’t you?  Yes, but now what if everyone used a milk-ologist?  And what if the grocery store, aware of this fact, simply added the cost of a milk-ologist to all of its milk straight across the board; then paid your milk-ologist at the register when you were done shopping?  And what if they hung a big banner across the front of the store that says “Buy Your Milk Here! You Won’t Have to Pay for a Milk-ologist!”?  Hmmm, you’re still paying for that terribly important milk purchasing advice aren’t you?  As a matter of fact, it’s a little deceiving for the store to hang a banner like that without mentioning that they raised the price of all their milk to cover the milk-ologist, don’t you think?  “But,” you say, “what’s the harm?  It’s all the same price to me whether I pay for the milk advisor or the store does.”  Okay, what if all the milk-ologists worked for: the store!  But wait, if the store is paying them to advise me, how do I know I’m getting the best dairy advice possible?  And now you’re telling me that this honorable milk-ologist is not only paid by the store, but he’s paid a percentage of the price of the milk he advices me to buy?  That’s no kind of system at all.

“It’s all fun and games until someone gets hurt.”

Guess what?  You’re the rube in this little game.  Besides the obvious lie of telling you that you don’t have to pay for your agent’s commission, there are other problems associated with the commission being bundled into the purchase price.  For instance:

  • The buyer’s agent’s commission is bundled into the purchase price.  Which means, that’s right, it is financed.  Tough enough to put together the money needed to purchase a home, what with the down payment and closing costs and lender’s fees; adding on the cost of an agent would… well, it would mean less people buy a home.  I wonder who is negatively affected by that?  I’ll tell you who is negatively affected by having the commission financed: the buyer!  On a $300,000 purchase, the buyer’s agent’s commission (at 3%) is $9000.  Paying back that $9000 (using 6% interest rate) over the life of the loan will cost you $19,425!  That’s a pretty hefty fee for hiding the commission.
  • By hiding the commission, you effectively hide accountability.  If you’re not paying attention to the commission, how can you possibly be holding the agent accountable?  After all, you’re not paying for their work.  Ever rented a company car or ordered food when you knew the meal was being paid for by some big company somewhere?  Would you say you kept a keen eye out and made sure you got your money’s worth?
  • It keeps the commission artificially high.  (Which, by the way, is why NAR does almost everything it does: to keep money flowing into the brokers’ pockets.  It is surely not to protect you!)  Think about it, if you had to pay for your buyer’s agent’s commission the way you had to pay for your loan originator’s commission, you’d probably shop and negotiate it the way you do with… your loan originator’s commission!  That might also explain why the loan originator’s commission is usually less than the agent’s commission, even though the loan originator is bringing more to the table in terms of expertise.

The next time you sit down with an agent, ask them how this works.  You’ll hear a couple of responses: “Yes, technically I am getting paid by the seller, but I’m entering into a Buyer Brokerage agreement with you so my loyalty will lie with you.”  So, you’ve either got an agent lying to you now, or lying to the seller when they take the seller’s money.   “What?  Lying to the seller?  No, no; we’ve been over this: the buyer’s agent is no longer a sub-agent of the listing agent.  The seller does not expect the buyer’s agent to work for them.”  I see, so why is the co-broke still hidden from the buyer?  When you see the MLS print-out online or from your agent, it’s not the same as the MLS print-out he or she sees (they are banned by MLS regulations from allowing you to see the real copy).  What’s been redacted?  The amount being paid to the buyer’s agent is removed from the version going… to the buyer.. why in the world would they do that?  Also, the Confidential Remarks has been removed.  Lots of stuff can go in here, but I only want to mention one item: this is where the listing agent puts any bonus being paid to the buyer’s agent if the deal closes by a certain date or certain price.  Isn’t that interesting?  Why would we keep a bonus being paid to your agent… from you?  Do you suppose that the bonus might influence the agent to steer you toward that home?  No?  What other purpose is there in offering a bonus?!?!  It’s a bribe offered – much like the co-broke – to the buyer’s agent to bring you to that particular home.

How do you fix this?  Easy, divorce the commissions.  How is that done?  Also easy, but don’t hold your breath.  I’ve put a link at the end of this where you can learn more on those details.  There is one other way to divorce commissions: actually pay for them yourself.  Not everyone can afford to pay commissions out of pocket, so isn’t this a case of the rich get richer?  Yes.  That’s the free market.  If you have to play the rigged game set up by the thieves at NAR, fine; at least go in with your eyes open.  If you can afford to pay your own commissions, you can save a bundle and gain accountability.  For more info on this concept, go to: A New Pricing Model.

If you want to know a lot more about this issue, go to the source.  As I said on the front page, we are part of “a movement, and we certainly didn’t invent it; but we passionately adhere to it… to being unRealtors.”  For my money, the guy who did start it – or at the very least the one who has written the most and the most intelligently regarding it – is Greg Swann out of Arizona.  Below is a link to his eBook on the subject of Divorcing Commissions.  If you really want to understand, research and be prepared for what is most likely the largest investment of your life, go and read it.  We’ll be here when you’re done, ready to continue raising your expectations.

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