Real Estate Commission Weirdness, Deconstructed

by Alex Stenback on August 21, 2007

If you’ve ever struggled to understand how exactly real estate agents are paid, and where the incentives are, check out this Dynamite post over at a Funmurphys, by regular guy and recent home seller Carl Drews, who unpacks the four essential "weirdnesses" of a real estate transaction.

The whole post is worth a read, but it really boils down to the fact that through practice, custom, and sometimes law, the real estate commission system under which the industry operates – where all commissions are paid by the seller – is one very few consumers truly understand, and results in all manner of perversely misaligned incentives.

Weirdness #1: Commissions are not split 50-50 by the buyer and seller agents. 

Weirdness #2: The Sellers pay the buyers agent to "intentionally, deliberately, professionally negotiate against them."

Weirdness #3:  Absent a written agreement otherwise, the Licensed Agent that first physically shows you a home has all rights to the commission should you buy it.  Does not matter if you were "just looking" and wanted to pick your own agent later.

Weirdness #4: There is no discount for "unattached buyers" in the typical listing contract, and all commission goes to listing agent.  (So much for the theory that you will have more negotiating power if you work directly with the listing agent rather than using your own agent.)

How Real Estate Commissions Work [Funmurphys, via Bloodhoundblog]

{ 5 comments… read them below or add one }

Teresa Boardman August 22, 2007 at 6:44 am

Weirdness #5 Real estate commissions are set as a percentage of the selling price. For the listing agent marketing costs are not all that much higher for a 500K home as the are for a 200K home.

T, J. Larson August 23, 2007 at 3:32 pm

This is true Teresa. And it is also true that the 1% Loan Origination Fee paid to your Loan Officer is the same regardless of loan amount, whether that is $200,000 or $1,000,000. And it’s all pretty much the same paperwork.

I love this blog. Very well written and fun. I wonder, have you ever done a story on Yield Spreads and other things that are Paid Outside of Closing? (POC) I guess you could file that under Closing Cost Weirdness.

Editor August 23, 2007 at 3:46 pm

I definitely need to do a “How Lenders Get Paid” piece. There are some definite weirdnesses and misaligned incentives there as well, and the average Jane’s understanding of a lenders compensation is even foggier than it is for real estate.

Coming soon.

Aaron Dickinson - Edina Realty August 27, 2007 at 11:42 pm

Weirdness 1,2,4: The seller is hiring the listing agent to sell the home, not hiring the buyer’s agent. As a listing agent, if I can sell it myself at a price and terms by seller is happy with, that’s great! If I can’t then it is my decision how much compensation to offer the buyer’s agent. That’s an agreement between me and the buyer’s agent through the MLS. Regardless of who sells the house, the seller is hiring ME to sell it, and I will do whatever it takes to make them a satisfied seller.

Weirdness 3: That’s the basis for Procuring Cause, but there is much more to it than that. I’ve been in these battles before and it can get messy. The biggest thing is: “who set into motion the unbroken chain of events that led to the successful completion of the transaction?”

Weirdness 5: It is quite hard to determine upfront how much effort a particular client will need. I’d rather charge them the standard commission with the expectation that if they’re really easy to work with I’ll get them something nice for closing and/or go out of my way for them in some fashion… if they take 3X the effort I was expecting, I’ll be glad I got what I did.

michael Hoskinson September 2, 2007 at 10:22 am

Hi folks, I hate to burst your Realtor-Hating bubble but this article inaccurate in a number of ways. I’ve listed his assertion and then the truth.

Weirdness #1: Commissions are not split 50-50 by the buyer and seller agents. Somewhat true, commission splits are either set by the seller or negotiated between agents.

Weirdness #2: The Sellers pay the buyers agent to “intentionally, deliberately, professionally negotiate against them.” Any Buyer’s agent that unserstands the Code of Ethics understands he has a fiduciary duty to his client to represent them in the most ethical and honest manner, he asserts essentially that the Buyer’s agent is being PAID to negotiate against the Seller, that is just inaccurate spin.

Weirdness #3: Absent a written agreement otherwise, the Licensed Agent that first physically shows you a home has all rights to the commission should you buy it. Does not matter if you were “just looking” and wanted to pick your own agent later. This is completely false, a buyer can pick any agent he wants to represent him and is only under an obligation when they sign an agency contract.

Weirdness #4: There is no discount for “unattached buyers” in the typical listing contract, and all commission goes to listing agent. (So much for the theory that you will have more negotiating power if you work directly with the listing agent rather than using your own agent.) False again. If a savvy buyer came in with no agent he would be free to ask for a discount and by all rights he should get it. There is no conspiracy to have the Seller’s agent get the entire commission (i’m not telling you he wouldn’t take it !!)

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