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divorce real estate commissions

Page history last edited by RealEstateCafe 15 years, 2 months ago

Sixteen years after the Consumer Federation of America first called for real estate commissions to be uncoupled, predicting billions in consumer savings annually, isn't it time to move beyond blogging to develop an implementation plan? Anyone want to talk about it following session at ConnectNYC entitled:  Offer of Compensation:  MLS Role Reconsidered?


If you're new to the issue, Greg Swann has written extensively on the subject and just released a five-part consumer guide to divorced real estate commisssions. That has triggered what one observer called a "fire storm of comments" on a blog post opposing divorced commissions. If you need a quicker overview, watch The Real Estate Cafe's 90 second slideshow or scan these two articles:


Uncoupling the traditional two-sided real estate commission:

10 Mega-trends leading towards a tipping point (slide show)


Inman: Why the split compensation system should be scrapped


Inman: The end of MLS as we know it:

Let’s get rid of interbroker compensation (Part 1 of 3)


Are any NAR or MLS committees discussing divorcing commissions or any public hearings planned, perhaps as part of regulatory efforts to create a more open, competitive real estate industry?


Is it time to form an informal coalition to bring together advocates, ideas, implementation strategies, and demonstration projects to explore different ways to unbundled the traditional two-sided commission and document best practices? Here are four action items:


1. If you are interested, please add your name to this wiki or email The Real Estate Cafe privately.


2. Watch our Twitter stream, http://twitter.com/realestatecafe, for invitations to discuss the topic over coffee or drinks after ConnectNYC.


3. Add your insights into this list of mega-trends pushing the traditional two-sided real estate commission to a tipping point (part one below), and


4. Use this wiki to document existing obstacles to uncoupling the real estate commission (part two below), and


5. Develop an implementation plan in your brokerage compay, local housing market, or nationwide (also part two below).




PART ONE OF TWO: (This working draft is ready for your edits and additions. You may want to start with Part two below)


Uncoupling the Real Estate Commission

10 Trends point towards separate agents with separate fees in the near future


While the traditional two-sided commission structure is a cornerstone of more than 900 multiple listing services nationwide, ten megatrends are likely to cause the obsolete compensation system to uncouple in the near future. Separate agents with separate fees would remove barriers to price competition in real estate, opening up the opportunity for real estate consumers to save approximately ten billion dollars annually (based on recent estimates by The Wall Street Journal and others).


1. Subagency disappearing


state and trade associations, including Massachusetts, are moving away from the practice of subagency, one of the justifications historically for the two-sided commission. ADD


2. Rebate business models pressuring


LendingTree, ZipRealty, and others less well known brand names have brought rebate business models into the mainstream, and are chipping away at the two-sided commission but alone, aren’t going far enough.


3. Old and new business models experimenting


Before it was purchased by NRT, Cendant’s largest franchise, DeWolfe New England, a major real estate organization, experimented with a new business model called “DeWolfeDirect.com” which featured separate commissions for buyers and sellers. Their now-defunct website read:


“Unbundled Pricing brings innovation to the cost of selling or buying a home. Selling a home requires a certain investment, as does finding and buying one: equal tasks with equal expense. Curiously, traditional commission models require the seller to pay for both of them. We believe it would be more logical if each paid for their own part of the transaction, so we treat them separately. We also use a scaled percentage model that reduces the rate for higher priced homes. It is equitable, straightforward, honest, and revolutionary.”



ADD: Zillow.com, a well-funded auction model, will bring even more revolutionary changes in 2006. Little is known about their business model, but since they will not be dependent on the MLS for listings would it be necessary for them to require a two-sided commission? Another innovative firm already lists each property with two prices: one with a cobroke fee and one without.


4. Listing entry only proliferating


Hundreds of web based services are listing properties in MLS listing for a flat fee, ranging from under $500 to approximately 1% of the sales price. MLS rules which require these sellers to offer shared compensation to cooperating agents are counter productive for their cost-conscious, do-it-yourself customers because they undermine their ability to maximize savings.


5. 103% to 107% loans financing

These innovative loans allow buyers to finance up to 3% of their closing costs, and pay off another 4% in consumer debt. It is only a matter of time before one of these innovative loan programs are expanded to allow buyers to finance their buyer brokerage fees.


6. Banks competing


If the Fed and US Treasury allow banks and financial holding companies to provide residential brokerage services, a proposal first made by Alan Greenspan in 2001 and endorsed more recently by the Brookings Institute, salaried bank employees will bring a new level of competition into the market. One of their first innovations is likely to be uncoupled fees for buyers and sellers, financed independently. Even if their entry into brokerage continues to be delayed, the anticipated new wave of foreclosures will force banks to experiment with new business models which minimize transaction costs and maximize seller equity — two things consumers want and need.


7. Fee-for-service unbundling


Whether or not banks provide brokerage services, the fee-for-service movement in real estate is maturing and a recent NAR study called “menu of service” or “a la carte services,” like those promoted by the National Association of Real Estate Consultants (NAREC.com), business models of the future.


8. Widespread consumer dissatisfaction


Two years ago, CBSMarketWatch found that consumers ranked real estate brokerage among the most overpaid jobs.


Find link to CBSMarketWatch at http://www.realestatecafe.com/recall/fees/overpaid.html


More recently, a similar poll by CNN/Money found that 83% of respondents felt that agents were overpaid, link to real estate cafe’s blog post on $60 billion question.


9. Regulators looking at barriers to competition


While one Congressional study of competition in the real estate industry overlooked it, another private study conducted by the Brookings Institute made repeated reference to the need to separate the two-sided commission (get exact quote). Through public comment and private correspondence, regulators are seeking recommendations on how to uncouple commissions.


10. Home equity falling with real estate bubble


As home prices stagnate or fall in the coming downcycle in real estate, sellers will increasingly seek alternative business models that maximize their home equity and minimize commissions and fees on both sides of the transaction. (link to FSBOBlog article?)


Why should sellers who are paying just $500 to flat-fee MLS listing services be required to pay a 2.5 to 3 percent cooperating fee to a buyer’s agent?


Why not let buyers hire their own agents and finance their own fees, inside or outside the sales price, rather than taking more money out of the sellers’ pockets, particularly those in housing markets where prices are falling?


Perhaps the time has come for such a basic change.


Fifteen years ago, the Consumer Federation of America called for the reform of the two-sided real estate commission, and predicted that uncoupling the traditional 5 to 6 percent commission could save consumers billions of dollars per year.


Eight years after John Tucillo, the former chief economist of the National Association of Realtors, predicted that “The next major revolution in real estate will be fee-based services replacing the blanket commission pricing that has dominated the industry for so long.” (Cover story, National Relocation & Real Estate, May 1997)


Five years ago, surveys by Gomez Inc., a consumer research firm based in Waltham, MA, revealed that just one in four buyers and one in three sellers wants full-fee, full-service brokerage services.


Commenting earlier this year on a forum for flat fee listing services, a traditional real estate agent called the existing commission structure is “outdated” and wrote: “Stop telling me how much I must work for and we can all get along. ...what I proposed is eliminating our fees from the actual house price! Only then will the sellers and buyers truly know how much we are all worth.”


Given the progression above and tipping points lining up, regulators and policy makers should ask why the industry is still built upon the traditional two-sided commission structure and what are the obstacles that need to be removed before buyers and sellers can hire their agents, determine what their services are worth, and compensate them independently.


Allowing buyers and sellers to finance their brokerage fees independently would make that possible. Changes at the national policy level, particularly at Fannie Mae and Freddie Mac, can make that happen across the country almost overnight.


Meanwhile, innovative companies like The Real Estate Cafe are eager to continue experimenting with an offer of compensation (that meets existing MLS requirements) called “BYOB” or “Bring Your Own Broker” without fear of having their clients’ listings boycotted.


Hopefully our efforts to bring about that reform will be protected by regulatory actions of the FTC / DOJ and applified by the Consumer Federation of America (CFA), which looked at anti-competitive practices in residential brokerage for the first time in more than a decade at their annual financial services conference on December 1, 2005.


Having first proposed “decoupling” commissions nearly 15 years ago, perhaps CFA’s reengagement now will be enough to push this long overdue, money-saving reform past the tipping point and into the pockets of millions of homebuyers and sellers annually across America. Billions of dollars are at stake.






Article by Erle Rawlins III, one of the most well respected real estate consumer advocates in the country, discussing barriers to uncoupling the commission and the role the regulators and Fannie Mae can play to change policies to bring about the change.



One of the most significant changes that can be made to enable home buyers to work directly with their own “buyer’s agents” is to modify existing lender requirements regarding fees (real estate commissions).


As you know, real estate fees CANNOT be rolled in to the purchase price for loan purposes. In the event an informed home buyer consumer elects to engage the professional services of a buyer’s agent for assistance in acquiring a real estate property, that buyer’s agent must usually rely on the compensation offered by the listing brokerage company. This “incentive” is not necessarily “consumer friendly.”


This is clearly not in the consumer’s best financial interests, and tends to disproportionately set commission amounts that may actually have nothing to do with the services provided or received. In the wake of increased “discount” or reduced listing service fees, home buyers can benefit from the usual fee savings which add little to the value of the property.


Consider the sale of a property listed for $100,000 with a 7% real estate brokerage commission charged to the seller. In a co-brokerage transaction, at the full price of $100,000, the seller “nets” (before other closing charges) $93,000. Assuming the sale occurred on the first day of the listing that $7,000.00 fee would equate to an hourly rate of $700 per hour if the entire transaction took 10 hours (a simple transaction, without complications, can probably be handled in that amount of time). At a charge of $100 per hour, the seller’s financial obligation would be reduced to $1,000.00 or a savings of 86%.


More importantly, the fees paid for the service would equate to the service actually received…a concept not promoted by the real estate industry.

Let’s assume, for purposes of illustration, that the $100,000 house is a FSBO and the seller is not offering any fee or other compensation to any real estate professional who generates the buyer for the property. A buyer, represented by a buyer’s agent wants to pursue the purchase of that FSBO property. That “buyer’s agent” would then have to seek the fee from the buyer client, “steer” the buyer to another property, or work pro bono.

Not usually a problem, assuming the buyer’s agent is not traditionally fearful of requiring the fee payment from the buyer client, but there’s another problem. Assuming the buyer client hasn’t sufficient funds to pay “out of pocket” for the brokerage services used needing, instead, to conserve as much cash as possible for the down payment and closing expenses.


The purchase contract can be written a number of ways to either increase the price high enough to allow the seller to pay the fee cost, or to require the seller in some other way to make the payment. These scenarios may actually hamper negotiations to the detriment of the buyer client, especially if there may be multiple buyers bidding for the property.


The cash strapped buyer, thus, could be disadvantaged somewhat attempting to negotiate the fee payment through the offer. Instead, if the buyer can pay the brokerage fee in some other manner, it may better enable the buyer to successfully negotiate for the property.


The easiest way for this to occur is to “roll in” the fee expense, as an acquisition cost, to the price for loan purposes. In other words, the buyer’s obligation to pay the buyer’s broker a fee for services rendered in connection with the purchase of the property should be a part of the overall acquisition expense. Thus, a purchase of $95,000 with the buyer’s obligation to pay $2,500 in fees to the buyer’s broker should be treated as a gross purchase price of $97,500 for loan purposes. The buyer who may seek 90% financing could then secure a loan of $87,750, instead of a 90% loan on $95,000 purchase and then having to pay the $2,500 fee “out of packet” in cash.


But there’s a real problem with this choice. Mortgage lenders will not currently allow the “fee” to be included as an acquisition cost for loan purposes. This policy works “against” the consumer (both buyer and seller) and relegates all consumers to what essentially is a “Realtor-friendly” policy of securing and maintaining a compensation system that is antiquated by historic practices.


In the event home buyers are allowed to roll in these “acquisition” costs, so that the “system” can be changed to allow home buyers to negotiate without the added expense of inflated commission amounts or fees paid where actually services aren’t supplied, then the cost of housing will likely decline somewhat. Note this is intended to cut the cost of housing (acquisition and closing costs only), not a decline of value. In fact, with the reduced costs, consumers may easily benefit by having greater “net” dollars.


Thus, in order to create this “revolutionary” concept and to save consumers unnecessary expenses, mortgage lenders should immediate change lending policies to permit these acquisition costs to be included for mortgage loan purposes.


Most likely, the real estate industry will aggressively oppose any such lending requirement change, as such change could effectively eliminate or greatly reduce the “listing brokerage” concept. To attack real estate commissions in this way can possibly bring about the wrath of the entire real estate industry typically bent on protecting this “sacred cow” and refusing to acknowledge that there really is a direct correlation between services provided and fees earned.


Make no mistake about it, while it usually requires no more time to sell a $100,000 property compared with a $1,000,000 property, the expectation of making ten times as much in commissions for the more expensive property can drive a lot of greed and protectionism. Duh…but how does the consumer benefit from this excessive largess?


The time is right to insist that mortgage lenders modify their policies to allow these fees to be rolled into the purchase for loan purposes. And yes, this policy change will also result in the way the appraisal business is conducted, as the total acquisition cost AND purchase price will have to be the benchmark for arriving at “market value.” Such difficulty shouldn’t be a concern as the bottom line should be—what is in the best interests of the home buyer consumer?


Erle Rawlins III, Broker

Real Estate Consumer Consultants

Empowering Home Buyer Consumers

214-363-7400 Office

214-893-0890 Cell




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