Getting Paid Now and in the Future (Part 3 of 5): Sellers
The crux of the recent/current class action lawsuits against NAR (and all of the major national real estate firms) began with a simple notion: real estate owners/sellers who felt they overpaid broker commissions (typically 5-6% total) because the listing agent and selling agent commissions were lumped together in the listing agreement (and subsequently paid out at closing via the seller’s settlement statement).
Wait a minute, what? Isn’t that just SOP (standard operating procedure)?
Yes, our Colorado Real Estate Commission form for listing property (aka The Exclusive Right to Sell Listing Agreement) specifically includes a blank for the “total” broker commissions to be paid, and then a separate blank for the amount to be deducted and paid to the selling broker (aka “buyer’s broker). It’s been SOP for the seller to pay out both commissions in the past…but don’t be confused…it’s the buyer coming to the closing table with the funds to pay for the purchase of the property, and also ultimately all of the ancillary costs such as real estate transfer taxes, closing fees, broker commissions, etc.
Just because the listing agreement specifies the seller paying both sides to the brokers, and the settlement statement shows the seller paying both the listing and selling commissions doesn’t mean that sellers have been getting taken advantage of…it’s realistically just the way the U.S. (and specifically Colorado & most other states) real estate listing agreements and transactions have functioned for decades. There are some states, and many countries, where the buyer has traditionally signed a commission payment agreement with “their broker” and the seller signs a listing agreement to only pay the listing agent.
Think about the math, for example:
Colorado SOP:
$1,000,000 purchase price (paid by the buyer at closing, it doesn’t matter if a loan is involved)
6% total broker commissions (3% to the listing agent and 3% to the buyer’s broker) = $60k
Net to the seller = $940,000 (obviously I’m ignoring other closing costs and settlement pro-rations for the sake of simplicity)
Seller pays the listing agent, Buyer pays the buyer’s broker:
$970,000 purchase price
Buyer is paying the buyer’s broker 3% = $30k (Yes, 3% of $970,000 is actually a little less than $30k but for ease of the example it’s pretty close)
NOTE: The buyer is paying the same amount as the example above, in this case $970k to the seller and $30k to the buyer’s broker = $1,000,000
Seller’s settlement statement has 3% going to the listing agent = $30,000 (no change to what the listing agent is paid)
Net to the seller = $940,000 (no difference in the net to the seller from the example above!)
In the two examples above the buyer is coming to the closing table with the same amount ($1,000,000) and the seller is leaving the closing with the same net amount ($940,000). The listing and selling brokers are getting paid the same amount ($30,000 each).
So what’s all the fuss about?
There’s some dialogue (and arguments) that the buyer’s broker won’t be successful in negotiating a 3% commission if the buyer is actually paying (instead of the seller)…but I would like to point out that the buyer has always been paying both sides of the commissions…and it’s just the optics on the settlement statement that change (and of course if a loan is involved how the lender treats financing broker commissions – see Part 2 of this series from yesterday). And more importantly, the buyer’s broker will get paid whatever amount the buyer feels is worth the value their broker creates – you already know this…know the business, know the market, create value…you can do this!
Regardless of which side pays, and how much, what I want us all to focus on is serving our clients in the best way possible…because that is what will lead to your greatest opportunities for professional and financial success over the long run.
Going forward I encourage you all to consider the following when it comes to listing properties:
Be abundantly clear with every listing agreement and seller that the seller is not obligated to offer a co-op commission, this has been and will continue to be optional
Also be clear that offering a co-op commission is “typical” and SOP in our market area
Clearly understand and be able to communicate the benefits of offering a co-op commission – i.e. the proven fact that buyer brokers are more likely to show properties that offer a co-op, and are in fact more likely to show properties that offer a higher co-op than listings that offer “below market” co-op commissions (even though this is often a subconscious decision, it’s just how market forces and psychology works) – if you want to dig deeper and geek out on this here’s an article that links to a study: Commission-Based Steering Study
Make a point of separating (or bifurcating) the listing commission from the co-op commission
I see this as a great opportunity to win listings at a 3% commission (instead of fighting for 6%)…then have the conversation about what the seller wants to offer in terms of a co-op commission to the broker who brings the buyer (including the listing broker, if they represent both sides)
Be prepared to discuss the possibility of offering a 0% co-op commission, and the positives/negatives about that approach.
Signing listing agreements that only pay a commission to the listing agent…think about the conversation when you go to your next listing appointment and you let your seller know you’d only like them to sign at 3% instead of 6%. Sellers are getting accustomed to brokers offering discounts at 5 1/2%, 5% even as low as 4%, particularly in the situation where an agent represents both sides of the deal. You will be armed and ready to only ask for 3% and only paying your commission. That’s powerful right now and if we are ahead of the curve, you will find more success signing 3% listing agreements.
Know the business and be able to pitch your value as a listing agent at 3%. After you’ve successfully had that conversation you can then move on to an entirely different conversation about what/why/how much for a co-op commission. This may sound obvious but it’s a nuance that is different than how most of you have been approaching your listing conversations in the past, and it’s this difference that will enable you to set yourselves apart from the commissions toilet bowl that our competition is getting flushed down by not being able to articulate their value proposition.
There will be much more to come in the near future regarding potential changes to our listing agreements, required practices for representing sellers vs buyers and general talking points & opportunities for you to be successful with winning listings under the “new paradigm” of our business. Rest assured we (ASSIR) plan to:
Provide regular education opportunities regarding seller listing agreements and seller/buyer broker commissions
Evaluate the form listing agreement broker commissions section and determine if we should have a custom clause to better address how commissions are paid to each side
Continue to offer our staff expertise and support to your transactions and issues that may arise
One last point: When it comes to the opportunity to represent both sides of a transaction I think teams, partnerships and co-listing brokers will have a natural advantage over individual listing agents going forward. When more than one broker is on the listing agreement it will be easier to amend the listing agreement to allow one broker to continue to serve as a listing agent and the other broker serve as a buyer’s agent – keeping both clients’ interests solely in focus, and financially having the opportunity for both brokers to reap the benefits of both sides of the sale.
