More About Austin Discount Realtors and How Commissions Work
Sylvia received a call today from an Austin home owner she met with last week. He called to thank her for coming out to discuss selling his house, and told her he has decided to go with another agent – one who is going to list the home for a 1% commission and offer a 2% commission to Buyer’s agents via the MLS.
For this Seller, a discounted commission was important, and he was up front about that requirement when he met with Sylvia. We don’t offer a discount program, so we did not win the assignment. Are we angry at the Seller or at the Discount Agent? No. Would we discount our commission to this Seller if we had it to do over again and could obtain the listing? No. That isn’t our business model.
We only know full service, full tilt real estate and we are good at that level of service. We don’t know how to give anything less. For example, there is no way I could bring myself to place only 1 photo in an MLS listing and charge extra for additional photos, as many of the Discount Brokers do via their “Unbundled Services” or “Ala Carte” programs. I’d actually be embarrassed to have my listings show only 1 photo. Photos are very important, as are virtual tours, because of the number of out of town buyers who select candidate properties online. We are simply not mentally oriented toward a partial, or limited service approach, and we are willing to leave that segment of the market to those agents who see value in this approach.
Do we think this Seller made a mistake by hiring a Discount Realtor? No. Well, we hope not. We wish for nothing other than a fast sale at top dollar for his home. We are not offended or hurt that he chose a Discount Broker over us. We understand that he wanted a service product that we don’t sell, and that’s ok. Real Estate customers do have choices, regardless of what we read in the news media and hear from consumer groups.
But this scenario provides a perfect opportunity to further discuss how real estate commissions work, and what might happen with this listing when it hits the Austin MLS with a 2% Buyer Agent commission instead of the more commonly seen 3%. Will the 2% Buyer Agent commission make the home harder to sell? Maybe – but not for the reasons most people assume.
How is a Buyer Agent Commission Amount Determined?
Let’s start with the question of who determines how much a Buyer’s Agent is paid. Is the Buyer’s Agent compensation determined by the amount offered in the MLS Listing? Absolutely not. Many people think it is, but the Buyer Agent commission is absolutely not determined by the amount a Seller is willing to contribute toward a Buyer’s Agent commission.
The compensation a Buyer’s Agent receives (at least in Texas) is determined entirely between the Buyer and the agent he hires, as set forth in a Buyer’s Representation Agreement. It is the Buyer who agrees to pay the Buyer’s Agent a certain amount, not the Seller. It is the Buyer Rep Agreement that dictates the Buyer Agent’s compensation amount, not the MLS Listing.
In our Buyer Rep agreement, a Buyer agrees to pay us 3% for our services as Buyer Agent. We will receive that amount regardless of the amount offered in the MLS listing, and this is explained to each buyer we work with. We will seek to obtain payment of the commission first from the Seller, and have always succeeded in doing so, but if the Seller is offering less than 3% to Buyer Agents via the MLS listing, our Buyer will be obligated to make up the difference, or decide to pursue a different home. On the flip side, if the Seller is offering a Buyer Agent bonus, or more than 3%, we rebate that to the Buyer so that our motivations and advice can never be attributed to a commission amount.
So far this year, out of almost 30 closed deals, we’ve encountered only one listing that our Buyer wanted that offered less than a 3% commission to the Buyer Agent. The Seller on that listing offered 2.5% commission. In that instance, we wrote up the offer to include the 0.5% gap in paragraph 12 of the sales contract, where the Seller agrees to pay some of the Buyer’s closing costs, and the Seller agreed. The Buyer was going to pick another home if the Seller had not agreed. So in this case, the Seller provided the other 0.5% commission to the Buyer, who in turned paid us the 0.5% gap at closing. Our buyer was not out of pocket for the difference and the Seller didn’t actually “save” anything by offering a lower commission.
Do Realtors avoid listings that pay less than 3%?
The claim by consumer groups and others that agents will avoid the listings of Discount Brokers is absurd to me. I don’t see how they can. When a Buyer signs up with us, or any other Austin Realtor, we have the ability to set up an internet search portal that notifies the Buyer via email each day of new listings that match that buyer’s criteria. We do this for every buyer. I’m not sure what percentages of other agents in Austin do the same, but it’s an invaluable tool for us and our buyers, and it’s provided as part of our MLS system at no extra cost.
The search portal is ignorant of and unaware of the commission amounts being offered on any particular listing. Buyers will see ALL listings that fit their search parameters. For those who say that Realtors avoid or blacklist listings that pay less than 3%, that’s hogwash. The MLS technology does not allow a way for us to filter out those listings or hide them from the buyer.
The buyer sees all listings that are available and matching their criteria, and they often call us right away when an interesting one pops up new in the system, and we will show buyers any and all listings that they deem to be good candidate properties.
So, Offering a 2% Commission Does NOT Affect the Marketability of the Home?
I’m not saying that. I’m saying it doesn’t affect which properties we show or recommend. This returns us to the listing I discussed above. The 2% Buyer Agent commission could hurt the marketability of that listing, but not because of the Buyer’s Agent. Assuming the Buyer and the Buyer Agent properly executed a Buyer Rep Agreement with a pre-established compensation arrangement, the Buyer Agent is going to be paid the same no matter which listing the Buyer decides to purchase. But the Buyer’s bottom line will be negatively affected if choosing a listing that pays the Buyer Agent only 2%.
The way that the marketability of the listing can be diminished is if the buyer herself penalizes that listing because she doesn’t want to pay the commission gap that exists between the compensation she agreed to pay the Buyer Agent, and the amount of Buyer’s Agent compensation that the Seller has agreed to cover.
Just as “saving” the 1% of commission is a motivating factor on the Seller’s side, the prospect of paying the commission shortage will be a de-motivating factor on the Buyer’s side, and the buyer may be more willing to keep looking instead of forking out 1% on top of the other purchase expenses.
What if the Buyer Agent is only charging 1%, won’t the Buyer still be 1% ahead?
No, and here’s why. Most Discount Agents gain buyers by promising to rebate some of the commission back to the buyer at closing. But if you read the marketing material of these agents, they are counting on a 3% commission to fulfill the promise of a 2% rebate. Ironically, the Discount Brokerage model (on the buyer side) only works when dealing with listings that pay a full commission (I find this to be pretty funny actually). So, even if the buyer is using a Discount Buyer’s agent, the buyer has mentally already put that 2% toward her closing costs and down payment. She may even need it to be able to make the deal happen.
So, in this case, even though the buyer will not be out of pocket anything extra, she is forgoing a cash contribution to her closing costs if she selects a listing that pays less than 3%, and in effect, she is again paying the commission shortage through an unrealized cash-at-close benefit.
So no matter how you slice it, the real estate market itself puts pressure on Sellers to remain in a very narrow range with regard to the Buyer Agent commissions offered on their listings. It’s hard for any Seller, under ordinary circumstances, to depart from the herd, so to speak, with lower commission offerings. These are market forces at work, driven by Buyer behavior, not greedy Realtors trying to fix prices.
A strong Seller’s market, or a very desirable home in a hot area, may surely erase that market pressure under the right circumstances, and render the Buyer Agent commission less relevant, just as it renders the list price irrelevant in multiple offer situations. We may be in such a market right now in certain parts of Austin, and Sellers like the one mentioned herein are testing the waters to find out. I don’t see any problem with that, so long as the Seller knows and accepts the risks I’ve outlined above. I will know the market’s response for this particular listing after I see it come on the market and observe how the market responds.