Buyer Agency and Fiduciary = Nonsense June 10, 2007
“In a market flooded with unsold listings, she says, a 3 percent co-op split “is always going to attract more attention than 2 percent. We call [inadequate splits] ‘getting eliminated at the office.”
Just another example of why the argument that fiduciary duties and buyer agency cannot co-exist based on the current method of compensation…and another reason that fiduciary agency duties were eliminated in Washington state.
What amazes me is that agents continue to blog away about the value they bring to their clients based in part on the level of their ”fiduciary” duties, when examples like the above continue to be part of the industry.
If the above quote is true and commonplace in the industry, isn’t it about time we eliminate this fictional notion of fiduciary from the nomenclature of the industry?
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- Posted in : General Real Estate
- Author : Russ Cofano
Comments»
Russ, it is complete nonsense. There’s a better word for it, but nonsense will do. I read that article in the bull-dog edition yesterday and just laughed—I wondered if it struck anyone else else similarly and I guess it did.
Russ,
If you only have time for one more client, and you take the one where you will make $10,000 over the one where you will make $7,000, does that mean you will not offer fiduciary services to the $10,000 client? If there are 100 properties on market and only 5 are less compensatory, why does that fact alone negate the fiduciary structure?
How many Redfin buyers will pass up houses that don’t allow for any cash back in the offering? If the buyer’s expectaton is to get 2% back, and they can’t, might they pass on that house?
That being said, of the properties my buyer clients were considering last week, more than half were 2%, one was 2.5% (the one that went into escrow) and the rest were 3%. None were over 3%. The buyer agent fee agreed to between me and the client was less than all of them. So it is the buyer’s decision whether or not the fee impacts his decision, not mine.
If almost all of the licensees are REALTORS, then almost all have fiduciary duties, even if the State of WA soesn’t hold them to that standard. Correct? So WA reducing the standard has virtually no effect.
Ardell
Are you really defending the ELIMINATION of listings from possible showings to a buyer based on the SOC as an example of a fiduciary duty? I hope not.
You said, “If you only have time for one more client, and you take the one where you will make $10,000 over the one where you will make $7,000, does that mean you will not offer fiduciary services to the $10,000 client? If there are 100 properties on market and only 5 are less compensatory, why does that fact alone negate the fiduciary structure?”
First, this is not an example of choosing between clients, this is eliminating houses for A client. How do you know that the buyer’s dream house is not one of those 5 that was eliminated from inventory based on the payday? More importantly, does the Buyer know that agents are eliminating houses from inventory based on the payday?
You asked, “How many Redfin buyers will pass up houses that don’t allow for any cash back in the offering? If the buyer’s expectaton is to get 2% back, and they can’t, might they pass on that house?”
This is not a full service v. limited service issue. If the buyer chooses to pass on the house, that is the buyer’s choice. As long as the buyer is making the decision, no problem.
You said, “If almost all of the licensees are REALTORS, then almost all have fiduciary duties, even if the State of WA soesn’t hold them to that standard. Correct? So WA reducing the standard has virtually no effect.”
Whether the Code of Ethics requires a higher standard of care is irrelevant if the accepted “standard of practice” is to ignore that higher standard. Do you really think that the local Assn of Realtors in the area of the lady who made that quote is going to bring an ethics enforcement action against her?
The fact remains, Ardell, that an agent cannot ELIMINATE inventory based on SOC and call themselves a fiduciary.
-Russ
Guys,
You are losing it, look at the last 10-20 posts, you seem to be writing for journalists, other Agents and bloggers instead of potential or ex customer’s main interests.
Just thought, a nudge might be worth it.
Amit C
PS: Sorry Russ, there are no place to comment on the whole blog direction, so I just picked this entry.
Russ,
Read the quote again. The person making the quote is not the agent for the buyer, it is the agent for the seller.
You agree that it is OK if a Redfin buyer, or any buyer, passes by that house because it offered 2% and not 3% and the cash back is not “as expected” by the buyer.
So you agree with what the agent said. More buyers may come at a higher offering and fewer buyers may come at a lower offering. It is the duty of every seller’s agent to advise what the impact might be. The seller’s offering is to attract buyers. What the buyer agent gets paid is then the between the buyer and the buyer’s agent. Seller’s simply set the financable cap.
Since it is against the code of ethics for the buyer agent to negotiate the fee with the seller, the buyer agent can only negotiate with the buyer. Once you agree that it is every buyer’s right to choose the house with the higher offering, you agree with the agent quoted.
I don’t think there are many customers left at this point - at least there won’t be in a few months.
Ardell,
Read the article, read the quote. She may be the listing agent but she is saying that listings that don’t have the “right” SOC get eliminated. They don’t get shown. That you want to provide an “incentive” for the selling agent to show the house.
Yes, Ardell, I agree that what the agent said actually does happen in real estate offices across the country. There is, however, NO argument, none, zip, zero, nada, that not showing a listing that MAY interest your buyer client because of a lower than STANDARD SOC is carrying out a fiduciary duty, UNLESS the client has directed the agent to do so.
So tell me Ardell, how many buyer agents sit down with their clients and tell them that they are going to ELIMINATE listings from possible showing if the listing does not have a certain SOC?
-Russ
Russ,
Buyer consumers have come to rely on the seller to provide for the payment of their buyer agent within the sale price. More and more, buyers are focusing on the seller’s offering. The quote does not make a distinction between whether the buyer agent, or the buyer, is making the decision.
When speaking with buyer clients about the buyer agent fee, many want to know what they can expect to remove from that price, or have returned as a cash back, after negotiating the buyer agent fee with their agent. I had this discussion twice last week with buyer clients. We agree upon the fee for my services, and then they ask what will they “get back” after that fee is charged. I tell them it depends on what the seller is offering, and I won’t know that until they choose a property to purchase. If the seller is offering exactly the fee that we agreed upon, they get nothing back. A buyer may look at two houses, and like them both the same. They may opt for the house with the higher offering, so they can use the difference to help pay their closing costs.
It is the duty of the seller’s agent to advise the seller regarding the impact of their offering, and how that decision may affect their ultimate goal. If the buyer needs to pay their buyer agent, because the seller reduces or eliminates the buyer agent fee, it is important for the seller to know how that may affect the buyers decision of which house to purchase.
Until and unless the buyer pays the fee, and does not rely on the seller to provide for that fee, every seller must be advised of the possible consequences of their actions.
The advice to a seller regarding that offering is never “it doesn’t matter”. If the seller offers $500, and the buyer then has to make up the difference between what the seller offered and what the buyer negotiated with their agent, buyers may choose a house where they do not have to additionally compensate their agent. And that is very important for the seller to consider.
The answer to “How much should I offer in the mls to insure the maximum exposure for my house” will never be “it doesn’t matter”. Whether it is the agent’s decision or the buyer’s direct decision…size matters.
“Do you really think that the local Assn of Realtors in the area of the lady who made that quote is going to bring an ethics enforcement action against her?”
As the agent for the seller, there is no ethics violation in her statement. The seller is entitled to know the possible consequences of their actions, and whether those decisions support their ulitmate objective. It is the seller agent’s duty to provide all possible scenarios. The agent is doing her job by noting any and all possible consequences of the seller’s decisions, same as when they ask if they they should paint the red walls a neutral color.
Many decisions affect the number of people who will come to see, and eventually buy, the seller’s property. There is no ethics violation in giving best advices regarding potential consequences of each and every action the seller takes to make his property more marketable, including but not limited to, the mls offering.
What a Seller cannot control:
1. Location
2. Competitition
3. Market Conditions
What A Seller can control:
1. Condition of the house
2. Terms (incuding commission offerings)
3. Price
Ardell
My post was not about listing agents nor sellers. It was about fiduciary duties, or the lack thereof, carried out by buyer agents who choose not to show homes to their buyer clients based on the SOC.
I’m not saying that buyer agents should not try to maximize their earnings. They are business people and business people try to make money. Nothing wrong with that. It is, however, impossible to do so when they don’t have a direct economic relationship with their client AND they want to call themselves a ‘fiduciary’. It does not work and no attempt to obfuscate the issue with arguments about sellers and their agents will change that fact.
Russ
Russ,
Your quote is from a listing agent talking to a seller. If you ever get a quote from a buyer agent saying they won’t show a house if the fee isn’t a certain amount, we can talk ethics violations and lack of fiduciary services.
All you have now is a quote from a seller’s agent, and the agent is correct in her advices to the seller.
I don’t see anything in the article about showing property, it’s about sellers offering more to get their home sold.
Greg,
Have you seen higher commissions working though? Would it compensate for a poor location? I haven’t seen it being effective from the seller’s side, have you?
Ardell,
As far as HIGHER commissions, no. I think most just think the house is overpriced.
There are 3 forms of depreciation:
1. Physical Deterioration
2. Ecomonic Obsolescence (located next to a freeway, strip mall, airport, etc.)
3. Functional Obsolescence (bad functional design, dated, steep driveway, etc.)
In my opinion, all three forms are best solved with price. The consumer always feels the need to pay less for a depreciated property, because one day the Buyer will have to sell it. However, the commission offered by the Seller should still be competitive (not necessarily more), as these properties are often more challenging in the process.
Personally, I think the Seller is best served pricing at the “right”price and offering a commission competitive to the market.
Can anyone else (besides Ardell) provide some guidance on what this means in the context of the article?
“We call [inadequate splits] ‘getting eliminated at the office.”
Exactly what does this refer to?
-Russ
I agree Greg. Most of the high SOC offerings I see in flyers are on New Construction. What’s your take on that?
Hi Russ,
I read Ken Harney’s column in yesterday’s Seattle Times, too. In the context of the article, I believe Ken is referring to buyer’s agents making a decision to show homes based on higher commission split while the agent is still in the office, selecting which homes to show. But why don’t we ask the author of the article?
I just sent him an email.
Ardell,
My take is sometimes the builders want us……and sometimes they don’t!
If the builder is sitting on excess inventory, then it might make some sense…..however,
I would rather see a market competitive commission and more buyer incentives.
Many agents are now requiring Buyer Agency Agreements to be signed before showing a buyer a property. On the NWMLS Agreement, one must indicate the commission due the Buyer’s Agent at closing. Buyer is credited with the amount the Seller is willing to pay in compensation, with the stipuation that if the Seller paid commission is not adequate, the Buyer must make it up out-of-pocket. Since most Buyers are loathe to do that, and are quite verbal in their unwillingness to do that, those houses risk being “eliminated at the office” and not shown.
(P.S. to Amir: I think I would call this an “industry blog”. Though it might have started out for customers, buyers and sellers, I’m guessing they’re already long-gone, except for a few stragglers who wander in by accident. Those who stay are called “Ardell’s Customers and Clients :))
Hi Russ,
I’m happy to join in here now that I’ve had a chance to read your article and the one referenced. With respect to the lady’s comment about being “eliminated” she is putting out there a comment I’ve heard from many other agents in various forms. An example is below:
I had to put an agent from Renton ‘in her place’ so to speak in one conversation I had with her about trying to cooperate on selling 2 separate houses in the same cul-de-sac out in the Bear Creek area of Woodinville. I figured rather than just being competing houses in the same area we could discuss pricing factors and come up with a great marketing and pricing strategy for both of our clients. She declined to have this discourse with me and later when she saw my listing and the SOC offered (it was 2.5 for this house) she dared to say that agents in the area would boycott my listing because of it and then proceeded to mention that in her office “they talk about this all the time.” My comments back to her were somewhat as follows: 1) If your office talks about this “all the time” then they should quit because that is potentially in violation of the Sherman Anti-trust laws, and you should cut it out, and 2) if an agent isn’t willing to show the listing to a buyer because of the SOC they are very likely in violation of local (state RCW) licensing laws which require agents to put the client ahead of the licensee. http://www.leg.wa.gov/RCW/index.cfm?fuseaction=chapterdigest&chapter=18.86
For me, to put my client ahead of myself includes that if the SOC of a listing is below a typical fee I would charge for myself (if I were the listing agent) then I go ahead and show that property anyway, but only if it meets the requirements my client has given me for their home search. If an SOC is particularly low (I saw one at a flat fee of $3000 the other day) then I will let the client know this. The state requires that I disclose my compensation anyway, so what does it hurt to discuss it with the client? We bring up issues of compensation at first meetings with clients so that we can have a comfortable discussion as it may come up in home searches, including if a FSBO will not compensate an agent for bringing in a willing and able buyer. I’ve taken plenty of lower SOC’s or flat fees and that’s fine - I care more about making my client happy and having them come back to us again in the future, or perhaps refer their friends, family, colleagues, you name it. I’ve had clients fight for me on behalf of a commission they believe I have truly earned (God love ‘em!) and that they want to see me receive as fair compensation for my work on their behalf. I’ve also been on the other side where an agent or builder is offering a larger SOC (such as 4%) and, again, we inform the client of the difference and in many cases we have given that “windfall”, or a portion of it, to the client as a credit at closing to use toward their closing costs.
I don’t agree that Buyer’s Agency is in and of itself ‘nonsense’ but I do believe that better discussion within the rank and file of the industry could help alleviate the kind of commentary you posted here. In my team we have a 5 page document that outlines our duties and the terms that the State of WA requires us to disclose and discuss with our clients. We find that this makes for a solid footing and opens up communication so everyone knows how to work well together and for the best benefit of the client.
Cheers,
Reba
oh, and as a footnote, I sold the Woodinville house in about a week for full price and with no issues from the buyer’s agent about the compensation offered. The selling price was above the price this woman thought I could get for the house too.
Most agents are requiring Buyer Agency Agreements that specify Buyer Agents compensation. Agency agreements include agreed-upon compensation by Buyer to Buyers Agent, with credit given to any commissions paid by Seller. If Sellers compensation does not cover the Buyers Agents compensation, then the Buyer would be required to make up that shortfall at closing.
Most Buyers make it clear that they are not able or willing to make that payment. Many are just barely scraping together a down payment, let alone coming up with anything extra at closing. Therefore, those properties that pay a low or non-existent Buyers Agent compensation “get eliminated at the office” by order of the Buyers or by the agents following the Buyers preference or request.
Regarding this quote in the Seattle Times article:
“In a market flooded with unsold listings, she says, a 3 percent co-op split is always going to attract more attention than 2 percent. We call [inadequate splits] getting eliminated at the office.”
This is only one agent’s perception–and there may be others that share this view, but this person does not speak for all agents, or brokers. She certainly does not speak for me. I am an Exclusive Buyer’s Broker, and my only concern is showing properties according to what my clients need, and can afford. I earnestly make it a point to maintain fiduciary duties with my buyer clients–and because of this–I don’t take listings.
It is not right, nor is it fair, to make sweeping generalizations about buyer agents, because it is a fact that not all real estate agents–let alone buyer agents–operate in the same way, nor do they all maintain the same values.
I guess I’ll second what Suzette said. I know there are agents out there that do this, but it seems to me that if you are a buyer’s agent, your duty is to that buyer and your buyer’s needs really should come first. Therefore, if the house meets the client’s needs in all respects it should be shown. If the buyer likes it, they are the ones that should be making the decision whether to buy or not buy. Not the agent.
I guess my take on things is that if you are focused on service, rather than on the money you might potentially make, you will always be rewarded in some fashion. Maybe you will get great referrals and a raving fan for a client. Maybe you will be well compensated. Maybe you will luck out and have both outcomes from the same transaction. But, I do think that if you keep the focus on the client and take a long-term relationship-based approach, there is a definite pay-off even if maybe you might make a little bit less on this one transaction.
I always try to keep in mind that my goal isn’t just to have this one closing with my client, it’s this closing and the next one and the next, and the word of mouth that happens when your clients know you really do have their best interests at heart and that you provide great value through the work that you do for them. That doesn’t happen when all you care about is the check.
(One other thing I’ve noticed around my office anyway is that while there is a lot of talk about how crummy it is to pay a low commission split, I do think that it’s mostly talk. MOST agents out there don’t eliminate a property just because of that. Often, though, the commission is symptomatic of other issues that may exist with the property. For instance, most of the properties I’ve seen where the SOC was less than 2.5% were in bad condition or had other issues. They are also often overpriced. So, it’s not the commission that gets them eliminated it’s the fact that compared to other properties on the market they don’t make the cut. There are exceptions, of course, but in my observation these things do seem to go hand in hand.)
I will point out that the writer spliced a small piece of a quote from the agent into his own wording there. The entire sentence is not a quote from the agent, and there’s no way to tell how the writer spliced in her quoted phrase vs. how it was contained in context originally during the interview. Same thing happened on 60 Minutes.
The only method I have found to absolutely guarantee that I do not in any way use the reduced commission as a criteria, is to not look at it until after the buyer chooses to purchase it. Then if the amount affects the buyer and not me, I need to discuss the impact on the buyer with the buyer, before the offer is written.
As Marlow pointed out, if the buyer has indicated that they are not interested in ANY property where the seller’s offering is less than the price agreed upon between the agent and the buyer, the agent could be following the buyer’s instructions when eliminating it at the office. However I would NOT eliminate it, as I never require the buyer to compensate over and above the offered amount, even if it is less than the amount we agreed to.
That could change if we see more dramatic reductions, but so far it has not been an issue. I have only had it happen once.
Given I will never let the commission get in the way between a buyer and seller, nor will I let a buyer lose a house that they want, if the difference is less than the commission, there is no need to eliminate property based on the offering.
Reba
Your comments are right on. I am not saying that buyer agency is nonsense. I support buyer agency 110%. However, there is an unavoidable conflict with true fiduciary duties if one lets the SOC govern their behavior.
Marlow,
I have to disagree with the comment that “most” agents are requiring a buyer agency agreement. If that were the case, then this issue would be largely moot. I did the Battle of the Barristers last week and asked the crowd of 100+ if they routinely got Buyer Agency Agreements signed by their clients. Roughly 10-20% of the people raised their hands. It may be “most” in your office. It is the opposite in the overall industry.
-Russ
—–Original Message—–
From: kenharney [mailto:kenharney@earthlink.net]
Sent: Tuesday, June 12, 2007 7:02 AM
To: jillayne@ethicallending.org
Subject: Re: question regarding yesterday’s column
What Fairweather was saying is that, in her opinion, a buyer’s agent with dozens of houses to potentially show a client, would be more likely to show the houses with the full co-op splits, ie, 3 percent, over discounted splits. Ken
Hence, breach of the fiduciary duty to the buyer unless the buyer, in advance, authorized such “elimination” of otherwise desirable properties.
-Russ
By the way Jillayne, thank you for contacting Ken!
You are welcome!
[...] It’s very understandable how an attorney/client relationship can exist within the meaning of fiduciary, but how about a Realtor/client. The disparity is that most attorneys’ I know are paid by the hour. Paid well too, I might add. Real estate agents are paid upon the successful close of escrow. Commission based sales are predicated upon someone buying something. Evidently the state of Washington saw the conundrum and eliminated the fiduciary relationship a Buyer has with an agent, as outlined in Russ Cofano’s post. [...]
I own and run an exclusive buyer brokerage holding no listings at all. The real issue is co op commissions versus separately negotiated commissions on each side between representing agent and client, not co op equals a invalidation of fiduciary duties/integrity.
I thought the article was pretty factual and interesting. That you could take the one quote and apply it to an entire industry is remarkable. To preclude any concept of this very situation I always show my clients the full listing sheet which discloses the BAC split. Of course I could selectively remove lower BAC listings from the batch, but with today’s savvy computer wise client that would be foolish. They are likely to find that same listing on their own if it indeed matches their needs and then discover the lower BAC when they ask to see the house. Hardly worth the risk of losing a few hundred dollars and future referral clients. If an agent is this desperate or greedy they will certainly not be long for the industry anyway, especially in these tougher market times.
My average sales price is 6.32% below the list price. So I normally save my clients, who are really paying the commission anyway since they provide all the money, close to the entire commission. Whether I was supposed to get 2% or 4% becomes irrelevant. But that fact that my clients appreciate my service and my integrity means they will send me referrals, making me more money not only in additional sales but in money saved not having to throw it at marketing.
Lets get to the real issue-co op commissions. I believe we should do away with co op commissions and negotiate our side with our clients. The listing agent negotiates their best agreement and I negotiate mine, eliminating the co op issue all together. But I say this more from the aspect of the “limited” or “dual” agency situation that arises at the gleeful salivation of the double sided agent now getting paid double for exclusion form fiduciary duties and no more real work. Lets attach the commissions directly to the client side. This is the real issue.
Russ: I think your point is well taken and we can file it in with all of the other conflicts of interest that occur in a real property transaction.
Someday someone will sort this all out, or not.