When a Real Estate agent takes a property listing, there are always two things involved: 1) a small mountain of paperwork, and 2) Sales Commission, to be divided between the Listing Agent, and the Buyer's Agent.
Now the logic behind dividing the total Sales Commission between the Listing and Buyer's Agents is simple. The Listing Agent is compensated (paid) for the work of listing the property: the paperwork, the photos, the yard sign, the print and/or Internet advertising, and all of their time involved with the process. The Buyer's Agent is compensated for working with the buyer: driving them around and showing properties, perhaps working with a Lender to streamline financing, negotiating an offer on the property, and helping the Buyer through the tribulations of the Escrow process.
No big news here. And overall, probably an equal amount of work on both agent's sides. But another Nefarious Real Estate Practice is catching on here in Skagit County. And, while legal, clearly steps over the line of 'right and ethical.' Worse: many owners listing their homes for sale don't even know it's happening to them!
Important note: All of the following numbers and amounts are imaginary. They are not the result of myself contacting other agents to discuss Real Estate Commissions. That’s wrong, according to the Sherman Anti-Trust Act passed in 1890. Instead… all of the following comes from my reading the HUD statement at the close of Escrow. The HUD statement clearly states the disbursement of funds at the close of a Real Estate transaction. I have derived all of the following from my personal review of HUD statements that I’ve been involved with. Right? Right.
In the recent past, a straight percentage commission was common here in Skagit County. Pick a number… 5%, 6%, 7% … the actual number doesn’t matter. And that commission was divided between the Listing and Buyer's Agents – for example, if there were a 6% commission on a particular property, the agents involved would get 3% each.
The realities of the Internet and modern 'discount' brokerages have applied pressure to this commission rate. Now common in our area is a ‘split’ commission rate: some percentage for the first $100,000 of the sales price, and a reduced percentage for the remainder of the actual sales price.
Again: let’s play with some imaginary numbers. Many times, I’ve seen the 6%/3% commission rate: 6% on the first $100,000, and 3% on the remainder of the purchase price. Again this was split for the Listing and Buyer's Agents: 3% on the first $100K and 1.5% on the remainder. In fact, this discounted rate is so prevalent that Buyer's Agents don't even question that commission when they see it with a new listing. New, and/or desperate agents frequently quote that rate, knowing that if a Seller shops around, they'll eventually find someone who will write the paperwork at that rate.
So far, so good. Here's where I have a problem with this ‘split commission’ that’s going on around our area. And it’s to the detriment of the Seller:
Suppose the Listing Agent writes the Listing Agreement at a straight percentage - I'll use an imaginary straight 6% to keep the numbers simple. Okay, here's the twist: buried on page 2 of the Listing Agreement is the SOC - Selling Office commission. And suppose the Listing Agent writes this up as 3%/1.5% SOC, to be paid to the Buyer’s Agent.
What does this mean when all the dollars hit the floor? Here's an example: for a $300,000 house, a straight 6% listing would mean $18,000 total commission. Divided in the normal manner, this would be $9,000 for the Listing Agent and $9,000 for the Buyer's Agent.
However, with this detail twist in the Listing paperwork, here's how the numbers work out: the Buyer's Agent (SOC) gets 3%/1.5% - for the $300,000 listing, that amounts to $6,000. The Listing Agent gets 3%/4.5% ... which works out to a whopping $12,000. TWICE what the Buyer's Agent is paid!
Why is this wrong? Well, the Seller is paying commission for the sale of the property. In good faith, they're paying to have both agents work hard to sell the property. And unless they're savvy with Real Estate contracts (most Sellers aren't) - they'd never even be aware of this scam in the fine print on page 2 of the Washington State Listing Agreement!
What can a Real Estate agent do to protect themselves against this unfair commission disbursement? Sadly, nothing. There's no way to even really be aware of it: the Listing Agreement paperwork is retained by the Listing Brokerage - and the Buyer's Agent is not privy to it. The reality is disguised because the Buyer's Agent commission appears to be a common 'discount' commission rate!
Oh yeah... the numbers will be clear at the close of Escrow, and reflected on the HUD (disbursement) statement. But how many Buyer's Agents take the time to review the line details of the HUD statement at the close of Escrow? Right. Maybe it's time to start.
What can a Seller do to protect themselves against this? Ask their Listing Agent, in very clear terms: "Okay, I'm paying x% commission for the sale of my property... HOW is that going to be divided between you and the Buyer's Agent?"
It's amazing to even think that a Seller should have to know this, or have to ask about it. To me, that's where the practice clearly steps over the line. It's wrong. Simple as that.