Do Commissions Offered on REO and Short Sales Put Pressure on Non-distressed Listings?

Note:  There is no such thing as a "standard commission."  The commission charged by a listing agent may only be established as part of the overall negotiation to obtain the listing and may be based on several factors, including costs to market the property.  Similarly, the commission offered to a buyer's agent by the listing agent is not a pre-established fixed percentage of the total and will vary depending upon the local market conditions.  The discussion of commissions contained in this blog post is not meant to infer or suggest any specific commission amount that should be paid by a seller to his agent or to a co-broker.  To do otherwise would be unlawful.

It is an established fact that most lenders, servicers, asset managers, including the government-sponsored entities of FNMA and FHLMC, and guidelines established under the Making Home Affordable legislation incorporate language related to the maximum commission that they will allow a Realtor to charge when handling a short sale or foreclosure listing on their behalf.  While certain Realtors may charge less or more than the stated 6% maximum fee, the guidelines generally state that as long as a commission is equal to or less than 6%, the selling party (lender, servicer, asset manager, GSE) will not re-negotiate the fee.

Which brings me to a question.  In areas where there is a high concentration of short sale and REO (foreclosure) listings, is a non-distressed seller at a disadvantage if they wish to negotiate a lower commission rate to the listing agent?  In other words, will a Realtor work harder for you if you pay them a higher commission?

I am going to suggest that the answer is an unequivocal "no."  I get asked this question often, so I am going to repeat my answer.  The answer is "no - a real estate agent's commission should be based on the effort that they are going to expend to market and sell the property."

Another question that I am often asked is "if the broker on property A is offering 3 apples to the buyer's agent and the broker on property B is offering 2 apples to the buyer's agent, won't property A sell faster because more buyer's agents will want to show that property?"  The correct answer is the better priced and marketed property will be the one that sells first, however I would be lying if I didn't say that I know of instances where Realtors are more inclined to show properties that will compensate them the most.  Exclusive buyer's agency agreements often establish a set fee for the services of the agent, so the issue of showing a client listings that offer a lower fee from the seller is really the decision of the buyer, not the Realtor, and will negate the possible appearance of "greed" by the buyer's agent.

So what happens when more likely than not, a 6% commission is paid by the "seller" in a short sale or REO transaction, and the compensation to the buyer's agent is less than what other comparable listings may offer?  Should the buyer request that the listing agent share more of his commission with the buyer's agent?  Well again, there is no standard answer.

Representing a foreclosed property often requires that the listing broker also become a property manager.  If the asset manager requires that the property be maintained during the listing period, the listing agent must pay for these expenses and be reimbursed later.  Sometimes the cost of errors and omissions insurance is escalated for REO and short sale transactions.  Usually the paperwork, follow up and follow through on a short sale or REO listing is quite time consuming and uses up minutes on the agent's cell phone or long distance bill.  Some brokerages also have legal counsel, negotiators (in-house or external), and extra administrative staff to handle the additional responsibilities of these types of listings.  Therefore, it is safe to assume that the listing agent may, after all his expenses, come out with less income than the buyer's agent - no matter what you think the total commission may be. 

One thing that I do disagree with is listing agents that require the buyer's agent to "share" in any referral fee that the listing agent may have to pay to a third party who introduced the property to the listing agent.  In my own personal opinion, the fact that the listing agent has to pay a referral fee should in no way interfere with the compensation that is due a buyer's agent, and buyers or their agents should not have to indirectly subsidize this referral fee.

So, where do we stand?  The fact that the government has established a maximum commission rate of 6% payable on short sales and foreclosures should NOT impact the private negotiations of a non-distressed seller and his agent with regard to commission.  Similarly, the commission offered by a listing agent to a buyer's agent should be reflective of market conditions in order to attract the most agents and their clients.