It’s been a while since I’ve talked about commission, and since it always produces a spirited debate in the comments section, and is often viewed as controversial, I figured it would make for a fun day.
But more importantly than that, I know there’s a lot of confusion and misinformation floating around out there specifically about the intersection of agency and commission.
So let me present a few questions and/or comments I often get from buyers and sellers, and without trying to antagonize anybody, or solicit dissenting opinions, simply explain how agency and commission intersect in these situations…
I’m sure we could come up with a dozen examples of questions, comments, and/or scenarios involving agency and commission.
But these are the ones I’ve encountered the most so far in 2018, so let’s take a look.
“I don’t have an agent, and I want to make an offer on this property. But I don’t want to pay the 2.5% commission.”
I’ve heard this line, and I’ve seen this situation, several times before.
The public will see this as a slam-dunk, I’m sure.
If you’re a buyer, and you have no agent, either because you’re conducting your own search, or you are deliberately setting out to purchase through the listing agent, you believe that you are entitled to a 2.5% discount on the price, and/or the listing agent should, or for some people – is obligated, to “throw in” 2.5% of the commission.
In reality, that’s not how things work.
A seller signs a Listing Agreement with the Brokerage, and an overall rate of commission is established.
Then, a second section of the Listing Agreement specifies how much, if any, commission will be paid to a cooperating brokerage. This, of course, is based on the old days when brokerages didn’t cooperate with any other brokerage. They sold everything in-house. So when the idea of a “buyer agent,” and/or a “cooperating brokerage” came along, it was important to specify whether or not the seller was, a) cooperating, b) paying a cooperating commission.
The Listing Agreement is a contract, bear in mind. With two parties privy: the seller, and the listing brokerage. Keep that in mind for later…
So when an unrepresented buyer shows up and says, “I don’t have an agent, I’m not paying the ‘other’ 2.5%,” that buyer is incorrect, first of all, since buyers don’t pay commission. I know, I know – you’ll suggest that they do, through the seller. But for all intents and purposes, and legally speaking, the buyer doesn’t pay.
But secondly, if the buyer says, “I refuse to make an offer unless that 2.5% is subtracted from the total,” then they may very well just not make the offer.
The seller and listing brokerage have formed a contract, say, at 5%. The buyer cannot unilaterally change the terms of that contract.
Can the listing agent waive part, or all, of the 2.5% earmarked for a cooperating agent? Absolutley.
But the buyer has no “right” or no ability to “force” the listing brokerage to waive part or all of that commission.
Now here’s where things get fun.
Every so often, I get a call from a really smart person, usually a lawyer, who says, “I’m going to draft my own offer, and I want you to submit it for me.” Of course, I’ll ask if they want to be represented as a “Client” or a “Customer,” and usually suggest that they choose “Customer,” as I don’t like multiple representation (and because to be honest – these people are never successful in their offers and I don’t want to be on record as giving them “Client” advice, because they always cry foul when their offers don’t win).
These smart people often put a clause in their offer that says something to the effect of, “The Listing Brokerage agrees to reduce the commission payable to the seller by 2.5%+HST.”
And I sigh.
Because so often, these smart people will say, “I’ve bought and sold tons of houses this way, I know what I’m doing, yada, yada.”
And then I have the thankless task of calling them to say, “You do know that, legally, you can’t contract out of a contract, right?”
Other agents get snarky. “What law school did you go to? Didn’t they teach you basic contract law at University of Arizona Online?”
But the bottom line for me is, a seller and a listing brokerage have a contract, and a third-party cannot unilaterally change the terms and conditions of that contract.
As for what I would do in this situation, personally, I’ll come back to this.
But for the people out there that think they have a right to submit an offer through the listing brokerage, and “save” 2.5% in commission that they believe would go to their buyer agent, if they had one, this situation is not as cut and dry as they might think.
Having said that, every buyer is free to try to negotiate with the listing agent and/or listing brokerage. I’m not saying that an agent won’t alter the commission.
But I will say that I have never received a competitive offer from an unrepresented buyer, looking to save commission. They’re usually the ones offering 7-10% under the list price, in competition…
“I only want to make the offer through YOU, the listing agent.”
I hear this a lot, and it’s somewhat tied to the situation above.
I had a listing a while back, for which the seller did not want to engage in multiple representation (I’ll cover this below).
So an unrepresented buyer called me and said he wanted to make the offer through me, and I told him he could make the offer through a colleague I’d refer.
He said, “No, I will only make the offer through you, because I want to save 2.5% in commission.”
I told him that there would be multiple offers, and I would never seek to “double-end” one of my own listings, and that commission hadn’t entered my thought process.
He told me, “It’s the only thing entering my thought process.”
As an aside, I think you’re better off overpaying for a house you love, than underpaying for a house you don’t. So if 2.5% is going to make or break an $800,000 or $2.5 Million decision for you, I think you’re on the wrong track. But I digress.
I told this buyer, “Go and find an agent; any agent, who isn’t me, and have them present the offer for you.”
He didn’t like this suggestion, because he said, “Then that agent is going to want the commission!”
It’s a similar situation to what I described above. The buyer was adamant that he save the commission.
Now does he have a right to make the offer through the listing agent? No.
Does he have a right to make the offer through the listing brokerage? Yes.
He can, in theory, have the Broker of Record (or manager) present an offer on his behalf, with whatever terms and conditions he wants. He can’t demand that the listing agent him or herself prepare the offer, and represent him.
Now this is where “Client” and “Customer” definitions come into play.
A colleague of mine recently had a situation where a woman wanted to submit her own offer, but kept insisting that the listing agent reduce his commission by 2.5%. She said her offer “reflected this,” albeit this and another $150,000, but that’s because she was out of touch, as these smart folks often are.
My colleague told her she had to sign a Buyer Representation Agreement, either as a “Customer” or a “Client,” and explained both to her.
She chose “Customer,” which meant that the listing agent wasn’t providing any service to her, and she was not a client.
When her offer was rejected, she emailed him and called him constantly, asking what she should to do strengthen her offer, where her offer stood, etc.
He simply told her, “I can’t speak to you. I represent the seller. You made an offer as a Customer. It breaches REBBA rules for me to speak to you.”
She didn’t listen.
Literally days of phone calls and emails, messages left with front desk. “What if I came up $60,000? TELL ME!”
The listing agent sold the property to another buyer, represented by a different brokerage. And yet, she continued to pester him for days thereafter.
This wasn’t about commission, on the listing agent’s part. This was about representation, and fiduciary duties to the right party.
I’m still waiting for her to file a complaint, as these folks often do.
But just consider when you ask for a certain type of representation, you’re going to get it.
“As a seller, I refuse to be involved in multiple representation, dual agency, or whatever you want to call it.”
Great. No problem.
Except, it’s not that simple.
Recall that in 2017, there was a lot of talk about “banning” multiple representation, because governments love to intervene in free markets.
At the time, I wrote the following blog post:
As is often the case, I think that instead of having the government step into a free market and tell consumers what they can and cannot do, it should be up to the consumer to decide.
I suggested that the Listing Agreement should be edited and updated to include the following:
1) I hereby give my consent for my agent to engage in multiple representation at the brokerage level.
YES ________ NO ________
2) I hereby give my consent for my agent to engage in multiple representation at the agent level.
YES ________ NO ________
It’s so goddam simple, that it bothers me.
It bothers me that this has never really been discussed, and probably won’t be. But I digress…
“Multiple Representation” exists at the brokerage level. If John Smith of ABC Realty has a listing, and Kate Jones of ABC Realty brings an offer on behalf of a buyer-client, this is Multiple Representation. Now if John Smith brings an offer on his own listing, it’s still Multiple Representation.
REBBA doesn’t distinguish between Multiple Representation at the brokerage level, versus the agent level.
And I think that is a major mistake.
The concept of “double-ending” for the most part applies to the listing agent providing a buyer to his or her own listing. Most people don’t care if the buyer-agent is another agent, registered with the same brokerage. In fact, some brokerages have thousands of agents. So how can you “ban” multiple representation? I’m getting off topic here…
To the point – a seller does not want to engage in “Multiple Representation,” is this possible?
Yes and no.
A seller can tell his or her listing agent, verbally, “Do not bring me any offers from you, personally.”
But is there a place in the Listing Agreement where this topic is covered?
Now, if an unrepresented buyer calls the listing agent and says, “I want to make an offer on your listing,” can, or should, the agent refuse?
Here’s where it gets tricky.
The listing agent has a fiduciary duty to the seller. So how is rejecting a potential buyer, out of hand, acting in the best interest of the seller?
I suppose this raises the question, “Can the seller opt out of his own best interest?”
Who can decide best interest at this point?
What if that unrepresented buyer wanted to make a spectacular offer?
It’s a grey area. Completely contradictory.
The listing agent has to listen to his seller’s instructions, but also has to act in his seller’s best interest, and in this case, those seem to conflict.
“As an agent, I would n-e-v-e-r show properties to my buyer clients that aren’t paying a 2.5% commission.”
Well, you’d better!
Otherwise you’ll be disciplined by RECO, and for good reason.
Call me naive, and tell me this is sappy if you want to, but in order to be successful in this industry long-term, and have a career, you need to consistently put the interests of your clients first. You must always think about them, before yourself. You must do what’s right for them, and trust that in the long-run, what goes around, comes around.
Not every agent thinks that way, but not every agent makes enough to actually live on.
In the Real Estate Business Broker’s Act (REBBA 2002), there is a Code of Ethics.
Section 19 details the following:
Properties that meet buyer’s criteria
19. If a brokerage has entered into a representation agreement with a buyer, a broker or salesperson who acts on behalf of the buyer pursuant to the agreement shall inform the buyer of properties that meet the buyer’s criteria without having any regard to the amount of commission or other remuneration, if any, to which the brokerage might be entitled. O. Reg. 580/05, s. 19.
I think it’s worth noting that there is a specific section of the Code of Ethics that deals with this topic, meaning it is an issue.
If a buyer is hiring an agent to look out for his or her best interests, and show that buyer properties that meet his or her criteria, then that agent must show the buyer all properties. End of story.
Regardless of the seller, listing brokerage, location, commission, or even circumstance (ie. something like, “I don’t want to show that property to my buyer because I have to pick up the keys way out at the listing brokerage in Mississauga”).
What happens if the agent does not comply?
Well, then that agent could be disciplined.
Here’s a Real Estate Council of Ontario (RECO) Discipline Decision.
All discipline is available to the public, FYI.
Putting this in writing is clearly a poor decision by this agent. It’s mind-boggling how somebody could do something like this, in today’s day and age.
But the irony of this agent’s footer – suggesting “utmost professional service,” should also be noted!
This agent was fined by RECO, not only for refusing to show the listing, but also for six other RECO violations, about abuse and harassment, language, professionalism et al, which are all basically the same thing. RECO often operates in the same way a Grade-6 student does a book report; take a section of the curriculum, and look for an application in the text. But that too is a topic for another day…
So what can an agent do, in a situation where he or she doesn’t want to work for the specified commission?
Well, there are OREA forms to address that.
Do you know those discount brokerages that offer $1.00 in commission on MLS? That’s how much the brokerage is offering in commission. The listing will say something to the effect of “Seller May Be Willing To Offer Up To 2.5% Renumeration. Use Form 202.”
So if you’re a buyer agent, go for it. Use Form 202.
But do not refuse to show the property to your buyers!
I’d be remiss if I didn’t put in one more word on this topic – to the sellers who feel they are “saving” money by not offering a buyer-agent commission. I know you already don’t like what I’m saying, but that’s just how it is.
A few weeks ago, I showed a property to my buyer clients that was offering $1 in commission, but whereby the seller was offering “up to” a 2.5% commission.
The property was priced well below fair market value, with an offer date.
But that was the wrong strategy to have in this case!
On offer night, I had the only offer. Even though this property was well, well under fair market value, I still was the only agent to come to the table.
Many buyer agents are afraid of dealing with FSBO’s, “Mere Postings,” or discount brokerages. Either because they’re afraid of not getting paid, or afraid of not getting paid their definition of a “full” commission, as per the agent above who was disciplined.
This strategy blew up spectacularly in the seller’s face. And for the life of me, I have no idea how he or she could have thought it was a sound, logical strategy.
“I’ve included a clause here that essentially says before closing, we’ll amend the purchase price to reflect a reduction of 2.5%+HST. I’m throwing in my commission.”
Can this clause be included in an Agreement of Purchase & Sale?
Can the buyer agent insist it’s included?
This is a term of an offer, and like any other term of an offer, the seller can reject it.
I choose to reject this term, or rather advise my sellers to reject it, because it clearly seeks to circumvent Canada Revenue Agency guidelines.
I had eight offers on a property a while back, and a commercial agent from Sudbury was representing one of the buyers. He was a part-time lawyer, part-time business owner, and part-time commercial agent. Yep. That’s who you want representing you on the purchase of your largest asset…
The agent included a clause to this effect, and said, “I’m doing this for my buyer because he’s a good guy, I don’t need to be paid,” etc.
That was really nice and all, but I wasn’t going to advise my seller to put himself at risk, nor was I going to risk my real estate license, and the good standing of my brokerage.
When I told the agent that we wouldn’t consider his offer as it was, because of this clause, he said, “Well I’ve done it before!”
I simply said, “Not with my brokerage, you haven’t.”
Any agent, buyer, or seller can do as he or she sees fit. Those that want to break the rules, can, and will. Those that recognize the value of good standing, won’t.
It helped that this offer was well under asking, among seven competing offers, for a house that sold 15% over asking. But as I said before, that’s always how the “smart” offers play out.
Well, that was a long post, folks!
Brevity has never been my strong suit.
I hope this was informative, and keep in mind – I don’t write the rules. I strictly try to play by them.
As a consumer, you’re free to conduct yourself however you’d like, just like some of the folks from the stories above.
And all agents are to act in accordance with the Real Estate & Business Broker’s Act, and the REBBA Code of Ethics.
Some light reading for you HERE and HERE, if you are so inclined.