anonymous guest writer submission
Buying a house is treacherous enough without having equity stripped from your house before you even buy it. That is exactly what was happening until TRELORA, a Denver based brokerage, in the name of transparency, started publishing data to help home buyers understand and negotiate Realtor commissions. The local Multiple Listing Service (“MLS”), REColorado, which is owned by six local Realtor Associations shut them down under threat of fines and termination of MLS access.
Buyers have an absolute right to know how much money is being offered to their agents before buyers are shown homes and possibly advised to buy homes with larger buyer agent payouts. Buyer agent commission data has traditionally (and wrongly) been concealed from home buyers. To keep this vital data from home buyers is a betrayal and serves to fix buyer broker fees high sapping nearly 3% of the equity out of homes before buyers even move in. The real estate industry has so thoroughly confounded their method of payment that even the most savvy home buyers and sellers don’t know how to properly negotiate commissions. Most home buyers are unaware that they are even paying their buyer agent, let alone how much. TRELORA sought to open this information to consumers in an equitable way that made sense.
In every other profession, clients pay for their own services. If that were true in real estate, home buyers would pay their agents, sellers would pay theirs and the price fixing schemes and predatory practices would all but vanish. Buyers would actually be able to represent themselves and keep the savings instead of listing brokers absconding with it. For decades, North American home buyers and sellers have paid more than twice as much in commissions than they should. In other countries, like Britain, real estate commissions average 1.8% because buyers are not tricked into paying for buyer brokers like they are here. Here buyers are often told that buyer agents are free and buyers rarely negotiate those fees. Sellers unwittingly agree to pay listing brokers a bundled fee that includes the buyer brokers’ fees and entitle listing brokers to misappropriate the entire commission even if there are no buyer agents involved. Worse, some listing agents use MLSs (like REColorado) to actually offer secret “bonuses” to buyer agents whose clients buy certain properties.
Failing to publish buyer agent compensation perpetuates the deception, keeps buyers in the dark, keeps brokerage fees artificially high and hurts the profession’s reputation. TRELORA published those fees so that buyers would know how much was being offered to their agents and give them the information they needed to negotiate those fees. Publishing that data serves a legitimate market purpose and hiding it does not.
Buyer Agents owe special duties to buyers
Buyer agents owe special duties to their buyers called fiduciary duties – those duties are the highest standard of care under the law. Those special agent duties provide buyers with an absolute right to know and to consent to any compensation being offered to their agents, especially if that compensation comes from someone who could be considered antagonistic to the buyers’ interests – like sellers’ agents. Interfering with those fiduciary duties is considered so serious that it could even trigger criminal law. Colorado Criminal Code states that a person commits a class 6 felony if he offers any consideration to an agent or fiduciary in exchange for the agent knowingly violating a duty of fidelity (generally paraphrased – see 18-5-401 Commercial bribery and breach of duty to act disinterestedly). Fiduciary law, criminal law, anti-trust law and possibly even more severe criminal law (RICO) standards could be applicable to this situation if it is determined that concealing this information from buyers amounts to a concerted effort to price fix.
Average savings for buyers of $7400.00
What would happen if buyer brokerage compensation were actually disclosed to buyers? Considering that over 80% of home buyers find the homes they buy on the internet without the assistance of a Realtor it is likely that buyers would find a way to claim some or all of this money for themselves. Some buyers would choose to not use a buyer broker at all and pocket the entire savings (average savings of $7400.00). Some buyers would use a buyer agent on a limited or hourly basis and have the broker collect and rebate the commission back to the buyer. Some buyers would utilize attorneys instead (ironically, often a far less expensive option). While it might not be so good for brokers, consumers might eventually see total commissions reduced to 1.8% like Britain and the elimination of some of the most predatory fiduciary practices that occur only in real estate (dual agency, pocket listings, open houses, data manipulation).
Perhaps the lesson here is for savvy sellers to refuse bundled fee agreements and offer the money directly to buyers instead of to listing brokers who may or may not pay it to buyer brokers. Savvy buyers might negotiate an hourly rate and have the buyer broker collect that 2.8 or 3% and rebate the difference back. Those same buyers would quickly learn to claim “bonuses” paid by the sellers’ brokers for themselves.
Imagine how buyers might flock to properties that offered a 3% built in savings. Buyers could then choose whether or not to hire a buyer broker or do it themselves and add the 3% savings back into the equity of the house- nationally, that’s 27 billion dollars annually. Lenders would rejoice because the added equity in homes would decrease the likelihood of foreclosures.