Brokers across the nation have agents who are very unhappy about one thing: falling co-op commissions. With an increasing number of alternative brokerage models, commission splits are changing.
“Every day I get an agent coming to me crying!” Mike Bjorkin exclaimed during a recent podcast with me. This HomeSmart broker from Santa Clarita, California, isn’t the only one constantly consoling real estate agents. Brokers across the nation have agents who are very unhappy about one thing: falling co-op commissions.
Well, let’s start by explaining how real estate commissions used to work. When a home sold, the seller paid a commission to the listing agent. Buyer’s agents got a percentage of that commission for their role in the transaction.
When I was a broker, I would explain to sellers that the commission is split equally into two parts — half for the listing agent and half for the buyer’s agent.
According to Real Trends, the average commission rate currently sits at 5.12 percent. When split evenly at that rate, buyer’s agents would get a 2.56 percent commission on average per deal. In reality though, the average co-op commission is now far lower than that.
Who’s to blame?
If you ask Bjorkin, it’s the brokerages that stray from the traditional 50/50 split. In his market, several brokerages have already dropped the commissions for buyer’s agents significantly.
Unfortunately, there’s nothing stopping others from doing the same. The multiple listing service (MLS) doesn’t have rules regarding minimums for co-op commissions, so if brokers want to set the commission for buyer’s agents at something ridiculously low, like one dollar, they can.
Up until recently, this was never a major issue because the traditional brokerage made money on both buyer and seller commissions. Brokerages utilizing the traditional operating model would be shooting themselves in the foot if they were to lower buy-side commissions.
Not only that, they’d be putting a crack in the armor of our industry. After all, deviating from customary commission splits puts the agents and brokers who rely on them in a very tough spot.
These days, however, an increasing number of brokerages operate under a different model entirely. Instead of spreading their business between buyers and sellers, they elect to work with sellers exclusively. Because of this, they couldn’t care less about how little buyer’s agents get paid.
What can buyer’s agents do?
To make matters worse, buyer’s agents have limited recourse. Because websites like Zillow and realtor.com have made information from the MLS available to the public, many buyer’s agents are simply showing clients the properties they want to see, not finding potential homes for them.
Mike Sloan, one of Keller Williams’ top agents in Maryland, recently told me, “I showed 12 homes yesterday: five I found, and seven they found. That’s about par for the course these days with my buyers.”
Any one of the seven houses found by Sloan’s buyers might offer a lower-than-average co-op commission, and he’d be ethically obligated to show these listings at the buyer’s request. If a buyer falls in love with a listing that happens to offer a co-op commission of only $1,000, Sloan is left with two options.
He could take the $1,000 and miss out on thousands more. Or, to recoup what he would have earned had the listing offered an even co-op commission, he could ask his buyer to make up the difference.
Obviously, getting a buyer to pay thousands out of pocket toward the tail end of a real estate transaction isn’t ideal, but it’s what many buyer’s agents are doing now to protect their livelihood.
Are agents worth the commission?
In turn, buyers and industry outsiders are left wondering if agents’ services are really worth it.
Some companies entering the real estate sphere don’t seem to think so.
Golden Key (formerly known as SoloPro), for instance, provides homeowners with a non-traditional platform for selling property. When buyers purchase property through this platform, they have the option of paying a little extra to have a buyer’s agent attend the home inspection and settlement. The buyer’s agent never receives a co-op commission.
A similar company, Purplebricks, allows buyers and sellers to talk directly without the input or control of either listing or buyer’s agents. In their eyes, it seems, agents only get in the way of closing the transaction.
Are agents really jeopardizing their clients’ deals to protect their commissions?
Yes, in many cases, they are.
It’s not uncommon for agents on both sides of the deal to act out of self-interest when their commission is at stake.
A buyer’s agent who feels entitled to a higher co-op commission might put a clause in the contract that would require the seller to adjust the commission split should they accept their buyer’s offer.
The listing agent could elect to withhold that offer from the seller until the buyer’s agent concedes to taking a lower fee. Commission-related squabbles like these are bad for clients on both sides of the deal.
Still, it’s hard to fault buyer’s agents for fighting back against unreasonably low co-op commissions, especially now that they’re being treated like an add-on service by some companies and removed from the transaction entirely by others.
Fortunately, there’s another option that’s better for buyer’s agents and their clients.
“Buyer’s agents must speak to their buyers from day one to prepare them for the possibility that they may need to pay commissions out of pocket,” said Keri Shull, the founder of the Keri Shull Team in Arlington, Virginia.
Discussing the issue upfront is preferable to waiting until it’s time to submit a deal. On top of that, it’s a good idea for buyer’s agents to ensure that commission-related issues are covered in the buyer-broker agreement.
Pat Hiban sold more than 7,000 homes over the course of his 25-year career in real estate. Now, he dedicates his time to helping others succeed as agents and investors. As host of the Real Estate Rockstars Podcast, Pat interviews real estate experts to explore what works in today’s markets. He also founded Rebus University, an online training platform for real estate agents and sales professionals.