Let's assume that the real estate broker/agent representing the Seller (the Listing Agent) charges the Seller 6% commission for selling the house or real property. What happens with this 6% commission (which is deducted from the Seller's net proceeds from the sale of the property), and how is it all allocated??
Does the Listing Broker/Agent get to keep the entire 6% sales commission? The answer is NO!
Here is how it typically works:
- the entire 6% is taken from or deducted from the Seller's pocket or net proceeds.
- the Listing Broker/Agent will offer to "split" or share that commission with the Buyer Broker/Agent as a "reward" or an "incentive" for the buyer agent bringing a ready, able and willing buyer to the settlement table.
- that commission sharing or split will typically be half of whatever the Listing Broker/Agent is charging the Seller.
- if we assume that 6% sales commission is being charged to the Seller, then typically half of that (or 3%) is offered to the Buyer Broker/Agent.
- That leaves each side of the transaction with 3% of final settled sales price for each party's commission.
- then each side's 3% is further split.
- real estate agent's have to share or split their commission with their broker for the "privilege" of doing business. (no other licensed profession, except real estate, that I am aware of requires a licensed professional to be "tethered" to a broker - an attorney fresh out of law school and having passed the bar exam with no trial experience whatsoever can open his own independent law firm or practice and is not required to be "tethered" to a managing or supervising lawyer "broker" or "split" his legal fees with a "legal broker" for example)
- depending on the split arrangement the real estate agent has with his broker the agent is institutionally forced to split or pay the broker a percentage of the commission they worked hard and on their own to get. That split could be something like an 80/20 or 70/30 split whereby the agent keeps the 80% or 70%, then pays the broker the 20% or 30% for the privilege of doing business. (agents pay brokers; brokers DO NOT pay agents).
Now, lets assume a house was sold for $500,000. Let's further assume the Seller is paying the Listing Broker/Agent 6% sales commission. Then, lets also assume that each agent in the transaction is on a 70/30 split with their respective brokers. Here is how the commission is all divvied up:
- $500,000 X 6% sales commission = $30,000 (that the Seller solely pays or is deducted from the net proceeds from the sale of the property)
- the settlement or escrow agent will divide that entire 6% (or the $30,000) between the Listing Broker/Agent and the Buyer Broker/Agent. Each side gets $15,000.
- assuming each agent is on a 70/30 split, the $15,000 will be split 70% (or $10,500 to the actual agent who did all the work), and the agent pays his broker 30% (or $4,500) for the mere "privilege" of doing business or as an institutionalized "tax" or levy.
Now I ask you.... regardless how all the money is ultimately divvied up; WHY SHOULD THE SELLER PAY THE BUYER AGENT/BROKER??!!
Imagine if you were a litigant in a criminal or a civil law suit. Should you be required to pay the prosecuting or State's attorney salary or pay the other party's lawyer in a civil law suit??!! Of course not! Then why should the Seller pay the Buyer Broker/Agent commission too?!
If the Buyer agent is being paid by the Seller, how can he serve two masters??!! (the Seller who is paying his commission AND concurrently the buyer client who he swears an agency fiduciary duty to). In any other context or application, this would be a clear and gross legal conflict of interests.
The truth of the matter is; that you cannot serve two separate masters while trying to "protect and promote the best interests" of the party who you represent.
In order to have true and real fiduciary agency duty and loyalty to the buyer client, the agent representing the buyer should be paid his commission for his professional services directly from the buyer.... and NOT from the seller!
If the Seller was not informally and institutionally mandated or required by the real estate profession to pay the buyer Broker/Agent's commission too, then the Seller could be offered much lower sales commission charge from the Listing Broker/Agent firm.
Furthermore, if the buyer was actually paying the buyer Broker/Agent commission directly, then the buyers would not play the games they do or be allowed to freely jump from agent to agent. There would be more accountability between prospective buyer and their agent. Then there would be true buyer agency representation.
The "Exclusive Right to Represent Purchaser Agreement" (NVAR Form #K1338) that a buyer enters into with his broker/agent stipulates that the Buyer or Purchaser is already required or obligated to pay his broker/agent. The Compensation Clause or Paragraph of the Agreement (paragraph 9 - see below) states that only IF [not when] compensation is offered by the Seller, then the Buyer or Purchaser's obligation to pay his broker/agent commission fee is offset or credited by what is offered by the Seller [if any].
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The institutional "system" is clearly flawed and needs to be corrected whereby "prevailing practice" takes on a whole new and more meaningful definition of agency fiduciary duty and loyalty which is more consistent, congruent and parallel with the legal definition of an "agent" or "agency representation"
A listing Broker/Agent who, when negotiating the commission they are charging for "their own services" to the prospective Seller; infers, implies, suggests that the Seller pay for the buyer Broker/Agent's commission too as a means of justifying the commission is actually engaging in the most egregious and nefarious violation of the provisions of the federal Sherman Antitrust Act law.
A listing Broker/Agent may tell a prospective Seller they are trying to get the listing from that the total amount of the commission (or the commission percentage total) is not "fixed by the industry" and will tell the prospective Seller what they are being charged in commission for the professional services of the listing Broker/Agent firm to sell their house - however, the STRUCTURE (of the Seller being "forced" to also pay the buyer Broker/Agent firm too) is not typically disclosed and is being "hidden" or 'concealed" from the Seller or homeowner. This practice is therefore a "price structure fixing" by the industry and is a violation of the Sherman Antitrust Act.
Remember, there is no legal or statutory mandate for the owner/seller of the property to also pay for the services of the buyer Broker/Agent firm too. A listing Broker/Agent cannot tell a prospective home seller that, "we all have to participate in cooperative brokerage commission splitting - therefore, you have to pay the buyer's Broker/Agent commission too." Any such utterance, inference or suggestion constitutes a gross and willful violation of the Sherman Antitrust Act.
Moreover, the National Association of Realtors Code of Ethics Article 3 stipulates:
- "Realtors shall cooperate with other brokers except when cooperation is not in the client's best interests. The obligation to cooperate does not include the obligation to share commissions, fees, or to otherwise compensate another broker."
Is the Seller paying the buyer Broker/Agent commission really in the Seller's "best interests"? Who should make that determination; the home owner or Seller, or the listing Broker/Agent?
Certainly, the Seller having to also pay the buyer Broker/Agent firm commission too through "cooperative brokerage commissions splits" is clearly NOT in the Seller's best [financial] interests necessarily as that only REDUCES their net proceeds from the sale of the property. Doesn't the listing Broker/Agent firm have a duty to see that the property is marketed and sold in such a manner as to maximize (not minimize) the owner/Seller's net proceeds?
The decision whether to offer "cooperative brokerage commission split" and having to pay the buyer Broker/Agent firm commission too should be left up to and made solely by the owner/Seller - after the listing Broker/Agent firm has advised and counseled the owner/Seller of their "non obligation" pursuant to Article 3 of the National Association of Realtors Code of Ethics.
How many listing Brokers/Agents actually inform or counsel the owner/Seller of this non-obligation? Doesn't the willful, intentional non-disclosure by the vast majority of listing Brokers/Agents constitute not only a gross violation of Article 3 of the Code of Ethics but more importantly, doesn't it also constitute "price structure fixing" for real estate services? Of course it does. Therefore, failure to inform or counsel the owner/Seller of the their non-obligation to have to pay for the buyer Broker/Agent commission IS institutionalized "price structure fixing" and therefore IS a violation of the federal Sherman Antitrust Act.
If the owner/Seller knew or was fully informed that the listing Broker/Agent were under no obligation to split the total commission that is being charged to or coming out of the Seller's pocket, and if the Seller knew that part of the justification for the listing Broker/Agent firm to charge what they are asking for also includes a "hidden" or "concealed" cost to pay the buyer Broker/Agent commission too which is being passed onto the Seller and taken out of the Seller's pocket; what do you think the Seller would say?
The Seller would naturally and logically say and conclude that it was NOT necessarily in their best [financial] interests to be asked or expected to pay for or be "charged" for paying the buyer Broker/Agent commission too. It would then logically follow that if the Seller did NOT have to pay for, be "charged", or "billed" for paying the buyer Broker/Agent commission (which they are NOT obligated to do), then the listing Broker/Agent firm would not have to charge then 5-6% sales commission since they are only likely getting half of that anyway (2.5-3% commission).
If the Seller's cost to their listing Broker/Agent firm for selling the house was only what they would be receiving anyway (the 2.5-3%), then their net proceeds after sale would be HIGHER since they are not being institutionally "forced" or being "charged" or "billed" for picking up the tab for the buyer Broker/Agent commission too.
If the Seller was fully informed up front:
- how all the commission would be ultimately divvied up (which they are being asked or expected to solely pay for), and
- was informed of their non-obligation to have to pay for the buyer Broker/Agent firm commission, and
- was informed of the Realtors' Code of Ethics Article 3 stipulation that their listing Broker/Agent was ALSO under no obligation to "cooperate when it was NOT in their client's best [financial] interests" and,
- was informed that their listing Broker/Agent's obligation to cooperate with other Realtors was a mere professional "courtesy" and DOES NOT create an obligation by the listing Broker/Agent firm to split commission charged to their Seller client and split that commission with the buyer Broker/Agent, and
- was informed that the Buyer or Purchaser was ALREADY obligated to pay his own broker/agent commission or "Broker's Fee" directly for their services;
what do you think the prospective owner/Seller would say? They would most likely say something to the effect of,
"Hell NO, I'm not going to pay for the other Broker/Agent too, let their client pay them just like I would be paying you ... they have already agreed to pay their own broker/agent, so why should I pay that for them then ??!! - Furthermore, why are YOU (potential listing agent) asking me or expecting me to do this ??!!"
So, isn't the intentional and willful "concealment" of the truth and facts about real estate commissions and the obligations AND non-obligations of ALL parties involved in a transaction with regard to "cooperative brokerage commission splitting" an act of price structure fixing???
If you answer yes to this question, then your potential listing Broker/Agent firm are BOTH jointly and severally guilty of not only federal Sherman Antitrust Act violations but ALSO gross and egregious violations of the National Association of Realtors Code of Ethics.
Interestingly, the Northern Virginia Association of Realtors (NVAR) publishes form # NVAR K1297 entitled, "Useful Information About Real Estate Transactions." This form or "disclosure" is given to either the buyer (in a buyer agency transaction) or to the seller (in a listing or selling transaction). The respective buyer AND seller are both asked to sign this disclosure form by each of their respective real estate agents.
Let's take a look at that form now (I'll do that for you so I don't have to copy the entire text here) and let's see if there is any "useful information" or any "disclosure" with regard to how real estate commissions are split or shared and all divvied up between buyer broker/agent and listing or selling broker/agent. That would indeed be very "useful information about real estate transactions", correct?
The form covers these headings and topics:
- REALTORS - defines what a "Realtor" is.
- SERVICES - describes or defines what type of services Realtors can perform.
- LEGAL REQUIREMENTS - advises both buyer and seller party (separately) that in order to be enforeceable, all contracts for real property must be in writing.
- FINANCING - information about mortgage financing and title insurance.
- HAZARD INSURANCE - advises both buyers and sellers (separately) about lender requirements for hazard or homeowner insurance as well as flood insurance too.
- MASTER PLANS - advises buyers that they should review local jurisdiction or county master plans or land use zoning maps to see ot only current, but more importantly, FUTURE land use or projects that could affect the buyers home of choice.
- PROPERTY CONDITION AND ENVIRONMENTAL MATTERS - advises buyers that they can and should make a home inspection and/or other environmental type of inspections a contingency in their contract offer.
- HOME ENERGY EFFICIENCY INFORMATION - advises buyers that they should get an "energy audit" done on the home they are considering buying to be fully informed of the property's energy or utilities consumption efficiency.
- RESPONSIBILITY - advises both buyer and seller (separately) to read all documents they are provided "to be sure that the terms accurately express the understanding of the parties as to their intentions and the agreement they have reached."
- TYPES OF REAL ESTATE REPRESENTATION - talks about different types of representation, confidentiality of information and duties of Realtors when representing either buyer or seller.
Then why would the Association of Realtors leave this most relevant and germane aspect of how real estate sales transactions work hidden or concealed from the public?!
Let's go back to the National Association of Realtors Code of Ethics.
- Article 1 - says Realtors have to treat all parties "honestly"
- Article 2 - says Realtors shall refrain from exaggeration, misrepresentation, or concealment of pertinent facts related to property or transaction.
- Article 3 - says Realtors shall cooperate with other brokers except when cooperation is not in the client's best interests. The obligation to cooperate does not include the obligation to share commissions, fees, or to otherwise compensate another broker."
- Article 7 - says that Realtors may receive compensation from only one party (but the seller is expected WITHOUT BEING INFORMED that they should or will be paying both listing broker/agent AND buyer broker/agent commissions?!)
- Article 12 - says that Realtors should "paint a true picture" in advertising or representations.
I could very easily make a legal case that the [willful & intentional] concealment by NVAR about anything related to how real estate commissions work between brokers from their own form entitled "Useful Information About Real Estate Transactions" (which is given to both buyer and seller in a sales transaction conducted by or through a Realtor) is:
1) an act of concealement,
2) an act of gross misrepresentation of pertinent facts (in this case a complete and entire OMISSION of pertinent facts relating to how real estate commissions work),
3) an act of NOT being completely honest,
4) an act of failing to "paint a true picture",
5) an act of concealment of Article 3 of the Code of Ethics from both seller and buyer,
6) an act of engaging in price structure fixing (which is a violation of the Federal Sherman Antitrust Act)
7) an act of grossly and egregiously violating its very own Code of Ethics.
What's more disturbing is the fact that these acts of concealment and omissions are not just an isolated occurrence of "oops I forgot to tell them that" - but is a MASS, widespread and standardized practice.
Yet another example of institutionalized "price structure fixing" by the industry is the Multiple Listing Service or "MLS" database where a Realtor or licensee enters all the information on a house they are selling so that other Realtors or licensees can see what houses are for sale to assist their buyer client in finding a suitable home to purchase. Policy Statement 7.23 of the National Association of Realtors Multiple Listing Service (MLS) Handbook states,
"in filing a property with the multiple listing service of a Board of REALTORS, the participant makes a blanket, unilateral offer of compensation to the other MLS participants and shall therefore specify on each listing filed with the service the compensation being offered by the listing broker to the other MLS participants.
What this states in plain English is basically that if a Realtor enters a home for sale in the MLS system, then they must or shall "therefore" offer "unilateral compensation" to other participating buyer brokers. Not only is this illegal for a third party service provider such as MLS to dictate the terms of sale that are being offered by a Seller through their listing agent/broker, but is also contrary to the National Association of Realtors Code of Ethics Article 3 which once more states clearly and unambiguously,
"Realtors shall cooperate with other brokers except when cooperation is not in the client's best interests. The obligation to cooperate does not include the obligation to share commissions, fees, or to otherwise compensate another broker."
The National Association of Realtors (NAR) cannot repudiate or nullify Article 3 of its own Code of Ethics by subsequently turning right around in a "Policy Statement" contained in a "Handbook on the use of the MLS" which negates or nullifies, or is in any way inconsistent with, Article 3 of the Code of Ethics.
The one negating, abrogating or repudiating caveat to my aforementioned argument or a Seller's objection to the "cooperative commission sharing" structure or arrangement outlined above would be this question to a prospective home Seller: When you bought your home were you represented by a buyer broker/agent; and if so, was your obligation to pay your buyer broker/agent's commission paid by the Seller when you bought your home??
If the answer to this question is yes, and they didn't object to this "system" or "arrangement" before and received this benefit in the transaction, then why would they object now when they're on the flip-side of that arrangement?? "Somebody [the Seller] paid YOUR buyer broker/agent fee for you when you bought your house so you would not incur the buyer broker/agent fee as an out-of-pocket expense (and may have additionally made other concessions to you or made additional contributions to your closing costs), so why would you object now in participating in the same scheme or arrangement?"
