Imagine a buyer’s agent who begins the hunt for the most suitable home for their buyer. The agent actively trawls through listings, filtering their search in accordance with the buyer’s housing criteria. They locate a few properties that reasonably fit the buyer’s needs, though each contains some deficiencies. In other words, they are qualified contenders, but not perfect. Then, as if by luck, the agent’s diligence produces a property that matches the buyer’s wish list impeccably.
However, the agent’s enthusiasm is curbed when they see the fee split offered by the seller’s broker: a lousy 1.5%. The agent’s time, talent and effort will not be well paid at that rate for the property’s price level.
The buyer’s agent, rationally concerned about their personal finances, considers whether to show their buyer the perfect property at the expense of their own income, or direct the buyer to other, possibly less suitable listings where the seller’s agent offers a better paycheck.
What is a buyer’s agent to do when such a conflict of interest arises, as they often do, and a patently inadequate fee split offered by the seller’s agent is confronted by the fiduciary duty the buyer’s agent owes their client?
To show or not to show?
A recent discussion in the industry concerning the impact of low fee splits on home showings brings this dilemma to the forefront. Common in the industry is the tendency of inadequately trained agents to avoid working on listings in which the seller’s agent offers a low fee split, despite how well the property may fit their buyer’s needs.
However, not showing a qualifying property to their client-buyer violates the fiduciary duty the agent owes their client. [Calif. Civil Code §2079.16]
Worse for the industry, the thought the seller’s agent controls the amount of fees the buyer’s agent is entitled to negates the buyer’s agent’s primary, if not superior, negotiating power. After all, it is the buyer’s agent who has the client with the money the seller and the agents want. Thus, the buyer’s agent always has the ability to set the amount of the fee they will receive for their professional services in a transaction. Who better to determine their worth than the buyer’s agent and the buyer — when the agent prepares a purchase agreement offer for their buyer to sign? [See RPI Form 150]
first tuesday posed the question to our readers: how often does an offered fee split determine whether you show a property to your client?
32% of respondents claim the fee split never plays a role in showing their buyer a property listed with another broker. And rightly, it cannot. 22% say rarely.
However, 26% say occasionally and 9% say frequently. Most notably, 11% admit the offered fee split is always a factor in whether they show a property. Thus, 46% admit they acquiesce, allowing another agent in another office to set their fee for whatever amount and level of professional services they have provided their buyer — while their client-buyer suffers an undisclosed opportunity. In total, the amount of the offered fee split affects 68% of our readers at some point.
Simply put, that reaction is a failure to understand who controls the most meaningful step in negotiations: the drafting of the buyer’s purchase agreement offer in which the buyer’s agent sets their fee amount. [See RPI Form 150]
While fee split offers by seller’s agents are viewed differently among real estate agents and impact agents with varying frequencies, one thing is certain: the fee split has great potential to influence the decision of an agent who is uninformed in the management of professional fees and the obligation to show suitable properties.
Negotiations protect your fee
Recent discussions about low fee splits dwell on the agent’s ethical predicament concerning their choice to show or not to show a property. However, the simple fact is buyer’s agents have the ability to bypass this conflict entirely by including the fee split they receive on a sale in their client’s negotiations — the buyer agreeing to the amount the seller will pay as determined by the buyer’s agent and agreed to by the client-buyer.
Importantly, the fee split offered by a seller’s agent in the multiple listing service (MLS) is not fixed by law. It is merely the seller’s agent’s first offer to be ignored, accepted or countered in some way. In fact, the practice of seller’s agents offering to “pay” the buyer’s agent a standard 3% is merely a vestigial remnant of earlier and less sophisticated MLS price fixing arrangements. Price fixing permitted the large brokers through association of realtors (AOR) arbitration to control broker income with a 50:50 fee split at no less than 6% of the purchase amount. [People v. National Association of Realtors (1981) 120 CA3d 459]
In reality, offered fee splits vary and are always subject to negotiation. [National Association of Realtors, supra (1981)]
When locating a property for a buyer, a prudent buyer’s agent will seek the fee split amount they believe they have earned and are entitled to in the transaction when writing up an offer — always in control of property selection and the amount of the fee they will earn. [See RPI Form 150]
The first approach requires the buyer’s agent to discuss their fee expectations with the buyer at the time they enter into an arrangement to represent the buyer, preferably a written buyer’s listing agreement. This early discussion confirms everyone’s expectations in the search for property and the nature of the buyer’s agent’s representation. The buyer’s agent and the buyer agree on the fee amount the buyer assures they or the seller will pay if the buyer purchases or leases a property sought under the listing. [See RPI Forms 103 and 111]
Here, the buyer’s listing agreement acts as the initial safety net for the buyer’s agent, ensuring the agent will receive a fee for their efforts from the outset.
However, the most critical defensive position for setting the fee is in the preparation of a purchase agreement offer. The buyer’s agent simply includes or uses a form that includes a fee provision, worded to set the exact amount of the fee the buyer’s agent will be paid (by the seller). [See RPI Form 150 §5]
To protect the agent’s broker fee, the Purchase Agreement (One-to-Four Residential Units – Conventional and Carryback Financing) published by Realty Publications, Inc. (RPI) contains a broker fee provision, allowing the parties to agree to a set fee amount and how it will be split between the brokers as part of the purchase offer. The broker provides an upfront and full disclosure of the fee arrangement to the client as required. [See RPI Form 150 §15]
Here, both agents agree to either a dollar amount or a percentage of the purchase price, to be paid by the seller. Placing the provision in the purchase agreement ensures the broker fee is an intrinsic component of the agreement. Here, it is inextricably woven into the closing and cannot be avoided by the transaction participants. The fee amount may be negotiated until resolved in offer/counteroffer submissions or by negotiations for payment directly from the client. [See RPI Form 180]
Alternatively, when the purchase agreement form is deficient and lacks a fully disclosed broker fee provision, the buyer’s agent merely attaches a separate broker fee sharing agreement to the purchase agreement offer. The fee sharing agreement indicates the amount of the fee and the split the seller’s broker and buyer’s broker will receive, if unaltered by negotiations, on closing of the sale. [See RPI Form 105]
Editor’s note — While negotiations are a buyer’s agent’s first response to a low fee split offer via MLS publications, agents need to be prepared for some difficulties and even rejection from a seller’s agent. Negotiating in a seller’s market, in particular, may present challenges as the seller is likely to receive multiple offers. This auction environment increases the chances the buyer’s purchase agreement offer containing the higher fee split will be rejected in favor of another offer, and for improper reasons that relate to fee sharing and not the merits of the buyer’s offer.
In this case, buyer’s agents may have no choice but to accept the lower fee split paid by the seller — or risk their buyer losing the opportunity to secure the property they seek and abandoning the listing. Here, the balance of the fee expected by the buyer’s agent is negotiated to be paid by the buyer to the extent the seller will not pay.
Setting competitive fee splits
Seller’s agents also have the ability to avoid the low fee split conundrum by:
- properly negotiating a fair fee amount with their seller upfront; and
- offering a neutral and reasonable fee split to the buyer’s agents through the MLS publication of the listing. [See RPI Form 105]
Consider that it is not only the pricing of a home that needs to be competitive, but also the offered fee split listed by the seller’s agent to avoid chasing some buyer’s agents away.
While buyer’s agents are required to fulfill their fiduciary duty by presenting compatible listings to their client (no matter the amount of the offered fee) and may negotiate their fee split, the harsh reality is that some uninformed buyer’s agents will bypass a listing when the offered fee split is not to their liking.
When a seller seeks to cut corners and save money by reducing the amount of the seller’s broker’s fee, an insightful seller’s agent will explain the importance of paying a fee consistent with the prevailing market rates. Discussing the advantages with the seller ensures they fully understand how the fee may affect the marketability of their listing (and therefore the seller’s agent’s ability to fulfill the purpose of their employment).
Further, seller’s agents need to be cautious not to set out to intentionally double-end a sale by the charade of offering a discounted fee to keep buyer’s agents away. For instance, an openly scheming seller’s agent will knowingly offer a low fee split to discourage buyer’s agents from responding to the listing. This conduct improves the seller’s agent’s chances they will first find a buyer, especially in a world where buyer’s agents mostly fail to enter into a written employment agreement with their buyer, and thus be contacted by a BYWOB (buyer without broker) to receive a full broker fee on the sale.
In analysis, acting as a dual agent is permissible when timely disclosed the instant the dual capacity arises. However, it does create risks of liability exposure. A seller’s agent who purposefully reduces the offered fee split for personal gain, and in so doing compromises without consent their seller’s ability in the open market to locate a buyer willing to pay the highest price on the best terms at the earliest moment, violates the fiduciary duty owed their seller. [Calif. Business and Professions Code §10176(d); see RPI Form 117]