I've included this article since it discusses some real life situations you will encounter in real estate and the appraisal business. This article is reprinted with permission from Ken Jones.
Don't Dictate My Fee
When a listing agent sets the amount of the commission to be paid to a buyer agent, is the listing agent acting legally and ethically?
As we all know, listing agents have a fiduciary responsibility to their clients, the sellers of real property. They're hired to provide services to market, as well as to promote the best interests of those clients. And, for performing these services, they're entitled to charge their clients a fee; a fee that should be freely negotiated solely between the listing agent their client, the seller.
Likewise, buyer agents also have a fiduciary responsibility to their clients, the buyers of real property. And, like listing agents, buyer agents are hired to provide services to accomplish their clients goal of purchasing real property by 1) seeking out, previewing and showing qualifying property, 2) performing due diligence, 3) providing counseling and advice, 4) preparing and negotiating offers to purchase, 5) assisting to arrange financing, and so on. And, for their services, buyer agents are equally entitled to charge a fee which should also be freely negotiated between the buyers agent and their client, the buyer. In fact, anti price-fixing laws and regulations require that all fees be freely negotiated between an agent and a client.
It's also pretty much the law of the land that a buyer agent and a listing agent are two different entities. However, it seems that many agents fail to recognize the fact that buyer and listing agents each have clients whose interests are both different and competing in the same transaction. This disturbing truth is evident on each and every multiple listing sheet in every multiple listing service that I've ever seen. For example, there's a section on virtually every MLS form that states the amount of the buyer agent fee; a fee that the listing agent has usually unilaterally and arbitrarily decided should be paid to the buyer agent. This is a legally and ethically dangerous practice, aside from being ludicrous on its face. It's like saying that a plaintiff's attorney has the right to dictate the amount of the fee that the defendant's attorney can be paid to represent the defendant.
Interestingly enough, even the National Association of REALTORS® seems to be perpetuating the outdated concept of a "shared" commission which is addressed in their 2004 Code of Ethics and Standards of Practice, from which the following quote has been taken:
Standard of Practice 16-16: REALTORS®, acting as subagents or buyer/tenant representatives or brokers, shall not use the terms of an offer to purchase/lease to attempt to modify the listing broker's offer of compensation to subagents or buyer/tenant representatives or brokers nor make the submission of an executed offer to purchase/lease contingent on the listing broker's agreement to modify the offer of compensation. (Amended 1/04)
It's pretty alarming when you consider, that on the one side, we have 1) state and federal anti price-fixing laws, as well as 2) state government real estate licensing departments with rules and regulations that require buyer agents to freely negotiate their fee with the buyer, while on the other side we find 1) these laws, rules and regulations are being totally ignored throughout the United States on a daily basis, and 2) those who are ignoring the laws are doing so with the assistance of the National Association of REALTORS® that consciously has taken an opposing position to these laws, rules and regulations as recently as January 2004.
Even most state licensing regulations provide, that if a listing agent wishes to act as a dual agent (and obtains the appropriate permissions from both his seller client and a buyer), the listing agent can then negotiate and agree to a fee for selling the property as a dual agent. But, arguably, the only other agents that can be legally bound to accept the selling commission for selling that property are the other agents in the same company as the listing agent, as real estate licensing laws generally dictate that all agents in the same listing company are also the listing agent and/or dual agent.
Frankly, I can't imagine that it's legal (much less, ethical) for a listing agent from ABC Realty to set the amount of the fee to be charged by a buyer agent from XYZ Realty, because it clearly denies the buyer and the buyers agent their legal right to freely negotiate the amount of the buyer agents fee. And, as the practice of "splitting the listing agents fee" denies the legal right of a buyer to freely negotiate the buyer agents fee, it also has the practical effect of forcing the buyer agent into a sub-agency relationship with the listing agent, thereby stripping the buyer agent of their independence. If you disagree with this observation, then please answer this question: When "splitting" a single fee, and when the amount of the split is dictated by one agency to another agency, isn't the dictating agency the superior agency, while the one being dictated to is the subordinate agency? (Duh!)
Another problem in this mix is the common thought that the seller pays the real estate commission. Let's make an objective analysis of this concept:
1. In fact, the seller virtually never brings money to the closing table. Consequently, the seller can't possibly pay any expenses, including the brokerage fee, out of his/her own pocket. The truth is, the seller brings the deed to the closing, and the buyer brings the money.
2. All of the sellers debts related to the sold property are paid by the buyer solely from the buyers funds prior to the seller transferring title to the buyer and prior to the seller receiving any money from the buyer. Why is this done? Because virtually all title insurance policies require that all debts against the property be paid in full before the title insurance policy takes effect (except in the case where the buyer assumes the sellers debt).
So, unless, before going to the closing, the seller pays off all of the existing debt and other expenses that either are or can become liens against the property (such as a mortgage, past due property taxes, utility bills and the like), all of the money used to pay the debts against the property, including the real estate brokerage commission for all agents, comes from the buyer. The bottom line is, that in virtually every transaction in which a brokers fee is paid, the money used to pay that fee must come from the buyer, because the seller has no money until after transferring the deed to the buyer, which is literally the last act of the closing.
Another illustration in support of the fact that the buyer pays all costs and fees in a real estate transaction is evident in another commonly misunderstood situation when it's said, "the seller is paying the buyers closing costs."
FACT: In almost every instance of this type, the price of the property is increased by the anticipated amount of the buyer's closing costs. This price increase takes place at either the time of originally offering the property for sale (because it may be common practice for buyers to finance their closing costs in that local market), or it's done at the time of the purchase contract negotiation.
Regardless. The increased price of the property is always paid by the buyer since those "seller paid" closing fees are actually built into the buyers mortgage. In the end, the reality is that the seller doesn't pay either the brokerage commission or the buyer's closing costs. But, back to the matter at hand. As to the amount of the fee / commission charged by each agency position, there's no particular need for the buyer agent to know how much the listing agent is charging in a given transaction, as there's no need for a listing agent to know how much the buyer agent is charging. In fact, the only time that the amount of the fee charged by either agency position might reasonably be disclosed to the other is at the time of contract negotiation when both agents are attempting to understand and deal with the net proceeds desired by the seller. But, even then, it's not particularly necessary to disclose the privately negotiated fee.
There are also few questions that gnaw at me regarding the current practice of listing agents publishing to the world the amount of the fee being paid by the seller.
1. Isn't it the fiduciary responsibility to a client that an agent keep the terms of their agency employment contract a private matter between the client and the agent?
2. Doesn't the term "fiduciary" also apply to the amount of the fee the client has privately negotiated with their agent? Both buyer and buyer-agent, as well as seller and listing-agent?
3. Isn't it detrimental to both the sellers and buyers negotiating position to disclose the amount of commission each has agreed to pay, since that disclosure could provide an indication of their relative level of desire, or perhaps, desperation to either sell or buy?
As I see it, there are three simple steps that can and should be immediately implemented to eliminate this legally and ethically questionable practice:
1. Listing agents must never impose a fee or commission upon buyer agents when taking a listing.
When taking a listing, the listing agent should always advise the seller that the fee being charged by the listing agent is only for services rendered to the seller in connection with marketing the sellers property, which generally includes pricing and marketing advice, the placing of a sign, creating and placing various forms of advertising, submission to multiple listing service(s), promoting the property to other agents, negotiating for the sellers position at the time a proposed purchase contract is presented by a buyer-agent, assisting with post-contract duties, etc. Additionally, it should become the listing agents responsibility at the time of listing to negotiate a selling commission, but only for his/her own agency to sell the property as a dual agent (when obtaining the sellers written permission to act as a dual agent). It's also important that the seller acknowledge, in writing, that this selling commission is only for the agents in the listing agency who might sell the property as a dual agent.
2. Listing agents must advise seller clients of buyer agent relationships and fee arrangements.
When taking a listing, a listing agent should explain to the seller that buyers may hire a buyer agent to represent them, and further explain that the buyer agent fee is negotiated freely between buyer and the buyer agent, not by the seller or the listing agent. Also at the time of listing, a listing agent should explain to the seller that all fees for both the listing agent and the buyer agent are typically paid from the proceeds of the purchase. The listing agent should also assure the seller, in writing, there is no obligation to sell the property unless they (the seller) are satisfied with the amount of the net proceeds, after the payment of all brokerage fees.
3. Listing and buyer agents should not disclose the amount of their fee to anyone, including to each other, without the expressed written consent of their respective clients.
As a practical matter, the net proceeds to the seller is an essential factor to be dealt with when negotiating of a bona fide offer to purchase. However, it's not essential that either the sellers or buyers agent disclose the amount / rate of their fee to each other. However, there may be circumstances where disclosure by both agency positions might better serve to bring the buyer and seller to a meeting of the minds, although this decision should be left to the two agency positions to deal with as circumstances dictate, but always subject to the approval of their respective clients and acting their clients best interests.
In closing, it seems clear that the practice of listing agents setting the fees of buyer agents is legally and ethically dangerous since it denies the basic right of buyers to obtain the benefit of professional assistance through competitive pricing. This practice also reeks of an implied agent / sub-agent relationship between the listing and buyer agents, with the buyer agent becoming an unwilling subordinate agent to the listing agent. When we combine these problems with the fact that the majority of published fee splits are nearly identical within most market areas, we have, at the least, the appearance of an illegal, collaborative price fixing scheme rather than fees that have resulted from a free and open market driven by healthy competition. I believe, that unless the current practice of listing agents dictating the fees that are paid to buyer agents is eliminated immediately, there's little doubt that sooner, rather than later, there will be serious and costly repercussions that will have a substantial negative impact upon all in the real estate brokerage industry. A "black eye" that the industry does not need, and can easily avoid.