Dear Monty: Variable Rate Commission Must Be Disclosed in MLS
By Richard Montgomery
Reader Question: We want to share our variable rate commission experience. Our agent and the listing agent both wrote offers on the property. We are friends with one of the sellers’ children, and he told us the listing agent had agreed to cut his fee if he found the buyer. We informed our agent, and she asked the listing agent if this was the case. The listing agent then revealed he had agreed to cut his fee, and our agent told him that she would reduce the co-op commission to make the costs equal. She also said the fee disclosure should have been on the MLS sheet. The listing agent stated the advice he received was he did not have to disclose it. He also had never heard of this MLS rule before.
We did get the house, but we would not have gotten it if we didn’t have the inside information. We wonder how many home buyers have lost in a dual-offer situation because they were not aware of how these fee arrangements work? Also, which agent is correct on the MLS disclosure?
Monty’s Answer: Your agent is correct. Variable rate commission rules are in the REALTOR® Code of Ethics. Here is the pertinent language lifted from a more lengthy explanation in the code: “REALTORS®, acting as listing brokers, have an affirmative obligation to disclose the existence of dual or variable rate commission arrangements. The listing broker shall, as soon as practical, disclose the existence of such arrangements to potential cooperating brokers and shall, in response to inquiries from cooperating brokers, disclose the differential that would result in a cooperative transaction or through the efforts of the seller. If the cooperating broker is a buyer representative, the buyer representative must disclose such information to their client before the client makes an offer to purchase. If the listing broker has a variable rate commission at the time of the listing, it should be identified as such in the MLS.”
How many homebuyers have lost a home this way?
There are approximately five million home purchases every year in the United States. This number can rise and fall somewhat with the economy. The number of these transactions in a cooperative or co-broke sale varies from MLS to MLS, but for the sake of discussion let us use fifty percent as a co-op sales rate across the U.S. This guestimate suggests about 2.5 million of these sales are cooperative sales.
The system has the challenge built in
There are about 700 different multiple listing services in the U.S. The language they employ to communicate policy varies between MLS’s. There are about 80,000 real estate offices in the country. There is no standardized training or standardized rules in the industry, and the law varies from state to state. There is also a relatively high turnover rate in the industry which can be a training challenge. The words “highly fragmented” come to mind which translates to “difficult to control.”
The average number of transactions per agent is low, the commissions are substantial, and there is minimal supervision. The nature of the real estate transaction and how the sales develop is very fluid and with near constant negotiation. Both the seller and the buyer want to save costs, and they are looking for ways to accomplish it. Many listing agents will not give up part of the commission with both sides of a sale. Other agents, probably a much smaller number, will offer a concession on their sales commission at the time of listing if they sell the house. It is likely that agents negotiate a sizable percentage of these commission concessions during the actual negotiation of offers. There are often deadlines written into offers and counter-offers for a variety of reasons. Will the listing agent call a time-out to go back to one or more agents to tell them of the fee adjustment, and delay a decision, especially when the pay is likely to double?
A practical matter
In your own experience, you became aware of the existence of variable rates through an insider tip. The listing agent, if he was telling the truth, was unaware the rule existed. Very few brokers track this specific event. The best way to ensure that a buyer can level the playing field if they plan an offer on a co-broke listing is to ask their agent to determine if a variable commission exists before they make the offer.
Richard Montgomery is the author of “House Money – An Insider’s Secrets to Saving Thousands When You Buy or Sell a Home.” He is a real estate industry veteran who advocates industry reform and offers readers unbiased real estate advice. Ask him questions at DearMonty.com.