Dual Variable & Co-Op Commissions – How to understand them before buying or selling a home
Pete Ambrose – 8/5/2021
The “Variable (AKA Dual Rate)” is defined by the National Association of Realtors® (NAR) as “listings where one amount of commission is payable if the listing broker’s firm is the procuring cause of sale/lease, and a different amount of commission is payable if the sale/lease results through the efforts of the seller/landlord or a cooperating broker [buyer’s agent].”
When used properly by your real estate agent, a variable commission typically looks like this: the seller agrees to pay their listing agent a Sale Commission of 6%. If the buyer comes to the table with their own agent (a buyer’s agent), the listing agent agrees to give them about half of the sale commission so they each make 3%. But, if the buyer comes to the table via the listing agent or the listing agent’s marketing, the listing agent agrees to take a variable Sale Commission of 4% and save the seller 2% in commissions. Sounds straightforward enough, right? Unfortunately, it’s not that simple and it opens everybody up to massive conflict of interest issues in the sale of a home.
Conflict of Interest #1: Is it humanly possible for a real estate agent to represent both sides of a transaction and reasonably double-end a deal? This is like an attorney representing both the plaintiff and the defendant. In an off-market transaction, where the buyer and seller already know each other and they just hire a real estate agent to be a Transaction Broker (like a referee or a judge), this is totally possible. However, dual representation gets muddled if the listing agent has already been hired by the seller and they have already been working as a fiduciary for their sellers’ interests. It is not humanly possible for them to step back and be a Transaction Broker and give the buyer any representation because the listing agent is obligated to serve the seller’s interests. This becomes even more complicated if the listing agent also has an Exclusive-Right-to-Buy contract with the buyer and has been working as a fiduciary for the buyer as well.
Conflict of Interest #2: If the listing agent already has a relationship with a buyer (Exclusive-Right-to-Buy) who might be interested in buying the listing, the listing agent has a conflict of interest not to sell their buyer their listing. This is because the listing agent will get paid more to sell the buyer a different house and take a full buyer’s agent commission (roughly 3%) on that sale, plus the 3% on the listing versus selling their listing to their buyer and taking a slightly higher commission (4%) on one transaction.
Conflict of interest #3: If the listing agent does not have a relationship with the buyer (buyer is truly unrepresented), the listing agent has an interest in selling the buyer their listing because they would get paid more on the transaction. No buyer’s agent typically means that the listing agent will take a higher sale commission, potentially the entire 6%. This unrepresented buyer may not be the “best” buyer for the seller, but the listing agent is conflicted and will likely try to sway the seller to take the offer because the listing agent will make more money.
What if the listing agent agrees to a “full” variable commission? So, if the listing agent is able to sell the house to a buyer without the assistance of a buyer’s agent, they would agree to only charge the seller the sale commission minus what they were going to pay the buyer’s agent, which would be 3% in most cases. This takes care of conflict of interests #1 & #3 because the agent would treat the buyer as a customer, not giving them representation, and thus pass the savings onto their seller who they’re representing. However, it makes conflict of interest #2 more apparent if the agent has a relationship with the buyer and must also give them representation. Additionally, the opportunity for the agent to earn a commission on a separate transaction as a buyer’s agent is now lost, and the agent is disincentivized to sell the house to their own buyer.
What if the listing agent agrees to a full variable commission but only if they do not already have a previous Exclusive-Right-to-Buy relationship with the buyer? In other words, if the listing agent is able to sell the house to a buyer without the assistance of a buyer’s agent AND they don’t know the buyer, they will charge 3%. BUT, if they do have a relationship with the buyer, they could sell them the house and take the full Sale Commission (probably around 6%). In theory, this takes care of all the conflicts of interest.
Unfortunately, this approach leads to a lot of confusing ‘If/then’ contract language to avoid any conflict of interest, and overall, most agents simply don’t offer this type of commission structure. If this is the case, what is the purpose of the “Sale Commission” and the “Co-Op Commission” in the first place if it’s so confusing and full of conflicts of interest? Can’t we just charge a listing agent commission and a buyer’s agent commission? This leads us to point #2.
Point #2: The Sale Commission and the split Co-Op Commission is when the listing agent charges a Sale Commission to the seller and agrees to pay a portion of that commission as a Co-Op Commission to the buyer’s agent. This is the traditional way of selling real estate.
Problem #1: In most states, there is an Exclusive-Right-to-Sell contract that provides a space to fill in a Sale Commission that will be charged to the seller. Then, there is a space to fill in the Co-Op Commission that will be paid to the buyer’s representation. That’s it. There is no space in the Exclusive-Right-to-Sell contract for the seller and their agent to agree on a variable commission before marketing the home for sale. If the agent wants to use a Variable commission, they must write it in manually, which leads to agents acting like attorneys and coming up with their own legal language which is sure to have problems of its own.
Problem #2: The Sale Commission and Co-Op Commission are confusing to consumers. Most consumers will look at an Exclusive-Right-to-Sell contract and believe they are to pay both a sale commission and a buyer’s agent commission. It is not clear that the buyer’s agent is paid out of the sale commission.
Problem #3: The variable commission is confusing to real estate agents. Since there is no given space to fill in a variable commission in the exclusive right contracts, the vast majority of agents do not use a variable commission, nor do they understand how they work. Therefore, if a buyer is unrepresented, the listing agent takes the full sale commission and has a major conflict of interest as they appear to be double charging their seller. If the listing agent has a buyer for the listing whom they have a relationship with, they have to figure out how to proceed with the transaction with no guidance from the exclusive right contracts. What kind of capacity will they represent each party and how much will they get paid?
The root of the problem:
The system is outdated. Due to one simple factor: consumers have complete access to real estate listing data. Therefore, buyer’s agents can no longer reasonably argue that they “found the house and brought the buyer”. The definition of the Variable/Dual Rate provided by NAR clearly says, “If the sale results through the efforts of a cooperating broker” aka, buyer’s agent. Therefore, a buyer’s agent cannot reasonably claim to be the procuring cause if the buyer can find the house themselves on any real estate website. Conversely, every listing agent who posts their listings for sale on consumer-based real estate platforms (such as Zillow, Redfin, and Clover Home) can claim that they found the buyer as a result of their marketing. Thus, sellers are misguided as to why they are paying the buyer’s agent. Sellers reasonably believe that they hire a listing agent to market their home directly to the public and expect to pay their agent for that service. Buyers are expected to find homes that they want to buy and reasonably believe they should be paying their agent for the services they provide.
Solution Part A: Exclusive-Right-to-Sell contracts should be modified in all states to eliminate the misleading “Sale Commission and Co-Op Commission” and replace it with something to the following effect:
Sale Commission: $_____ OR _____% of the gross purchase price.
Buyer Agent Commission: $_____ OR _____% of the gross purchase price.
Listing Agent Commission (Paid by seller): $_____ OR _____% of the gross purchase price.
MAX Buyer Agent Commission (Paid by seller) $_____ OR ______% of the gross purchase price.
In the event that Listing Agent has previously obtained a signed Exclusive-Right-to-Buy contract by a prospective buyer prior to the listing date, the listing agent must change their status to a Transaction Broker and may charge the seller both the Listing Agent Commission and the MAX Buyer’s Agent Commission. In the event that the listing agent works as a Transaction Broker for both Buyer and Seller, the listing agent may not charge the seller any Buyer’s Agent Commission if the listing has not been publicly marketed (pocket listings).
Solution Part B: In order to eliminate commission bias, the advertising of Co-Op Commissions should be prohibited everywhere, including privately between brokers and MLS subscribers. Rather, the seller will determine a maximum commission that they are willing to pay a buyer’s agent prior to listing the home. The buyer’s agent commission will be negotiated with every purchase contract, without exceeding the maximum set by the seller. The payment amount of the buyer’s agent commission and who is paying it (buyer or seller) is negotiable with every purchase contract. Of course, there is always the option for the buyer’s agent to charge their buyer any amount of their commission that the seller did not pay.
Until the industry changes, Clover Home has solutions of our own
1. First off, the percentage-based commission is doing nothing more than creating an oversupply of real estate brokers in America. We never charge based on a percentage basis, even when the seller is offering to pay us a percentage-based buyer’s agent commission. We charge $10,000 for full-service and $3,000 for Clover Home Direct which saves buyers and sellers thousands of dollars. We also disclose on our site how much buyer’s agent commission is being offered with every listing.
2. All of our purchase contracts are written with language to ensure that the listing agent reduces the Sale Commission to account for our reduced commission so that the listing agent can’t pocket the extra cash. This way everything stays transparent between buyer and seller. The way it should be.
3. Our listing contracts are written with a listing agent commission and a buyer’s agent commission. None of this confusing Co-Op commission nonsense. This way we can’t double-dip, even if we wanted to.
4. We have built an auction platform where people sell their homes to the highest Net-to-Seller bidder, commissions included. This puts commissions out in the open and makes real estate transparent to buyers and sellers.
Tips for negotiating with your real estate agent
When selling a house, be sure to ask your listing agent to work on a full variable commission but only if they do not already have a previous Exclusive-Right-to-Buy relationship with any potential buyers. In other words, if the listing agent is able to sell the house to a buyer without the assistance of a buyer’s agent AND they don’t know the buyer (the buyer was a result of the listing agent’s marketing), they will charge roughly half of the Sale Commission. BUT, if they DO have a relationship with the potential buyer prior to listing your house, they should show the house to this buyer and expect to make both sides of the commission. Thus, you have incentivized your agent to bring their own buyers to the table. Keep in mind, that many states still do not allow Dual Agency (acting as an agent for both parties). Therefore, if your agent does bring a buyer who they have an exclusive right relationship, and you live in one of these states, your agent will have to become a transaction broker (like a referee or a judge) and do their best to not be a fiduciary for either party. Which may not be humanly possible… see Conflict of Interest #1.
States that do not allow Dual Agency – Alaska, Colorado, Florida, Kansas, Maryland, Oklahoma, Texas, Vermont.
When buying a house, before you sign an Exclusive-Right-to-Buy contract with your agent, ask them how much money they think they are worth for the buyer’s agent services they provide. Agree on a specific dollar amount that their commission will not exceed, not a percentage-based commission, and ask your agent to work on this flat fee even if the seller is offering to pay more. This way your agent does not make more money if you spend more money and their interests are aligned with yours. Make sure they write purchase contracts with language to ensure that the listing agent reduces the Sale Commission to account for their flat-fee (reduced) commission so that the listing agent can’t pocket the extra cash
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