A few readers have sent in articles regarding the class-action lawsuit filed about commissions – an excerpt:
A class-action lawsuit is seeking to upend the way homes are listed for sale and the commissions paid to agents. The goal, say the plaintiffs, is to make home selling more affordable by challenging how agents share commissions on local Multiple Listings Services known as the MLS.
The focus, the suit claims, is on NAR’s “Buyer Broker Commission Rule,” which, according to the complaint, requires “all brokers to make a blanket, non-negotiable offer of buyer broker compensation” in order to participate in the MLS, which is what brokers traditionally use to list for-sale properties. Brokers who don’t participate in the MLS can’t effectively market their properties, according to the lawsuit.
NAR, however, has no such “Buyer Broker Commission Rule” as described in the lawsuit, according to Mantill Williams, vice president of communications at NAR.
“The only requirement imposed by NAR rule is that the listing broker advise all other MLS participants what the amount of compensation to the buyer’s broker will be,” Williams says. “That amount is determined by the seller and the seller’s broker – not by NAR or the MLS. It can be expressed as a percentage of the sale price or as a fixed dollar amount – as low as $1. Under NAR policy, a buyer’s broker is free to negotiate the amount of the commission with the seller’s broker.”
Sellers can negotiate the amount of commission they pay to their own agents. Although sellers traditionally pay the commission, that commission is typically split with the buyer’s agent. The seller might end up passing on the commission costs to the buyer in the form of a higher listing price.
There are two problems that contribute to the situation; 1) The commissions aren’t disclosed to buyers, and 2) In spite of the statement in bold above, the commission rate offered to the buyer-broker is non-negotiable, according to the Code of Ethics:
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)
The lawsuit wants to cause the buyer-agent’s commission rate – and who pays it – to be more negotiable (it’s not negotiated by the buyer now). What this lawsuit will include, but not solve, is buyer-agents steering their clients to listings that pay 2.5% or more in commission.
The attorneys will sensationalize the facts during their jury trial, and NAR will probably end up agreeing that buyers have more access to commission rates.
We will ignore this basic premise though: sellers should be free to offer a bounty to buyer-agents to sell their house, and the listing agent should convey that message, and encourage sellers to offer a rate that causes buyers to be steered to their house.
It sounds edgy, but it’s how it works in real life.
I said previously that this will likely cause more buyers to go directly to the listing agent, which will destroy the broker cooperation model we enjoy now.
But we could solve all of these issues with one answer.
If we did auctions instead, we wouldn’t have these problems.
The commissions would be obvious in advance (it’s been the 10% premium, paid by buyers), and all buyers would have an equal chance to buy the home. The sellers would be the big winners – no commissions, and eye-to-eye competition to drive the price higher, with no shenanigans!
The DRE has finally issued ‘guidance’ on the Coming Soons. Ignored are these facts about agents making off-market deals with no MLS exposure:
We see top agents doing it regularly,
There is no enforcement whatsoever, and
You give us the forms to CYA (last paragraph).
Burying this advice in the back of the bulletin isn’t enough. Until we see realtors being prosecuted and found guilty, nothing will change.
DRE Weighs In on “Coming Soon” Advertising: “Be Sure to Maintain Fiduciary Responsibility for Your Client or Face Civil and Regulatory Liability”
The Department of Real Estate has included in its 2018 Winter Real Estate Bulletin an article which discusses the risks of “Coming Soon” marketing. It includes a statement of the DRE’s view of “best practices” for listing agents:
“Coming Soon” advertising CAN benefit the seller if handled properly. Such advertising can increase exposure time of the property and generate interest in the public about a soon-to-be marketed property, helping potential purchasers prepare to tour the property or make an offer when the property is put up for sale. A practice of “Coming Soon” advertising coupled with initially not showing the property is sometimes known as a “Coming Soon—No Showing” strategy (or similar) and can well serve a client. In such a strategy, the property may show as “Coming Soon” on a multiple listing service, but also as not yet being shown to potential buyers. After a time, the property is broadly marketed as for sale. There are likely multiple listing service requirements that must be met to advertise a property as “Coming Soon—No Showing” or similar.
The potential conflict a “Coming Soon” strategy can have with a licensee’s fiduciary duty comes when the listing agent begins accepting offers before the property is exposed to a larger audience via a multiple listing service or by other means. When a property is not exposed to the full market, a client’s best interests might not be served, even when a full price offer is received (because the property may well have sold above the marketed price if better advertised). Imagine the dilemma for a listing agent if a seller accepts an offer on a poorly marketed property and then receives much higher backup offers as the property receives greater exposure.
At a minimum, an agent should disclose that a better sales price could be obtained if the property were to be marketed on a multiple listing service and obtain the seller’s prior written permission that she or he agrees to not fully market the property.
A listing agent who encourages the use of a “Coming Soon” program, without broadly advertising a property via a multiple listing service or other means, especially exposes himself/herself to the potential for an increased chance of civil liability and regulatory action when the agent also then represents the buyer in a dual agent capacity. Such a dual agent would need to be able to demonstrate that the agent acted in the best interests of the seller to obtain a purchase price that was as high as could be expected for a fully marketed property. This agent, who receives commissions on both ends of the transaction, could face scrutiny questioning whether they worked to obtain the best offer possible for the seller or was acting in such a capacity for personal financial gain.
The following are some best practices for agents when representing a seller:
• Market the property via multiple listing service or other broad advertising means.
• Make sure the seller agrees to and understands how the property will be marketed.
• If using a “Coming Soon” strategy, do not accept and act on offers until a property has been broadly marketed.
• If the property will not be fully marketed, obtain prior written permission from the seller that demonstrates they understand that such a “Coming Soon” strategy may not result in receiving the best sales price.
• Avoid double-ending a property that is not fully marketed—it is best to refer potential buyers to another agent.
The C.A.R. Residential Listing Agreement explains the benefits to the seller of using the MLS and the impact of opting out.
For the seller to instruct the agent to opt out of the MLS, the seller and broker must initial paragraph 5 of the RLA. Additionally, the seller must sign form SELM (Seller Instruction to Exclude Listing from Multiple Listing Service) or the comparable form provided by the MLS.
Yesterday we heard from Gov Hutchinson, the assistant general counsel for the California Association of Realtors. He travels around the state to inform realtors of the basic changes to forms, and helps define other aspects of the business – here’s a summary of what we heard:
Transfer Disclosure Statement – The buyer has a five-day rescission period after receiving the completed TDS from the seller (the form where the sellers disclose pertinent facts about the property). If the form is delivered to the buyer’s agent late, incomplete, or unsigned, the buyer can still cancel the transaction even if they have already released their other contingencies.
The CA Department of Real Estate is unhappy with compliance to the rule that realtors need to have their license number on every flyer, business card, sign, social-media account, etc. They have hired additional personnel to chase us around.
It’s acceptable for landlords to say ‘no pets’, but they must accept tenants with service animal (seeing-eye dog) or emotional-support animal with a note from a licensed caregiver – as long as it is reasonable. If the animal affects the landlord’s insurance, or is a threat, the landlord can say no. The law supersedes HOA, C,C,&Rs, and city codes, and the landlord cannot require a pet deposit or higher rent for these animals.
A landlord cannot require tenant insurance.
A landlord cannot be compelled to take a Section 8 tenant.
Low-flow plumbing is required in all homes throughout the state. Sellers don’t have to fix/update if the buyers will accept as-is.
If a house for sale has hidden cameras, there should be a sign near the front door to alert buyers and agents who are showing the property that the house is under surveillance.
No laws, rules, or guidance on Coming Soons – it is a local MLS issue.
I think we can say that the Coming Soon dilemma has been decided – nobody wants to address it globally, so it will be left up to the agents.
Realtors love the Coming Soons, and are now pitching them as a vital part of the marketing program. But with no rules or guidelines, what happens when a buyer wants to see the home? Do you show it during the Coming Soon period? Do you field offers? If you do get an offer, do you throw the listing on the MLS to give everyone a chance too? Or do you just make the deal and hurry off to the next one? How do you know if you got full value? (you don’t know)
Virtually every listing will go this route in 2019, and then most will be uploaded to the MLS with diminished urgency because the motivated buyers already saw the sign two weeks ago, and forgot about it.
Instead of relying on instant market data from the internet, we’ll need drivers to patrol for new Coming-Soon signs, and rely on word-of-mouth between agents to make these off-market deals we now crave for some reason.
This is how the industry enforces the rules – run an article like this every once in a while that gives tips how to CYA. We do have a form that absolves agents from wrong-doing, which just begs agents to ignore the rules:
If you or your client is interested in proceeding with an off-market listing, be aware of the potential peril of compromising your fiduciary and ethical responsibilities. Here are five scenarios to avoid, along with ways to reduce your risk.
The real estate agent or broker, not the seller, is the one pushing for an off-MLS listing. Ensure the decision is made voluntarily, solely by an informed seller. Have a signed listing agreement that spells out to clients the limitations of not listing on the MLS (such as that it may reduce their chances of getting the highest and best price for their home by reducing its exposure more widely to the public).
“Coming soon” marketing that limits the listing’s availability to a specified group of brokers during the premarketing period. Be certain all brokers and buyers have equal access to the listing.
An agent fails to notify their member MLS when a client opts to keep the listing private. Most MLSs require that after a listing agreement is signed, the agent must file a certification—signed by the seller—noting the listing is not to be disseminated to other brokers using MLS. Typically the notification must be filed within two to three business days after a listing agreement is signed. Agents can be fined for failing to do so.
An agent faces accusations of breaching fiduciary duty in order to earn a double commission. Off-market listings can lead to more dual agency transactions, as the agent may actively advertise the property only to his or her clients. While not illegal, the practice can be problematic if the prospect of a double commission is the reason an agent suggested an off-MLS listing. Agents risk being sued by a buyer client, for example, who might believe you didn’t seek the best price since you also represented the seller.
Agents are accused of antitrust or fair housing violations by limiting listing exposure to a narrow buyer segment. Be sure you are fulfilling your duty to “cooperate with other brokers except when cooperation is not in the client’s best interest,” as stated in Article 3 of the REALTORS® Code of Ethics.
For those who ‘specialize in the off-market space’, here’s a new excuse to justify your unethical and probably illegal practices: “some buyers don’t want photos of the home they’re purchasing on the internet”.
The real estate market has heated up so much in certain regions that brokers are taking transactions into their own hands—or, rather, their pockets. With increasing prices and, seemingly, more buyers willing to pay an amount that’s leaving sellers with nice profits, the question these sellers keep asking is, “Why bother with the MLS?”
While the answer to that question varies greatly depending on who is asked, more and more brokers are saying don’t list on the MLS, or even Zillow, for that matter.
“It’s an opportunity for a savvy agent, who uses his or her network properly, to make more money for their client,” says Jon Paul Molfetta, a broker with Keller Williams Realty in New York and New Jersey.
“If sellers aren’t familiar with the concept of a pocket listing, I would expect that their area/location doesn’t warrant it. Savvy sellers know when they live in a hot market. They understand the value of having a strong broker with a large network. If they contract with the right agent, they can realize top dollar without the hassle of having every nosy neighbor or unqualified buyer through their home,” says Molfetta.
“Agents who lose touch will lose deals (and) miss opportunities,” says Molfetta. “When someone misses out on a property, they might be willing to overpay for the next one. Regardless, people will not underpay for a pocket listing. If you’re a strong listing agent who controls a portion of the inventory, you provide added value to both the buyer and seller. For the buyer who wants into the neighborhood, you offer the unique opportunity of finding a home before it hits the market. For the seller who is ready to list, you provide a pool of qualified buyers from months of successful marketing and proper lead capture. It’s a win-win.”
California seems to be a haven for pocket listings, where sellers are coming to their brokers and demanding it. Lori Steele is a specialist with Beverly Hills, Calif.-based The Agency, which launched a private national off-market platform last summer called The Pocket Listing Service (PLS). Steele says it’s been incredibly popular among sellers who value privacy and speed, and it helps all the agents under The Agency roof generate business for clients and cultivate their networks.
Steele is involved with The Agency’s expansion through Orange County, Calif., and she says The PLS is a big part of the appeal.
“About 40 percent of all of our deals are done off-market,” she says. “It’s important for seller discretion, and some buyers don’t want photos of the home they’re purchasing on the internet.”
The State of California doesn’t have a Code of Ethics…..
This article is Part Two of a series arguing for the reinstatement of the Department of Real Estate (DRE)’s code of ethics. If you haven’t already, take a look at Part One, which provides context for the current vacuum in California ethical standards.
Why a code of ethics?
Every public-facing industry, especially one as complex as the real estate industry, is in need of common standards of practice. Presently, the code providing those standards for California real estate agents is far from an ideal set of rules governing an agent’s conduct in service of the public.
The code in question is a generic product of the National Association of Realtors® (NAR), which NAR’s state-level manifestation, the California Association of Realtors® (CAR), has commandeered as its own.
Real estate practice is rooted in state codes, cases and regulations aimed at protecting residents of that state, and as a result, this national code of ethics is frequently ill-fit to the unique marketplace of California. NAR has next to nothing to do with California, where principals might have little to no personal knowledge of the agent representing them (especially in urban population centers), and have no choice but to operate under a general set of expectations for licensee conduct.
Further, the Department of Real Estate (DRE) has continuously pushed the NAR code as an acceptable standard for those California licensees who also happen to be Realtors®. As we discussed recently, the state nixed the DRE’s code of ethics in 1996, and California has consequently been left without a California code of ethics for the real estate industry — a situation the DRE could rectify.
But before we can argue for the reinstatement of the DRE code of ethics, we need to understand what’s in it. What are we arguing for? And maybe more critically, what are we arguing against?
In hopes of finding some legal clarity on the listing agents who practice the Coming Soons and Sold Before Processings, I came across this example at the DRE website – we see these happen regularly:
The requirements of law governing the relationship between agent and principal is to the effect that the agent cannot be allowed to profit at the expense of the agent’s principal, no matter whether the result is reached by misrepresentation, concealment or other fraudulent device.
In the case of Rempel v. Kells the court held that an agent obtaining profits by fraudulent conduct and concealment from the principal is not even entitled to recover expenses incurred by the agent in connection with the transaction. The duty of a real estate broker to disclose material facts known by him to the seller employing him was again confirmed in the appellate court case, Jorgensen v. Beach ‘n’ Bay Realty, Inc., (1981) (125 Cal. App. 3d 155)
In Jorgensen, the listing broker presented an offer to his seller that was only about 7 percent less than the listing price. The broker presented the offer on behalf of a speculator for whom the broker hoped to act in future transactions. When the broker presented the offer, he informed the seller that he was also acting on behalf of the offeror and was therefore a dual agent in the transaction.
The seller wished to counter offer on the price, but the broker recommended that the seller not do so. The seller followed this recommendation. The sale was consummated. Shortly thereafter the purchaser resold the property through the broker at a 13.5 percent profit.
In reversing a nonsuit for the broker, the appellate court held that the broker did not fully discharge his fiduciary obligation to the seller by simply disclosing that he was acting as a dual agent in the transaction.
It was the broker’s duty to disclose all material facts known to him which might have affected the seller’s decision to accept the offer. The court suggested that the facts known to the broker which might have affected the seller’s decision included (l) the fact that the buyer was acquiring the property for investment purposes and (2) the fact that the broker had a substantial personal stake in negotiating a bargain purchase for the buyer. (Field v. Century 21 Klowden-Forness Realty (1998) 63 Cal.App.4th 18).
The standard knee-jerk response about pocket listings is to insist that some sellers don’t want to be on the open market for personal reasons, and that’s fine. In reality, those should be limited to major Hollywood icons who are unsure of how much their star-power adds to the price of a home, AND those who are flat-out bamboozling the buyer – like these sellers, who just sold this property off-market for $11,000,000. The buyer’s agent has been in the business for two years and this is his only sale ever on his Zillow profile!
Eight months ago, the sellers paid $7,195,000 for it after 1+ years on market:
If the sellers are fully aware that they are engaging in an off-market deal, then fine. But most are being duped into thinking they are on the open market, but then all of a sudden – whiz, bang, boom, whoosh – and there is an offer on the table that is good enough to get them on their way.
It moves so fast that they never realize they weren’t on the open market.
In San Diego County, you can’t say there isn’t enough competition.
There are around 20,000 realtors, and last month we only sold 3,288 houses and condos! You can list your home for sale on the MLS for as little as $95, and every agent offers their own service/commission package for the consumers who are willing to shop around.
The main beefs:
Commissions aren’t disclosed. The realtor community will fight hard to keep the actual amount of our commissions private, but it’s not that big of a deal. The buyer-agent commission is disclosed in every MLS listing, so it’s just the seller-side – which is disclosed, and agreed to, by the most important person – the seller! But if they were disclosed to the general public, we’d probably find that there isn’t as much difference between traditional and discount agents as we thought.
Commissions haven’t changed with higher pricing. An ivory-tower professor ranted on and on about this topic, and cited two ancient studies of other industries that weren’t applicable. She needs to do a current study of actual commissions taken from the closing statements for accurate comparisons.
Decouple the commissions, and have the buyers pay their own agent. While this sounds like a great way to lower the buyer-side commission in theory, it ignores two critical facts. A) Sellers are offering a reward, or bounty, to buyer-agents to sell their home, and should have every right to do that, and B) the likelihood of an agent being able to steer a buyer towards a home just because of a higher commission is extremely remote. If the FTC didn’t agree, then publicly displaying the buyer-side commission could help, and allowing rebates pretty much covers it – no other change needed.
What wasn’t covered:
A.What you get for the money. If the FTC and DOJ wanted to impose one thing to help the consumer, it would be requiring that every agent publish the exact services they provide for the money, and their actual recent experience in selling homes. Realtors have fought every attempt at publishing the sales history of individual agents, but have somehow allowed Zillow to do it openly. I think it’s time that consumers know the truth.
B.Enforcing the rules. With no enforcement, there are no rules. The FTC and DOJ could at least publish their opinions on pocket listings so agents know what is legal, and what’s not.
A couple of people mentioned that they should do another workshop with actual realtors working the street. I’m available!
The selling of listings prior to MLS input has happened since the beginning, but in the era of inventory desperation, we’re now seeing companies openly advertising ‘previews’ of their listings before they put them on the MLS. Before long, the MLS will just become the market of last resort, much like Loopnet is for the commercial brokers.
Home sellers expect and deserve open-market exposure, but nobody in the business wants to give up the hope of double-ending a commission, or making a quick deal and moving on to the next. Many of these off-market deals involve an outside buyer’s agent, which is really mind-boggling that listing agents are so lazy that they are willing to compromise their fiduciary duty to their own seller just to make a quick buck.
Frankly, this issue is only going to get worse. Redfin (dozens of times) and other disrupters are doing it too, and we are heading towards having only one agent per sale – which sounds efficient, but will sellers get full exposure?
Here’s a solution for those agents who insist on doing it, and a way to ease into a more-ethical era (hopefully):
DON’T PUT THEM IN THE MLS – EVER.
For agents who say that they have to input their listings per the rules, give me a break. You already broke all the other rules, don’t go holy roller on me now.
Here are the benefits of not inputting your off-market sales onto the MLS:
Other agents won’t have to explain to their waiting buyers why they didn’t get a chance to make an offer.
Other agents won’t think you’re a sleazebag.
Other agents won’t be encouraged to do it too.
You won’t leave a trail of evidence for the district attorney.
Help preserve the MLS and our business.
How bad is it? An agent who sells 100+ homes per year recently told me that half of their listings sell before MLS-input!
Did you have special circumstances that required an off-market sale, and you insist on MLS input? No problem – mention the special circumstances in the remarks so others don’t jump to their own conclusions. But special circumstances are rare – most common and unsuspecting residential home sellers deserve open-market exposure.
We’d like to believe that realtors are ethical – heck, we have a Code of Ethics! But when tempted to make a quick and sexy off-market deal, most agents can’t resist, even if it’s not in their sellers’ best interest. I’m convinced that the vast majority of agents don’t even know the difference.
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