Commissions are negotiable, no doubt about it. However, if in negotiating a commission to secure the business, the agent is knowingly harming the client, is it the right thing to do?
Here’s a scenario. The sellers are modest investors. Their investment in a small group of rental properties is not penciling out and they’re starting to go upside down. Several factors are contributing to their bleak financial picture – difficulty in retaining renters, a softening market and lack of enough liquidity to subsidize their properties through the thinning months. Certainly, it was their choice to make the investment and the risk of owning properties in a down-turning market is theirs to bear. Never-the-less, you’re an out-of-area agent competing for their listings in a neighborhood a good twenty miles outside your typical area of focus. You need the business so, in order to win it, you offer to cut your commission. In your usual territory, the selling office commission (SOC – that commission payable to agents representing buyers) is typically “x” percent. However, in the neighborhood where the listings are, it’s common for it to be “x” plus 1/2%. (Note: It’s common for selling office commissions to differ by neighborhood, type of property, price range, etc.)
While negotiating with Mr. and Mrs. Seller, you explain half of your reduced commission will go to you (really your broker for whom you are a sub-agent) with the other half payable to the buyer’s agent side. What you’re not telling them is that advertising and paying a lower than typical SOC in the listings’ neighborhood will probably produce fewer showings. Furthermore, you omit that the sellers would be better served to pay the typical SOC in said neighborhood, while you take the hit on your listing commission side of the equation. To the sellers, your offer seems reasonable enough. After all, they need to get out from under their investment. Saving commission dollars will help cushion their losses, especially as they know they’ll be writing a check to walk away at closing.
Although it is a buyer agent’s responsibility to show properties, even if their SOCs are reduced, realistically, many don’t for the simple reason that they’d rather earn more by showing only those “full SOC” listings. An exceptional agent who is a strong negotiator will explain to his buyer clients that he charges a certain fee for his services and that, if the SOC is below that typical fee, he’ll look to the buyers to make him whole.
So, how is the seller harmed? SOCs below the norm of the neighborhood reduce agent traffic which means fewer showings. Statistically, fewer showings lead to longer market times, creating greater pressure on price. The net result for the seller, then, may be property which gets less traffic, costs more in time and inconvenience to list and ultimately sells for a price below what it would have commanded all because buyer agents were alienated by the discounted SOC. For a seller in a duress situation, this can be very harmful, indeed, especially in a “buyer’s” market.
Researching selling office commission is very easy. Simply look at recent sales in the neighborhood and price range for the specific property type. Compare their SOCs to those of active listings. In general, there will be a correlation between market time and commission, all other things being equal. Think before you advocate a lower selling office commission. A short term business win may be a long term loss for both you and your client.