The High Road: Yes, it’s okay to talk about commissions

 

The Times loves to skewer sacred cows (get it?), and regular readers know that I have a healthy appetite for doing so as well. (Flickr photo by turbotoddi)

The New York Times has forced my hand.  The newspaper’s lead story in Sunday’s Real Estate section–which quotes Charles Rutenberg co-founder Kathy Braddock, among others–maintains that sellers can negotiate broker commissions successfully.

Ironically, I had been musing about commissions since a lively discussion that several members of the REwrite group of real estate bloggers enjoyed at a meet-up that I organized last Thursday night.  More about that in a bit.

As the Times noted, real estate practitioners face constraints when discussing commissions under federal law that bars price-fixing.  So, let me stipulate that I do not advocate any commission percentage or disclose my standard; instead, I’ll assume for purposes of this post 6 percent because that is the fee I see most frequently in routine Manhattan listings.

(The fee usually is split four ways–among the seller’s broker, the buyer’s broker and the firm with which each broker is affiliated.)

The Times began its article on commissions this way:

Prices in the New York real estate market may rise and fall, and trends in housing may come and go, but one number has remained largely unaffected: the 6 percent broker commission.

But lately that figure is under attack by buyers and sellers looking to save money in a tough economy, and by an array of alternative real estate business models that offer an à la carte menu of services to clients willing to do some of the work themselves.

There follow anecdotes in the piece showing how some sellers saved a ton of money by working with brokers who don’t offer full services and by undertaking most, if not all, of the responsibilities of selling their properties themselves.  Doing so, the Times acknowledged, requires the owners to shoulder a heavy burden.  Writer Susan Stellin conceded:

All three sellers who declined the standard commission model said anyone considering this option should be prepared to invest a lot of time in the sale, and to develop a thick skin for comments made during showings and the back-and-forth of negotiations.

As I see it, the Times implies a trend where none exists, especially because sellers appreciate that our current housing market makes it tough to unload a property that isn’t ideal.  The time, energy and experience, not to say, distance needed in any negotiations are far greater than in markets that are hotter, even warmer, than the one in which we are submerged today.

I would argue that for every successful sale by owner (FSBO), I could unearth one that has failed, maybe two or three.  In a tale on which I commented last year, BrickUnderground.com chronicled one such FSBO saga.

Yet I agree, and have written, that many broker commissions can be hard to justify in terms of the time and professionalism that we bring to the table.

Why commissions should be based on a percentage–whether the property sells for $250,000 or $25 million–rather than on a fixed fee eludes me (though, admittedly, I follow the convention).  And why should brokers almost always earn so much more than the lawyers who negotiate contract subtleties?

Scandalously, all that’s necessary for a real estate agent to become licensed is some classroom time and the ability to pass a laughably simple 100-question multiple-choice test.  By contrast, everyone knows that lawyers have to pass an intensely rigorous bar exam.

Lawyers are paid to use their brains.  As for brokers. . . well, too many of us in New York are skilled at little more than opening doors.

That said, the topic that came up in my REwrite group had a quite different focus.

Provocatively, someone wondered why brokers don’t charge even higher percentages than the prevailing ones if the point is to sell a property.  That way, he suggested, the listing broker would give more than the standard even split to the buyer’s broker, keeping less for herself or himself (and of course the firm).

If unethical buyers’ brokers decide what properties to show their customers and clients so as to maximize their income, then why not bait all of us with even bigger commissions?  Such a practice would serve the seller’s best interests by producing the most exposure and the quickest sale, but it would serve a broker’s self-interest much less well.

Alternatively, brokers could opt for the going rate and be satisfied with giving the other side a greater proportion of the commission than the listing broker receives.  If there’s something wrong about this model of serving clients, I don’t know what it is.

Commissions always will be a subject that generates much anxiety and heat.  That doesn’t mean we shouldn’t discuss our fee structure, even if doing so means wearing asbestos clothing and daring to conceive of–yea implement–change.

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Malcolm Carter
Licensed Associate Real Estate Broker
Senior Vice President
Charles Rutenberg Realty
127 E. 56th Street
New York, NY 10022

M: 347-886-0248
F: 347-438-3201

Malcolm@ServiceYouCanTrust.com
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