MLS Compensation; The Ugly Truth Today

The good, the bad and the ugly truth today
Guest perspective: MLS offer of compensation needs to go away

Jeffrey Bastress

Real estate compensation structures are wrought with problems, which could be effectively eliminated if the MLS-mandated offer of compensation were done away with.

Agent compensation is set by office policies that support a specific company's fee philosophy and income. But the system doesn't take into account how it affects consumers' opinion of value received, or how it can clash with other companies' compensation policies. These policies also contribute Compensation: The good, the to uneducated agents blacklisting certain properties -- either intentionally or unintentionally.

One major contributing factor to the compensation problem is that a buyer's agent is paid according to the selling agent's office policy. This totally disregards the buy-side agent's office policy on compensation, the buyer's contract with his agent and the seller's best interests, which are to remove any barriers that may keep potential buyers from seeing their home.

One problematic result of the mandatory unilateral offer of compensation is the belief that the seller and his agent are the ones paying for the buyer agent's fee. In reality, both the seller and buyer agents' fees come from the negotiated sale price, and are deducted from the proceeds at closing. It is the buyer who put the money on the table and who has agreed to pay back the lender.

It's no wonder that sellers feel brokers' fees are too high -- they think they are the ones paying for the buyer's agent fee. They've been conditioned to feel this way by seller agents who simply dictate company policy that's based on the MLS compensation offer. It is all sellers and their agents have known without questioning for so many years.

The practice of including the buyer agent fee in the commission fee that sellers pay has directly contributed to the growing number of for-sale-by-owners. FSBOs in many cases offer a fee to the agent who brings the buyer, which shows the seller is not averse to paying a fair fee to one agent to secure their home sale.

If the MLS offer of compensation were not offered to buy-side agents, then many if not most FSBOs would gladly let a seller's agent handle the entire transaction, knowing the one fee they would incur. Also, all buyer agents would negotiate their fees in the offers from the closing proceeds or be paid by the buyer.

Consumers get it. Most agents and their companies do not. The MLS definitely does not.

Fixing this fundamental compensation flaw would eradicate the entire debate over high commissions charged by so-called "traditional" firms versus the "discount" brokerage fees. By eliminating the MLS offer of compensation, traditional firms can list homes for any fee their company sets on the selling side and know that buyer agents will be compensated either directly by their buyer or from negotiated proceeds at closing.

The difference is that the seller and buyer each pay for the services they bargained for, and the negotiated sale price includes all these facts on the table. Buyers would get to see all properties, not just ones that fit the agent's company policy. Sellers would get more showings and opportunities to entertain offers that they don't see now due to the invisible barriers set when the compensation offer is perceived to be too low.

One-size-fits-all company fee policies do not take into account what the consumer pays for compared with the perceived value of service they receive. Agents of all experience and education levels charge the same for their services. It's company policy!

The internal office splits favor the company on new agents versus experienced agents, but the consumer pays the same no matter the experience level. This is another reason consumers feel they pay too much -- 90 percent of the time they pay the same amount for inexperienced service that the other 10 percent of consumers paid for more experienced service. This contributes to the bad rap that real estate professionals have to combat, and makes it harder for the experienced agents to justify their fees as horror stories abound.

If we eliminate the MLS offer of compensation, we could eliminate:

--Sellers' adversity to high fees;
--"Traditional" versus "discount" fee battles. Each will simply negotiate their fees with their clients and get paid from proceeds at closing;
--Blacklisting certain companies' listings due to low co-broke offers of compensation. More showings and more offers is a good thing;
--Agents thinking the world spins around their office policy. So why doesn't everyone else?

And instead we could:

--Empower consumers with decisions on offers based on more than just one office policy;
--Enable consumers to more easily shop and compare agents to ensure value received;
--See more FSBOs hiring selling agents;
--Minimize MLS arbitration (as 90 percent currently is over compensation disputes);
--Enable buyer agents to negotiate fees based on anticipated workload for "entry-only" or flat-fee listings.

The days of MLS compensation's usefulness are over. It had a purpose back when information was hard to come by and all agents basically worked for the seller.

Just like sub-agency, which recently became an issue of mandatory disclosure, it will have to be mandatory for brokers and agents to disclose the MLS offer of compensation to clients for it to go away. Otherwise the issue of whether the office policy best serves agents or clients will not be considered. The ugly truth of offering compensation through the MLS will not, in my humble opinion, be considered unless the MLSs mandate changes themselves.

The many agents that not so long would never have worked as buyers' agents or only allow sub-agents to show their listings have learned only by mandatory agency disclosure why to change for the better. These will be the same ones that will only accept the obvious truths of MLS offer of compensation, only by a forced MLS mandate. Sadly, this encompasses the vast majority of real estate company policies and their agents' blind acceptance.

Jeffrey Bastress is president of Sterling, Mass.-based Startpoint Realty. He will be hosting a roundtable discussion on problems with the MLS offer of compensation at Real Estate Connect in San Francisco, Aug. 1-3, 2007.

Response to "Why Your Worth It" Realtor Magazine

Response to "Why You're Worth It"
Article in Realtor Magazine
by Elyse Umlauf-Garneau
February 2007 Realtor Magazine

Is it NAR's job or charter to try to help the 90% of realtors on how to justify their commissions by promoting that they defend their companies inefficient and expensive ways of conducting business?

I thought it was individual realtors that make up NAR's membership, and not the real estate companies they work for. My dues should not pay for how agents should justify to sellers why they chose to work where they did.

If they need to justify their offices inefficiencies such as premium large offices, high paid personnel, and the costs of maintaining hordes of agents that average 3 transactions a year by charging consumers the fees they do, then they should develop their own plan internally for doing so. Not by using my membership fees in articles as this that encourage misleading consumers.

Professionals that help sellers price homes correctly and use efficient low cost marketing plans is what sells homes in a shorter period of time, and therefore always nets the Seller the most every time. This is in the Sellers best interest, and also the agents best interest, and what consumers are demanding. Not what this article points out by telling sellers that since their home will sit on the market longer, is one reason why I need to charge you more!

Obviously this article is for the 90% of realtors that have no clue in what they are worth and work for companies that set policy on what to charge which is not based on the proficiency of the agent what so ever.

I am appalled that my due's are being used to tell these realtors to mislead sellers with statements such as "History has taught us that in every profession, the people who charge less 'typically' give less service because they have less revenue to actually fund those services".

History in fact shows that those new to a profession, or those less educated get paid less, or those with less experience get less. Seeing this article is geared for the 90% of realtors that fit this description I don't see the correlation for justifying higher fees.

Also history has shown us just the opposite. Need I point out Southwest Airlines, Wal Mart, Home Depot and Lowes that have great service and lower costs. McDonalds is a huge success...how would this author explain this? What about expedia.com wiping out the entire travel agent business? Has anyone rented a car from Hertz lately? Avis certainly tries harder and gives better service and fees.

Further this approach is demeaning to the consumer, who "typically" are much smarter than this author would give them credit for. They are the same ones that use expedia or priceline to travel, and home depot for hardware and lumber. If an agent gave me the pitch this article teaches I would tell that agent they are working for the wrong company, if that is all they get paid at the end of the day, as it is the agent I am hiring.

How do realtors explain to sellers that 90% of realtors cannot explain agency proficiently, none the less open lock boxes on their own, and which are "typically" working for companies that expect the highest fees? That would be an article I would applaud.

How about: "History has taught us that in every profession, the people that charge less are typically the most efficient at what they do and therefore do a lot of business and actually have more revenue to give you superior service at a fair price." This is more the truth.

I know, how about an article that teaches the realtors that they are in business for themselves and consumers clearly are not wanting to pay for the "fat" any longer, and history shows that by doing nothing about it other than trying to explain why such as this article preaches, are all doomed like the way travel agent has gone.

How about an article that teaches realtors that to be a top producer, it is not the company behind them that makes it happen, and that "typically" the fat can be eliminated by working on their own or for a low fat company and by learning how to be highly proficient, educated, and efficient they can as a real estate professional charge fair fees they are truly worth and be a huge success.

Thank You
Jeffrey Bastress
978-337-9745 cell
jeffrey.bastress@startpoint.com