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Tuesday, June 5, 2007

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.

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