do some seller incentives threaten the buyer

or, can disclosure cure at this level?
Not to go full MalcolmBlogger High Road on ya, but I was flabbergasted by a marketing gambit that recently went out through the inter-firm data-base. I am sure it is a legal way to motivate agents for buyer, but I have real concerns about how it would play out in the real world.

I will approach this by talking about the ways sellers typically motivate buyer agents to find buyers for their properties, some creative ways that sellers do this, and the potential consequences for the buyer – agent relationship. Briefly, in this case the seller is offering to double the buyer agent’s fee if a buyer signs a contract within a specified period. Might that outsized incentive poison the buyer – agent relationship? Can it be ameliorated, even cured, if the buyer is fully informed?

co-brokering is a way that sellers motivate buyer agents
Of course, the typical residential real estate sale in Manhattan and elsewhere involves the seller deciding that the sales fee for a successful sale will be x%, to be split evenly between the broker whom the seller exclusively engages to market the property and the broker that represents the buyer. Indeed, it should be a source of shame for the Manhattan residential real estate community that only in the last 6 or so years did mandatory sharing (“co-brokering”) become the standard, long after this practice was common in America (I am looking at you, REBNY).

Since the sales fee is subject to negotiation, the same buyer agent working with the same buyer may discuss candidate listings in which the agent’s compensation will vary. Depending on the fee for specific property the buyer ends up buying, the broker for the buyer may be offered 2%, 2.5%, 2.75%, 3%, or more. (I am going to gloss over for this discussion the fact that “broker” in this situation means brokerage firm, and that that “agent” compensation depends on the split between that agent and that brokerage firm; for discussion, assume it is a 50/50 split.) On a million dollar sale, to use round numbers, the agent may end up with $10,000, $12,500, $13,750, $15,000, or more (again, assuming a 50/50 split).

Here is one structural conflict of interest between a buyer and her buyer’s agent: if the buyer buys Apartment One for a million bucks, on which the co-brokering compensation to be split between the two firms is 5%, as opposed to Apartment Two, on which the co-brokering compensation is 6%, the agent for the buyer gets either $12,500 or $15,000.

• in a perfect world, the buyer knows that her agent provides advice and analysis without regard to the agent’s compensation, so the buyer is indifferent to the compensation arrangements
• in an imperfect world, the buyer hopes that her agent provides advice and analysis without regard to the agent’s compensation, but it is indifferent to the compensation arrangements because the buyer senses that the numbers are not big enough to impact that loyalty

In a sense, the system is built on the fact that both buyer and agent recognize that the agent’s long-term financial interest is in making buyers happy rather than in exploiting an opportunity for a one-time $2,500 ‘extra’ compensation.

Of course, there is another structural conflict of interest between a buyer and her buyer’s agent because fees are based on prices: the more the buyer pays, the higher the fee to the agent. I will ignore this in this discussion, as it is a conflict that is obvious, relatively trivial (the 50/50 agent will put another $750 in her pocket if the buyer overpays on a 6% deal by $50,000), and irrelevant to the main point of this post.

special incentives can create special problems
It is hardly unusual to see a seller offer a bonus to a buyer’s agent for a contract signed by a certain date (sometimes, for a full-price contract); I recall offers of iPads, scooters, and (in a case that got a lot of publicity, i.e., was relatively effective marketing) airfare to the 2010 World Cup with a pair of tickets. A seller’s goal is to attract attention and interest from the population most likely to produce a buyer: co-brokering agents. A buyer’s concern might be whether “her” agent is talking about a particular listing because the agent will get an iPad or because the agent really thinks it is in her interest to consider that listing. But most agents can sincerely maintain a relationship based on trust with a buyer client that is more than strong enough to deal with goodies that an agent might qualify for if the buyer makes a deal.

But when the goodies are dollars, and lots of them, that is a difficult relationship to maintain. Let’s get down to particulars, without identifying the property, the agent or the firm involved, before considering how hard it might be to maintain a relationship based on trust in this instance.

Ballpark the current asking price at $800,000. At around a full-price contract, the buyer’s agent would be looking at around $12,000 in her pocket on a 50/50 split with her firm. The property has been on the market for a some months, and the seller has decided to try to motivate buyers by dropping the price a material amount (about 9%) and to motivate buyer agents by offering an additional non-trivial cash bonus for a contract signed within a specified period (roughly $24,000 to the buy-side firm, doubling the buy-side compensation to the firm and to the agent).

Now the landscape looks like this: the buyer will compare the property to other properties priced around the new price, but the buyer agent is looking at being compensated as if the buyer were spending twice as much as the buyer will be spending, and twice as much as the buyer agent would be compensated for any of the competing listings.

In theory, so long as the agent tells the buyer about the bonus being offered, the buyer and agent can maintain their relationship of trust. A prudent buyer would think twice about the comp analysis between the Bonus Apartment and a competing listing at the same price, but disclosure of the unusual compensation could cure the conflict by bringing it into the open. It remains, as always, the buyer’s decision as to which property to buy, and at what price to negotiate.

While I believe this is do-able for any professional (i.e., ethical) agent, I see it as a situation in which to step carefully. In my view, disclosure is mandatory, even if I do not generally discuss with buyer clients whether the co-broke compensation is 2%, 2.5%, 2.75%, 3%, or more.

I assume that the seller agent and firm discussed this dynamic fully before going ahead with the cash bonus, but it is not their ethical problem.

like a direct deal on the sell side
There is actually an analogous situation for sell-side agents that is more common in a busy market than in a slow market. A seller presented with multiple offers may find that one of the competing offers is from a buyer who is not represented by an agent, on which the entire sales fee will go the selling and listing firm (if that buyer is deemed ‘best’).

One reason I am not bothered as much in this sell-side situation is that it is anticipated in all exclusive listing agreements, and certainly should be the subject of discussion before a listing agreement is signed. Often, in fact, an agreement may provide that the sales fee is (say) 6%, but will be 5% if the fee is not split with a buy-side firm. (Put aside for this discussion whether this is a ‘windfall’ for the agent; the agent will certainly do more work on a deal if the buyer has no agent than if there is a buyer agent doing all the purchase application work .) The seller knows up front that the agent’s compensation will vary depending on whether a buyer is represented or not.

Also, the seller is in a very good position to compare the competing bidders without regard to the impact on the agent’s compensation. Seller will see each bidder’s financial qualifications, and can easily ask pointed questions to rank the bidders on both the net cash to the seller (different for an unrepresented buyer if the seller ‘saves’ 1% on the sales fee) and on the financial strength (cash vs. mortgage, mortgage contingency vs. non-mortgage contingency, assets and income vs. assets and income).

This conflict between seller and seller agent troubles me not at all, assuming a relationship of trust and full disclosure. The one with the buy-side double compensation worries me, and would keep me up at night even after disclosure and full discussion. I suspect I would always wonder if my buyer client was worried if my loyalty would be impaired by the double compensation offer.

Interesting …. Troubling ….

© Sandy Mattingly 2012