Do high cooperating real estate commissions help sell homes?

sleazy salesman.jpg

The other day I got an email promoting the closeouts at The Columbian at 1160 S Michigan Ave (more on that in another post). One of the things that got my attention was that they are offering buyer's agents a 3.5% commission on all the units except the penthouse unit listed at $1.9 MM on which they are paying a 4% commission.

Those commissions are really high - and intentionally so. Do the math. Whenever I see commissions like this I get this puzzled look on my face.

Sidebar with some background: Real estate commissions, paid by the seller, are split between the seller's agent and the buyer's agent. The seller and his/her agent decide upon how much the buyer's agent should get and this percentage is spelled out in the MLS. Most of the time you will see co-operating commissions of around 2.5% but they can vary both above and below that. Lower priced listings are more likely to have higher percentages and higher priced listings are more likely to have lower percentages because differences in these percentages can offset the impact of the price differences. (Note to justice department: I did not use the word "standard", nor did I imply it. What I am stating is a statistical fact so don't mess with me.)

Furthermore, even though the buyer's agent is paid by the seller, in the state of Illinois the buyer's agent represents the buyer and not the seller and actually has a fiduciary duty to represent the buyer's best interests.

Why then would a seller and their agent ever offer more than 2.5% on a reasonably sized deal? Occasionally sellers will ask me if we should do this in order to help sell their place. Apparently the belief is that a higher co-op commission will give the buyer's agent more incentive to close a deal on their place. But if you go back and reread my background section above you will see that this makes no sense. It would require a buyer's agent to breech their fiduciary responsibility.

But you might say that not all real estate agents are ethical (perish the thought!) so let's appeal to that very small and infinitesimally insignificant segment. OK...but that's a very dangerous game for even the very rare unethical buyer's agent to play in today's world simply because buyers can see everything on the market and if their agent starts pushing a particular home on them they are going to see right through it.

Consequently, I uniformly discourage high co-op commissions with my sellers and tell them that they would be better off just taking those funds out of the price - with one exception. If you are selling a home but have decided to not put it on the MLS the dynamics change. In this case buyers can't find it and you are at the mercy of other agents to bring your home to buyers' attention. If those agents don't like the co-op commission they can just ignore your home but if they do like it they can at least encourage their buyers to take a look at it.

This whole discussion reminds me of my days at Circuit City, where the merchandising guys would SPIFF certain high margin products in an effort to encourage their sale by the commissioned salesforce. I always found this practice disturbing because it was counter to the notion of providing good customer service. Well, you know how the Circuit City story ended.

So I'm always surprised when I see a really high co-op commission on a home. To me it reeks of desperation.

Comments

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  • Buyers' agent taking commissions from sellers is not a good practice. It can bring loss to both home seller and home buyer.

    As Gary said, seller is" at the mercy of other agents to bring your home to buyers' attention. If those agents don't like the co-op commission they can just ignore your home but if they do like it they can at least encourage their buyers to take a look at it."

    The buyers may get to look into houses neither they can afford nor they like only because the seller is offering a high commission to their agent.

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    After 20 years in the corporate world and running an Internet company, Gary started Lucid Realty with his partner, Sari. The company provides full service, while discounting commissions for sellers and giving buyers rebates.

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