Real Estate Commission Bonuses: The Good, Bad, and Ugly
When I got into the Real Estate business many years ago, every Realtor represented the seller. Consumers did not have the luxury of having a Real Estate agent in their corner to represent their best interests.
Consumer law in Massachusetts, however, changed in the 1990s. Buyers can now have a buyer’s agent represent them in purchasing a home or other property.
Frankly, the opportunity for both a buyer and seller to have representation makes far more sense. It is a level playing field where both parties should get good, solid advice.
Does this always happen? You would love to think so, but this is not always the case in the real world.
Like many industries, there is a word that gets in the way of people doing the right thing. It is called GREED!
Real Estate is a commission-based business, and when a Realtor makes a sale, this is how they get compensated. Talking about Real Estate commissions is always a highly debated topic. It brings a lot of passion from both inside and outside the industry.
When every Realtor represented the seller, there were far fewer consequences regarding commissions and agency relationships.
Commissions Are Displayed in The MLS
How so, you may wonder? In Massachusetts and, I assume, most other states, an offer of compensation is made from one Real Estate brokerage to another when a home is added to the Multiple Listing Service (MLS).
The exclusive right-to-sell listing contract executed between the agent and seller will explicitly state the total commission.
The offer of compensation is some percentage of the total commission the seller offers to get their property sold. The MLS lets every Real Estate agent know when a property has been put up for sale and the commission they will earn with a sale.
The MLS system is the backbone of real estate sales across the country.
The problem that arises with Real Estate commissions and buyers’ agency is the amount of compensation that is offered.
Real Estate commissions are negotiable, and as such, the compensation offered to a buyer’s agent is not always the same.
In any city or town, it is quite possible that most homes could have compensation offered at X and a far smaller percentage of homes offering Y. To be clear, Y is a smaller amount than X.
Why an Agent Bonus Can Be Horrible For a Home Buyer
Here is where the problem comes in. If you are an advocate for a buyer, the commission that is offered should have no bearing whatsoever in regards to whether the agent shows you a home or the advice they give you surrounding that particular property!
A buyer’s agent owes the buyer undivided loyalty, reasonable care, disclosure, obedience to lawful instruction, confidentiality, and accountability.
The agent must put the buyer’s interests before their own and negotiate the best price and terms for their client.
Have you ever wondered why the agent you were working with did not mention taking a look at a specific home even though it matched the description perfectly of what you were looking for?
Have you ever felt like you were being talked out of a property without good cause and were unsure why?
You likely have met one of the rotten eggs in our industry. This type of agent probably does not do much business, and every last dollar is crucial to them. Obviously, this type of Realtor is not ethical and certainly not someone you want in your corner.
Buyer’s Agents Should Never Give Advice Based on Commission
A good buyer’s agent will not give advice based on how much money they will make!
An agent bonus is another sales tool that tends to rear its ugly head when the market is weak and just as bad. Agent bonuses can be given for several things, but the ones you see most often in the MLS read like this:
- $1000 agent bonus is under agreement by “X” date.
- $1000 agent bonus if you bring a full-price offer.
Sometimes the bonus is just there if you sell the home with no other stipulations. Any Realtor influenced by this is just selling their sole to the devil.
Hmmm, if I get the seller (who I do not represent) the terms they want from my buyers (who I do represent), I get a nice bonus. This works well if you have no integrity!!
Going back to the days before buyers’ agency existed, there was no issue with getting a bonus to sell a particular home because every Realtor represented the seller. As a seller giving those extra dollars made sense.
Today it does not unless you are explicitly targeting the crud of the industry.
Buyers Don’t Know About a Commission Bonus
The sad thing is buyers will never know if there is an agent bonus unless your Realtor tells you. Almost always, the agent bonus is put in a field within the MLS that consumers do not see.
In my opinion, it should be mandatory for a buyer to know if there is a bonus. No such rule exists, however.
Let me clarify commissions and what is offered as compensation when selling a condo or house. Sometimes, the commission being offered could be far lower than what would be considered reasonable.
Every buyer’s agent who establishes a buyer’s agency relationship with a client should discuss their commission policy.
If an agent has specific compensation parameters that they feel need to be met, they should be explained to you when you hire them.
This discussion avoids the abovementioned problems and allows the Realtor to be paid fairly. If a client knows going in that the Realtor is going to make X percentage of the sale price and they would have to make up the difference if the seller is only offering Y, everyone is on a level playing field right from the get-go.
This should also head off any potential for shenanigans behind your back.
It always makes sense to check on a realtor’s credentials and track record before committing to use their services.
Some people like to think that paying Realtor fees isn’t worth it. That is a discussion that brings great debate.
Final Thoughts
It is essential to work with a buyer’s agent you can trust. Look for someone you feel will put your interests ahead of their own. The best agents could care less about agent bonuses.
The commission is never paramount in doing the right thing to help their clients make the best home-buying decision.
About the Author: The above Real Estate information on real estate commission and agent bonuses were provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-625-0191. Bill has helped people move in and out of many Metrowest towns for the last 36+ Years.
Are you thinking of selling your home? I am passionate about real estate and love sharing my marketing expertise!
I service Real Estate Sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Natick, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton, and Uxbridge MA.
Bill – You’ve really nailed it with this post. Excellent explanation and analysis of REALTOR Commissions. I would recommend that a seller offer a bonus to buyers in the form of closing help, pre-paid condo fees, or even a local gym or pool membership . This is a better way to entice buyers since they could assume (incorrectly) that any agent bonus is a factor in selecting which homes to show them.
Excellent article Bill. Most consumers don’t know about those hidden commission bonuses.
Richard D. Vetstein, Esq.
The Massachusetts Real Estate Law Blog
Margaret – Thanks for the compliments on the article. I agree with you completely. If the seller wants to provide a perk it should be going to the buyer and not the Realtor!
Richard – You are right most buyers have no idea about a Real Estate selling bonus. It sure makes sense that they should be informed.
Bill,
Have been reading your blog for the last month or so and found this particular article interesting. It’s really sad that a buyer’s agent will compromise fiduciary responsibility and integrity to steer a buyer into a home based solely on the commission or bonus they will make.
It’s good to see an article such as this so that the consumer is a bit more aware of what goes on.
Regards
Good article. I am continually troubled with on the buyer side – negotiating price. Ethical agents do their best to get the buyer in for the lowest price possible. Yet, agents make more money the higher the price. Wish an easy solution for this existed.
One point related to your article – a buyer will find out about a bonus as it appears on the HUD. Always nice to surprise a client at the closing table, eh?
John – you are right about the buyer finding out about the bonus once they see the HUD if they happen to notice it. Some buyers only pay attention to their side of the ledger and may not look at the sellers costs. It should be mandatory that the buyer knows a bonus was paid.
Ray – I agree with you 100%. This kind of behavior will catch up to you real fast though. Most people start to catch on and when they do the agent can be dragged under the bus where they belong. I think consumer awareness is very important in the Real Estate industry. If something smells fishy it usually is!
What can I say, Bill? Suffice it to say that you and I are in lockstep on this one. I suppose I should simply thank the listing agent for the offer of a bonus on a property that suits my buyer as it ultimately represents a lower price or closing cost concession that I will negotiate on their behalf. How can you fight for the best terms if a little chunk of change that could come out of the bottom line are directed to the agent’s pocket instead? I’ve taken a fair amount of heat on my post over this (one clown just mockingly referred to me as Ghandi for the audacity of verbalizing an ethical objection to a business practice), but it just doesn’t wash with me.
Paul we are definitely on the same page regarding agent bonuses and all the problems they create. I think it should be mandatory that a bonus is disclosed to any buyer looking at a property. That would certainly weed out the gamers and those that base decisions in a Real Estate transaction for their own merits and not their clients.
Hi Bill,
Just saw this on Twitter. Well written narrative on agent bonuses and those who are not transparent. BTW I like your wordpress site and am about to launch one of my own as my new outside blog separate from AR. Nice job!
Thanks Russell. Agent bonuses are a waste of money for sellers unless you are catering to a few Realtors who don’t have much ethics. Good luck with your new Real Estate blog!
Another great post; thanks Bill!
I always thought that bonuses are supposed to be disclosed; I disclose any and all forms of compensation to my clients. I agree with you that buyer agents should discuss compensation with their clients when the relationship is established. That is one of the reasons a written contract is so important, it gets all of those issues out on the table. The problem is that so many agents still do not use written agreements or have minimum compensation requirements, they just check of buyer agent on the disclosure form and take whatever the listing agent offers. It is unfortunate that so many agents are so afraid of losing a buyer if ask for a contract or if they discuss compensation. Fear and and greed leads to bad behavor in any industry.
Thanks Marilyn! There is nothing worse than a Real Estate agent who puts their interests before their clients. As we both know there are agents that just care about the almighty dollar and nothing else. This is the perfect example of why consumers should work with an agent that doesn’t NEED to make a sale. Agents that produce think differently than agents who are looking where their next check is coming from.
I will always disclose the existence/terms/etc of a bonus to my clients. I understand that greed can motivate some or else the use of a bonus would be not be so popular.
Bill, great post. I’d like to add one more element from the opposite side: listing agents whose offer of compensation is $1. The whole idea of the MLS, as you explained, is broker to broker compensation. One dollar won’t pay the gas to get to the house. The real reason these listing agents put in an ultra low number is not to bring other brokers in at all…but to have buyers come to them directly so they can “double end the deal”. It’s a tricky thing to set out what is OK on the MLS in terms of compensation, but clearly $1 is lip service to the concept only. (I see it here in Silicon Valley once or twice a year.)
Mary that is interesting. Fortunately here in Massachusetts I have never seen that type of compensation offered. I see exactly what you mean and it is a very poor way of doing business. Double ending deals is far less common here since buyer’s agency was instituted.
Bill, this is a great post – and it raises very relevant issues! But, at the risk of being very unpopular in the Realtor community, I am going to offer a slightly different perspective as to what the originating problem is:
“The real problem arrises from the fact the listing brokers offer compensations to buyer’s agents!”
While common the Real Estate World, it is just about unheard of elsewhere in the professional arena.
IF each agent only charged for their half of a transaction, so that sellers and buyers would compensate their Realtors independently it would accomplish a lot:
1. All issues discussed in your article are addressed and solved.
2. Sellers would feel that commissions are “reasonable” – since they are now 1/2X
3. Buyers would finally understand that they are actually paying for a service as much as the seller, since they are bringing money to the table. Therefore they would negotiate fees – and their agents would be held more accountable. Having a contract might prompt even buyers to be a bit more definitive and decisive in their expectations and decisions; since time would likely be tied to the compensation, just as in other professions (one visit versus 10 visits). Furthermore, it might weed out a portion of agents that are selling today without being able to sell themselves?
4. It would eliminate the industry’s “commission dilemma”, which (in my opinion) unfortunately DOES exist, since the “HUD” clearly states commission rates and distributions in every transactions. So, de-facto the rate for every broker is published every day with every transaction (the government made a very poor decision in regulating this matter)!
So, just as a side note:
1. The current commission arrangement dilemma is one of my pet peeves – and I wish I knew how to change it.
2. I always make buyers and sellers aware of the commission distribution and the fact that De-facto they are paying 1/2 of the deal.
Awesome thoughts Dietmar! I have often thought the same thing. Real Estate unfortunately is one of those old fashioned businesses where change can be hard. Your points are very valid ones.
I have always catagorized real estate agents with car salesman, politicians, and criminal defense lawyers.
John there are certainly some in the real estate industry that I would agree with you give our industry a bad rap.
Very good, Bill. Thank you. I liked most of the comments too, except the last one about bundling Realtors with car salesmen, politicians, and criminal defense lawyers. Unfortunately, this labeling by a consumer has made the profession harder-stressful for the truly good, ethical, agents who are pro “consumer protection”. Firstly, Car salesman wait in a building for a person to come to them. Realtors go all over the place with their customer, and have much more legal paperwork to do than a car salesman, who by the way also talks “price” over with the manger and finance guy, and they are fighting each other all the while in the back room. Politicians? Oh, the liars? Well, ethical Realtors don’t lie, and there are many other hands (title, escrow, inspectors, termite,hazards,appraisers, etc) in a transaction. Besides with EMAILS and a slip of the TEXTING nowadays it is easy to be caught in any lie. And Realtors get sued, not politicians! Criminal Defense attorney? Tell it to the Judge! Realtors don’t visit courts or jails, and don’t charge by the hour and don’t ask for retainer fees, and don’t get a settlement fee. Attorneys can get paid if they win or lose. Realtors get paid ONLY if the escrow closes. I don’t see the comparisons at all. It’s all about TRUST and there are GOOD people who can be trusted and they can be a REALTOR.