“Well, how do you get paid?”
It wasn’t the first time I had been asked that question. The couple was in their late 20s and was making an offer on their first home, a modest 2-bedroom home in Pollock Pines. Before reviewing the purchase contact, I prepared an estimate showing the buyers an itemized list of their down payment and closing costs. After I had pointed out their typical fees — title insurance, loan processing fees, recording costs, etc. — they asked me where was my fee?
“That’s the best part,” I said. “I get paid by the listing agent who gets paid by the seller. It doesn’t cost you anything to utilize my experience working on your behalf.”
The commission is the largest fee the seller will pay in selling their home but it all doesn’t go into the same pocket. Typically, commissions are divided into many pieces. The listing agent will disclose in the MLS what commission percentage they are offering to pay the selling agent. That’s usually half of the total commission. Once escrow closes, the title company pays the agreed upon commissions from the seller’s proceeds to the listing and selling agencies. When the company receives the money, they typically retain a portion for overhead, pay any referral fees and pay the agents their portion of the commission.
Commissions and their customary splits have changed over the years. When I was first licensed, all commission rates were set at 6 percent by the Board of Realtors which usually owned or controlled the local multiple listing service. If a seller wanted to negotiate and pay less than the 6 percent, too bad. They could not have their listing in the MLS. The MLS also dictated how the commission was divided between the listing agency and the selling agency. Most of the time it was a 50/50 split but in times of tight inventory when listings were more valuable, the MLS allowed a 60/40 split with the listing firm retaining 60 percent of the commission. When buyers were scarce and listings plentiful, that percentage was reversed.
That all changed in the late 1970s when the Justice Department filed a lawsuit against members of the Board of Realtors for conspiracy and price fixing under the Sherman Antitrust Act. Since then, commissions have been negotiable. Currently, about two-thirds of county listing are indicating a 5 percent total commission and one-third showing a 6 percent total commission.
Bonuses have pretty much disappeared but back in the day, a few sellers and many builders were offering obscene incentives to agents who could produce a buyer. Most popular bonuses were an additional 1 percent fee to the selling agency, tickets to Hawaii and I remember one seller offering an Alaskan cruise vacation to the agent who furnished him a buyer for his million dollar home in Serrano. Any special incentive paid to the buyer’s agent should be disclosed to the buyer.
In addition to commissions and bonuses, some real estate companies charge extra fees, often called an administrative or transaction fee. Agents will justify the extra fees as a necessary expense for handling all the paperwork. The fee may only amount to a few hundred dollars but most sellers find the fee to be as objectionable as having to pay $500 for an airline ticket and then another $50 baggage fee.
Referral fees between agents are a normal part of the business. When Mike called me about relocating to El Dorado County, he also said he needed an agent in San Jose to sell his house. With his permission, I contacted another broker, Sharon, who had an excellent reputation in the community. Sharon listed Mike’s house and from her share of the commission, paid me a tidy referral fee. Referral fees can only be paid between licensed agents.
Years ago, when I was opening a new real estate office in Southern California, I was approached by a vice president of a major title company who offered to pay for all my furniture and equipment in exchange for directing title business in his direction. Mortgage brokers were also notorious for making undisclosed deals with real estate brokers, paying them a percentage of the loan origination fee for referring their buyers for a mortgage. Unfortunately, illegal kickbacks still continue.
Last month, the LA Times broke a story about a federal investigation of widespread illegal kickbacks between Fannie Mae employees and real estate brokers. Armando Granillo, a foreclosure specialist with Fannie Mae, was arrested with a pocket full of cash delivered by real estate brokers in exchange for Granillo handing out listings. Cecelia Carter, a former Fannie Mae employee claims she was fired in 2011 for trying to expose the kickbacks. Prosecutors, in a sting operation, say Granillo described the kickback as “a natural part of business.” What’s more, he told the brokers not to speak to other workers in the Irvine office whom he said were “engaged in similar conduct.”
Consumer Financial Protection Bureau Director Richard Cordray said his two-year-old old agency has moved to shut down kickback operations not only because they’re illegal but because they reduce competition and increase costs to the public.
The Fannie Mae spokesman declined to comment on the investigation but has warned his foreclosure staff against seeking payments from real estate agents. You think?
Ken Calhoon is a real estate broker in El Dorado County. He can be reached through at kencalhoon.com.