Real Estate Agent Cooperative Commission: What It Is, Who pays and Why?
By Jesus “Jesse” Gonzalez Licensed Real Estate Broker in Tennessee / September 24, 2019
The co-op or cooperative commission are the terms we in the industry use to describe the traditional real estate agent commission structure where the seller or homeowner pays both their agent and the buyer’s agent commission fee. For consumers, this set up is an obvious conflict of interest because it’s asking the buyer agent to be a fiduciary for their buyer however, they get paid by the seller.
Imagine for a second, you slipped and fell on some water that was leaking out from under the freezer isle when selecting your favorite ice cream at your local grocery store. Unfortunately, you end up breaking your knee in the fall and are rushed to the emergency room. You’re out of work for a few weeks and thousands of dollars in medical bills. Naturally, you ask the store to pay and they refuse so you hire yourself a top-notch Attorney. So far, everything seems reasonable and logical, that is until the Attorney you hire tells you that his fees will be covered by the insurance company for the grocery store. Would you continue to work with that Attorney or fire them on the spot? Let me be clear here folks, for all real intents and purposes, when the seller is paying both real estate agents commission fees, this is essentially the scenario you are setting yourself up with.
Let me put this another way. When a buyer is working with an agent they hire to represent their best interest, you would reasonably and logically assume that one requirement of the buyer’s agent would be to negotiate the lowest price and best terms for their buyer and yet, they get paid by the seller whose not interested in selling at the lowest price or most favorable terms to the buyer. Do you see the conflict?
This guide will go through the most common questions about the co-op commission. I hope you find it helpful. Knowing how the agents get paid, by whom and when is critical to your success when selling your home.
Question: Why do homeowners pay both agents in the first place?
Based on my own experience, I believe that most homeowners just don’t know they have options. I’ve found that most homeowners don’t do enough, or in some cases any, research before they list their home with an agent. To be more precise and clearer, I’ve found that most homeowners don’t interview but one agent and in the interview process, they don’t really know what to ask.
My experience is backed up by on-going annual research conducted by the National Association of Realtors annual Profile of Sellers which tells us that in 2018, “63% of sellers found their agent through a referral” and “75% of sellers contacted only one agent.” With statistics like that, I really do believe the primary reason homeowners pay both agents is because, they aren’t informed otherwise.
What motivation does a traditional agent who is charging you 5, 6 or 7 percent have to tell you about other listing options that could save you thousands, if not tens of thousands in Realtor fees? Essentially by educating you to other options, they would be taking your money out of their pocket and putting it back in yours. It makes no sense to do that when they know you will pay 5, 6, or 7 percent because your neighbor recommended them, and you expect to pay the same your neighbor did. What’s even worse is, the whole time, you thought you were hiring a fiduciary who was looking out after your best interest.
Question: What happens if I don’t want to pay the buyer’s agent?
Real estate commissions are completely negotiable. Throughout the industry, no standardized commission exist and that is a direct result of the Sherman Anti-Trust Act. This Federal law prohibits price fixing which means, Real Estate Brokers, Agents, and the Multiple Listing Services or the MLS cannot agree to set sale conditions, fees or rates. For a Broker or Agent to even hint at, suggest, elude, imply or say, that commissions are standard, is potentially a violation of Federal law. A real estate commission should always be a matter of competitive negotiations between you and the individual Broker or Agent you hire.
Since real estate commissions are negotiable, it’s very hard to say how much you should or could expect to pay a real estate agent. As a Real Estate Broker myself, for me to even do so could very well be interpreted as a violation of the Sherman Anti-Trust Act. None the less, it’s helpful to know what other agents are charging so that you can make a wise decision yourself. For this reason, I recommend that you interview at least three different agents from three different brokerages. By interviewing a variety of agents, you will get a better idea of agents are charging in your area. None the less, always remember, real estate commission are negotiable.
Question: Is not paying a co-op commission bad?
Not paying a co-op commission is an alternative to the traditional listing where the homeowners pays both agents. As with any alternative, you need to know the risk and rewards. Once you know the risk and rewards, you can make an informed decision on what is best for you.
· RISK: Advocates for the traditional agent commission model where the homeowner pays both agent commission fees will tell you privately, not offering a co-op commission will cause buyer agents to boycott your listing and not show your property. This is a legitimate risk for homeowners who don’t offer a co-op commission even though it’s wildly unethical, immoral and potential a violation of law however, it’s a risk the homeowner takes none the less.
· Mitigation: The reality is, it’s not as big a risk as traditional agents would have you believe. A boycott risk by buyer agents has been greatly reduced, if not eliminated due to syndication and internet data exchanges of real estate data. In this digital age, where reliable real estate data can be found on hundreds, if not thousands of websites and smart phone apps, consumers don’t “need” a buyer’s agent in order to see a home. They can contact the listing agent directly by way of any of these sites like; Realtor.com, Zillow, Trulia and the many others. So if the agent they reach out to isn’t willing to show the home, consumers will contact the listing agent or just find another agent that will.
This brings up the 2nd point of mitigation to being boycotted by not offering a co-op commission and that is, agent competition. It’s estimated that here in Middle Tennessee, we have 1 agent to every 150 people. That means everyone knows an agent or at least can find an agent who is willing to show the home.
Finally, you may be thinking to yourself, who would show a home for free and that brings up my third and maybe my most important point about mitigating the boycott risk by not offering a co-op commission. By State law, before someone can call themselves a buyer agent, they must have a signed representation agreement in place. What most homeowners don’t know is, in the Tennessee Association of Realtors buyer’s representation agreement, paragraph E, line 36, the buyer and buyer’s agent have already worked out how much the buyer will pay their agent (the buyer’s agent) in case no co-op commission is offered by the seller. Below is the actual excerpt from the buyer’s representation agreement from the 2019 buyer representation form. The Tennessee Association of Realtors set this up to ensure, at no time should a buyer’s agent ever be unwilling to show a home to a prospective buyer due to no co-op commission being offered by a homeowner.
· REWARD: At the end of the day, it’s all about saving money. By not offering a co-op commission, you can save thousands, if not tens of thousands of dollars in expensive real estate agent fees. For homeowners considering working with a traditional agent who charges a percentage fee on the gross sales price of the home you are essentially cutting the real estate commission in half. Outside of paying off any existing mortgage, the real estate commission is typically the largest expense a homeowner has. For example, the average home in Nashville is $350,000.00. With a traditional percentage agent charging a fee on the gross sales price of the home at 6%, that’s a agent commission of $21,000. Now, imagine, cutting that in half and selling your home and putting $10,500 back into you pocket.