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Code of Ethics not clear on negotiating commission down.

Code of Ethics ImageMass Code of Ethics confusion is the best way to describe what happened when I inquired in a Facebook Group about an ethics violation another Broker said I committed during our negotiation when I requested he reduce his commission.

Many said it was an ethics violation, many said it was not, and after close to 400 comments about it, I found my answer.

First, however, I want to let you know what happened. I represented the seller, and we were negotiating back and forth verbally with the buyer’s agent on the price. When it seemed like the seller and buyer could not come to an agreement, my seller suggested that the buyer’s agent reduce their commission to 2%, as that was what I was getting, so it seemed fair. With that suggestion, the buyer and seller would have an agreement and go into escrow.

It sounded like a reasonable solution to me. After all, the commission was $45,400 at 2%, and thousands of condos sell for much less and Realtors are satisfied with a much smaller commission.

I was shocked when the Broker representing the buyer told me I broke the Code of Ethics by making this request. I thought how could this be an ethics violation? I am simply passing along my seller’s proposal to complete our negotiations. When I inquired with my local Board of Realtors, I received an email back with the Code of Ethics attached referring me to Article 3 which covers commission between Brokers.

That answer did not satisfy me so I thought I could get some clarification in a Facebook Group for Realtors that I belong to. I was surprised to see Realtors very strongly supporting both sides, and no clear resolution was coming out of it. Realtors were making their case, and some were getting very nasty about it by denigrating other posters, and two even attacked me for even making such an unethical post.

Finally, one of the posters had the smarts to take the entire post to an expert and here is what they said:

“Just showed this entire discussion to someone that actually teaches the COE at our board and is on grievance committees. No code violation as it’s an upfront discussion between the two parties in a negotiation and no unilateral change is occurring.”

For me, this response makes a lot of sense. We are just negotiating. No one is forcing anyone to do anything they do not want to do.

I don’t know if the commission reduction was presented to the buyer. The buyer’s agent was adamant about not reducing their commission at all and was willing to lose this property for their client and their $45,400 commission. The next similar unit was priced $590,000 above our unit, which made me wonder if now the buyer would have to pay over $500,000 more to get a unit because of this disagreement.

My take away from this experience is the Code of Ethics should clarify that commission can be negotiated if the seller wants to. That being said, based on the mass confusion this caused, the response from the other side might be negative, or perhaps you will get accused of an ethics violation like I did.

In the end, we reduced our side of the commission even more, and we are now in escrow. Our seller expressed his appreciation for reducing our commission to meet his bottom line goals.

If you were in my shoes and your seller asked you to lower your commission, what would you do?

About Bryn Kaufman

Principal Broker and creator of OahuRE.com, one of the most popular websites on Oahu. I enjoy working with PHP, MySQL, jQuery, JavaScript, HTML5, Ajax and more. I am always looking to improve my Website and business. When not working, I enjoy spending time with my family and doing anything on or in the Ocean.

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  • Hank Lerner

    Wasn’t privy to that Facebook post, so not sure if this was explained there. A big part of the confusion in this area occurs because the restrictions on buyer agents and listing agents are a bit different, and because this issue is handled in two different parts of the Code.

    Article 3 and its standards of practice say that a listing broker can’t unilaterally change an offer of compensation, but that brokers can freely negotiate changes between themselves if desired. But then take a look at Standard of Practice 16-16, which says that a Realtor working for a buyer “shall not use the terms of an offer to purchase/lease to attempt to modify the listing broker’s offer of compensation…nor make the submission of an executed offer to purchase/lease contingent on the listing broker’s agreement to modify the offer of compensation.” If the buyer’s agent had used these negotiations to ask you to INCREASE your offer of compensation in this way (e.g., “if you don’t pay me more than your original offer in the MLS my buyer will walk”) it could have been a violation, but there is no explicit restriction on the listing broker side.

    In my experience, that’s usually where a lot of the confusion occurs. If there are buyer agents who have been warned off this tactic from the buyer side they naturally assume that the listing side can’t do it either, but that’s not actually what the Code says.

    To help clarify the issue, several years ago the Pennsylvania Association of Realtors requested that NAR amend this SoP so the duties would be reciprocal – if the buyer agent can’t use broker compensation as a contingent term of an offer then a listing agent shouldn’t be able to do so either. We also asked that they clarify that any restrictions in the SoP should apply not just to the original offer but to any counteroffers from either side. They declined both requests, so here we are in the same place with the same confusion.

    • Hank, good points, and I have also requested some confusing rules be amended in the Code of Ethics and they declined too.

      I did not realize the buyer’s agent could not ask for more compensation. We normally offer 2.5% because that is the standard in our market, and once in a while we get a counter from the buyer’s agent asking for 3%.

      It seems to me this is all part of the negotiation though and should also be allowed as long as the buyer is made aware of it. I think making the buyer aware of it is key, as you do not want to agents negotiating the terms without the seller and buyer being involved.

  • grizzy86

    I agree with you, this is simple negotiation ….in fact I think that the buyers broker was unethical in not presenting and discussing this with their client. Who’s best interest was the buyers broker looking out for in this example? IMO their own, not their clients ….

    • Good point. If this property was selling for a lot less I could see them not wanting to accept less, but when it is still $45,400 commission it seems the Broker did not put their clients needs ahead of their needs.

      I wonder what the ethics implication is on something like that in terms of do you have to present that proposal to your client and tell them how you plan to respond. I would assume you do, otherwise it could be seen as you are now negotiating on behalf of the seller without their knowledge.

  • I hesitate to even dive into a conversation like this but since it’s already published….

    Facebook groups aren’t the place to ask about CoE violations. 400 comments often don’t equal a correct answer.

    I’d also take issue with your assertion that the buyer’s agent “was willing to lose this property” or “did not put their clients needs ahead of their needs”. Your seller offered a set compensation to a buyer’s agent. The seller’s and buyer’s inability to meet at a mutually acceptable price doesn’t negate that offer, nor does it require an agent to reduce his/her compensation to prove loyalty.

    It’s a slippery slope argument, and you don’t want to find yourself at the bottom of it.

    • Sam, what harm could come from asking about a possible Code of Ethics violation in a private Realtor Facebook Group?

      My local Board would not give me any guidance on it, and through the Facebook group as shown above I got expert guidance from a Code of Ethics teacher who also sits on the grievance committee.

      This was exactly the answer I was looking for, and at no cost I received this expert opinion via Facebook. I think the results show it was worthwhile posting this question.

      While not every Code of Ethics question might get a clear answer, I still see no reason not to at least give it a try. I just saw another Code of Ethics question in the same group yesterday, so agents feel it makes sense to ask.

      Regarding my assertion, the facts back it up. The agent was willing to lose this property for their client. That is just a fact on what happened, as they walked away and made offers on much higher priced units.

      When you are willing to lose the property your client wants because you won’t accept $45,400 commission, I call that putting your need for more commission ahead of the client’s need to buy this property.

      Frankly, the public would be shocked that this type of behavior happens in Real Estate. That is a huge commission for one quick and easy 20 day transaction. I think it should be against our Code of Ethics for a Realtor to go against their client’s best interest and wishes when a very fair commission amount is being offered.

      I do agree there is no requirement to cut commission, it was simply part of the negotiations suggested by my seller.

      • In another case I was considering filing a Code of Ethics violation when an agent mentioned no one will show my listing because my seller is “only offering $100,000 commission”.

        When I contacted the Broker about this, the agent claimed that it would not be her course of action, but said others might do it, so no claim was filed.

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