RobChipman.net

It is a fact that real estate sales commissions in Canada are completely negotiable. It is against the law to fix them at any specific level. The Competition Bureau, an arm of the federal government, is motivated to prosecute anyone it can find guilty of doing so. In fact, it has been involved in a misguided attempt to prove that certain parts of the real estate industry have in fact been restricting competition (misguided because the Competition Bureau has been going after the wrong people, and because the restriction of competition simply does not exist).

Proof of the fact that competition is not restricted, and of the fact that commissions are completely negotiable, is provided in a recent news story about a bad apple in the organized real estate barrel. The story also provides a cautionary tale for both buyers and fans of discount listing services.

Marco Vincenzi, a Vancouver area realtor, reportedly admitted to altering documents related to the sale of a local condo. You can find reports of the event here and here. Mr. Vincenzi was acting as a buyer agent in the purchase. The listing offered a reduced commission. We don’t know how much of a reduction it was, but that’s irrelevant to the issue. Mr. Vincenzi wanted to be paid more than was offered, and so apparently created a fee agreement and allegedly forged his buyer’s name onto it, according to reports.

It’s time to review a few things.

Commissions

“Standard” commission rates vary across the country, and again, I’ll stress that “standard” is a relative term. Commissions are about as standard as Vancouver lots – they vary. That said, traditional standard commissions in the Lower Mainland tend to be 7% on the first $100,000 of sales price, and 2.5% on the balance. Half of that would stay with the seller’s agent (who used to be called the “listing agent”) and half would go to the buyer’s agent (who used to be called the “selling agent”).

In the old days there was a 7% fee levied by the real estate board on the commission. That 7% funded the Multiple Listing Service. The listing agent (the guy working for the seller) paid that fee to the board, so in order to get an effective net split between the seller’s agent and the buyer’s agent the seller’s agent would take 53.5% of the total commission and the buyer agent would get 46.5% of the total commission. Don’t let your eyes glaze over, because this history is important: 7% x 46.5% = 3.255%, and 2.5% x 46.5% = 1.1625%. These figures are still in use today, even though the 7% levied by the board was long ago replaced by a flat monthly access fee. Where you see the 3.255% and 1.1625% is on the realtor’s version of a listing print out, near the bottom. Buyer agents look at that to know how much they’ll get paid if they sell the property.

There’s nothing wrong with this. Most people don’t work if they aren’t being paid, and most people want to know how much they’ll be paid. Printing on the listing what the pay rate to the buyer agent is is fair and reasonable. It has to be printed on each listing for the simple reason that there is no standard rate; a buyer agent can’t just assume that he’ll be paid any specific amount. There has to be a contract somewhere stating that he’ll be paid, and that contract is what causes the listing print out to say “3.255%/1.1625%”.

It doesn’t always say that. In the late 80s and early 90s the “standard” commission rate took a 1.5% beating in the Lower Mainland, leading to 5.5% on the first $100,000. That translates into “2.5575%/1.1625%”. With the advent of flat fee listing programs that percentage figure has sometimes been a flat fee, in which case it would simply say “$2,500″ or some other figure. Of course, the seller can also offer a bonus to look more attractive, so that you can find listings that offer “3.255%/1.1625% and $2000 selling bonus”.

The point is, every member realtor (i.e., member of a real estate board) can see what he or she will be paid in the event of a successful sale. Mr. Vincenzi knew, or should have known, exactly what the discounted listing was going to pay him.

Agency

More history. When I came into real estate we operated under a system called “sub-agency”. A realtor listed a property for a seller, and became his agent. Buyer agents existed, but were misnamed, because they did not actually work for the buyer according to prevailing law. They were. in fact, sub-agents of the listing agent, and worked for the seller. All the agency duties owed by an agent to a principal were owed by all agents to the seller. The buyer was, technically speaking, unrepresented.

This legal situation did not reflect what actually occurred. Buyer agents did then what they do now: they provided information to buyers, negotiated for them, advised them, kept their confidences, etc., just as they do today, but the prevailing wisdom was that the seller paid the commission. The real estate industry changed the system and adopted what we refer to as “agency”. This meant that each party, both buyer and seller, had their own agent, and it meant that the law now reflected that fact. The idea that the seller paid the commission was thrown out the window (based largely on the assertion that while the seller did pay the commission he did so with money that the buyer gave him). We began to describe commissions as “transaction driven” – meaning they were paid by both the seller and buyer equally, which reflects the actual facts on the ground.

Making this existing fact plain allowed some sellers to declare “I’m not paying for the buyer’s agent. If the buyer wants an agent they can pay for that themselves”. This led to something called a “fee agreement”. A fee agreement is exactly that – an agreement that someone (usually a seller, but also possibly a buyer) is going to pay someone else (usually a buyer agent) a certain fee.

Sellers would sign a fee agreement because a buyer agent would explain to them that their buyer was ready, willing and able to buy, but required that their agent be paid out of the sales proceeds. Since the listing contract paid a discounted commission the buyer agent would get the seller to agree to a fee agreement to ensure that the buyer agent was paid as much as he felt he was worth.

The potential for conflict is obvious. A buyer agent could meet with a seller and a seller agent and claim that his buyer required that the buyer agent be paid a bonus, and the buyer agent would have the offer as leverage: “Don’t sign the fee agreement and I won’t present the offer, and you, Mr. Seller, will miss the sale!”.

There’s a simple solution: outlaw secret commissions (done, done and done a long time ago) and require the buyer to sign the fee agreement as well as the seller. The idea is that since both parties pay the transaction driven commission, both parties have a right to agree or disagree on how much commission is paid and how it is shared. In fact, they have more than a right to know. They actually have to agree.

If the allegations are true it should be apparent why Mr. Vincenzi would forge his buyer’s signature. He didn’t think she’d agree to pay him. What’s not clear is how he thought he’d get away with it. To understand why you have to imagine how the buyer pays the seller for real estate. It doesn’t happen directly, and there are several forms involved that instruct the people involved who to pay, and how much to pay them. The amount of people involved and the amount of paper involved makes it tough to keep anything secret. That, of course, is why Mr. Vincenzi appears to have been caught – the other realtor (while not owing the buyer any agency duties he does owe the buyer the duty of fair treatment) raised the red flag.

The Current Commission and Agency Structure

The current commission and agency structure allow for a great deal of latitude in arranging realtor compensation. To qualify for MLS exposure sellers must offer some sort of commission to a co-operating buyer agent. However, that amount can be as low as $1.00 (a quick search of the MLS reveals that there are at least three active listings on the REBGV MLS offering exactly that). Aside from that the total amount of commission paid to realtors for services rendered is completely negotiable. It can be a percentage or a flat fee.

Agents can work for sellers, buyers or both, but they no longer all work for the seller by default, as they did thirty years ago. That means that sellers can refrain from paying buyer agents a viable commission rate. In essence, sellers can practically enter into an exclusive agency agreement with their realtor and yet enjoy the benefits of the MLS.

The amount of commission paid must be disclosed to both the seller and the buyer. This is done with the seller through the listing agreement. The buyer gets a completely different and distinct form, called a Disclosure of Remuneration. There are no secret commissions.

If a seller does not offer enough commission to make it worth the buyer agent’s while the buyer can enter into two types of agreement – either a fee agreement with the seller, disclosed to the buyer, or a buyer agency agreement whereby the buyer pays the buyer agent directly.

What Should a Buyer Beware Of?

Obviously, a buyer should beware of individuals acting as Mr. Vincenzi is alleged to have acted (not having seen the Real Estate Council’s report, I’ll use the word “alleged”). But here is how a buyer can protect themselves.

Ask for the Full Realtor printout of the listing and look at what commission the buyer agent is receiving. If the seller is offering $1.00, as this listing is, be prepared to either ask your realtor to work for free or be prepared to see a fee agreement or buyer agency agreement. You get what you pay for.

Not all discount listings pay discount co-operating commissions. When I sell a mere listing package to a consumer I advise them to offer a healthy buyer commission.

Obviously, a seller who offers no co-operating commission is less interesting to many buyer agents than one who offers a reasonable commission. However, a seller who offers a deeply reduced co-op commission may be tipping his hand a bit in terms of sophistication or motivation.

Also look in the realtor comments of the Full Realtor print out. A “mere” posting indicates (although this is not 100%) that the seller is not represented by a professional realtor. This is worth knowing if you are a buyer. A seller without an agent may, indeed, be very tough to get in touch with.

Ask for the Disclosure of Remuneration form. This is the form that discloses to the buyer how much the buyer agent will be paid if the buyer purchases a specific property.

There’s one last thing to consider from a buyer’s point of view when dealing with a discounted listing. There is a train of thought that says that the market price for real estate includes the transaction costs. If the “standard” commission portion of the transaction cost is 7% and 2.5%, that comes out to $13,250 on a $300,000 sale (exclusive of tax). If the buyer agent, working for the buyer, get’s the traditional 46.5% of the traditional 7% &2.5%, there is still a little over $7,000 that the seller has saved by making use of a mere posting and doing the marketing and negotiating themselves.

What can you make of that? How about this: The buyer agent explains to the buyer how he is paid and what value he brings to the table. He explains that if the buyer wants to buy a discount listing there has to be enough commission for the buyer agent or else they will have to use a fee agreement or a buyer agency agreement. The two of them do, indeed, find a property that is listed as a mere posting. It’s arm’s length market value is $300,000, just like our example above. The seller is offering $6,161 as a co-op commission. The seller plans to net an additional $7,000.

Is there anything stopping the buyer and the buyer agent from going after all or part of that $7,000? The answer is “Absolutely not!”. All the buyer has to do is say “Listen, we’re in a terrible market and buyers are in short supply. Instead of paying you $300,000 I’ll pay $293,00. You don’t save $7,000, but you come out exactly where you would have if you’d been paying a realtor, so you’re in the same position”.

The seller can come back and say “Wait! I did the work of the listing agent, so I’m entitled to that savings”, and then, dear Buyer, you can start negotiating. Any part of that $7,000 that you get is money that you and your buyer agent have earned for yourself. Think about it. An hour of negotiations could very easily earn you $5,000, with your buyer agent doing most of the work, and you not really doing anything extra.

Mr. Vincenzi and Justice

Based on the facts as I understand them there is really no reason this had to happen. Mr. Vincenzi was apparently closing in on $100,000 gross commission for the year. That’s gross, not net. we don;t know for sure, but there’s a rule of thumb that says that all splits are 70/30 by the time they get to the book-keeper, meaning $100,000 gross is $70,000 net. He reportedly consented to a 120 day suspension of his license, which means he can’t sell real estate for 25% of the year. You could argue that he received a $25,000 fine, based on his gross income.

We don’t know why he allegedly forged the documents, and because he consented to discipline the possibility exists that he did not forge them at all, but was caught breaking some other rule. However, we do know (based on the reports) that he used a fee agreement, that the fee agreement required the buyer’s signature, and that the other realtor discovered an irregularity and blew the whistle. Score one for honest realtors.

The buyer can sue Mr. Vincenzi and his brokerage. Both the agent and the brokerage have errors and omissions insurance, so the buyer can collect if she proves damages. The problem is that as of now it appears her damages are emotional rather than financial. She apparently got the property and did not lose any money. It’s tough to prove damages in court if you haven’t suffered reasonable damages.

However, if the buyer can prove that Mr. Vincenzi breached his agency relationship with her she could demand that he forfeit his commission. With a Real Estate Council finding in hand it should be pretty easy to prove that the agency relationship was breached (and, in fact, this may already ahve been addressed and simply not reported on).

Realtors must have a license to provide real estate trading services in BC. This puts them under the jurisdiction of the Real Estate Council (an arm of government), as well as all laws of general application. They do not have to be members of any real estate board (real estate boards are voluntary trade organizations), but most are. Realtors who are members of a real estate board have to abide by the published ethics of the board they belong to. Anyone accused of doing what Mr. Vincenzi is alleged to have done is fair game for real estate board discipline, should the board receive a complaint. That complaint, of course, takes second place to a Real Estate Council complaint, but REC discipline does not preclude additional real estate board discipline.

The Real Estate Council, being a government licensing body, can impose fines, license suspensions and education requirements. The real estate board, contrary to common belief, cannot remove licenses. They can require education and suspend membership privileges, however.

What about forgery? I’ve read a lot of unhappy comments on blogs about dishonest realtors (each of them forgetting that it was honest realtors who caught the bad one before the buyer ever knew what was going wrong), but I haven’t seen many comments questioning whether forgery occurred, and if it did, why the police are not investigating it. I don’t want to send any more trouble Mr. Vincenzi’s way, but I will offer this: if you think that what Mr. Vincenzi has done is criminal, and you do not think that the REC has punished him enough, consider the role of your local police. It seems to me that either he has not committed a crime (in which case there is no role for the police) or he has (in which case it is not the role of the Real Estate Council to deal with the criminal aspect of the case).

Just food for thought.