What Is a ‘Variable Commission’ and Why Should Home Sellers Demand It?

This week’s column is intended to help those who might benefit from a better understanding of how real estate brokers are paid.  If you’re already well versed in this, please bear with me while I share some information with those who aren’t as well informed.

Before I explain what a variable commission is, let me explain who pays — and who receives — the commissions in the typical real estate transaction.

Normally, sellers pay the full commission to the listing agent, who then compensates the agent representing the buyer. How commissions are paid and shared is the primary purpose of the Multi-List Service, or “MLS” — to provide a system of  “cooperation and compensation.” If you’re a member of an MLS (a must if you want to do more than just word-of-mouth real estate), you commit to putting all your listings on it so that other MLS members can show and sell them. MLS listings disclose how much the “cooperating” broker will be compensated by the listing agent for procuring the buyer. 

Real estate firms may not dictate, share or discuss the commission rates that their agents charge sellers. To do so would constitute price fixing, a federal offense under the Sherman Anti-Trust Act of 1890. Brokerages may, however, dictate the amount each agent offers to other agents who sell their listings. At Golden Real Estate, we, like most brokerages, require that our broker associates offer a minimum 2.8%  “co-op” commission.  Offering less could result, I’ve found, in fewer showings by other MLS members.

There’s some history behind that 2.8% co-op commission.  Before the Justice Department forbade  the real estate industry from engaging in the fixing of real estate commissions, the Denver Board of Realtors fixed the rate at 7% and pegged the co-op commission at 40% of that, which is 2.8%. Listing commissions began falling due to competition once Realtors could no longer tell sellers there was a “standard” commission, but the  co-op commission remained at 2.8% to assure their listings got shown by agents.  As a result, it’s not uncommon now for listing agents to receive less at closing than buyers’ agents, even though they absorb all the costs of listing a home — signs, advertising, photos, video tours, showing service, staging consultations, etc.

Perhaps you’ve seen ads offering a “1% listing commission.” Such ads conceal (except in their fine print) the fact that an additional 2.8% is added to compensate the buyer’s agent.  As noted above, the listing commission includes what the listing agent will pay the buyer’s agent, so promoting a “1% listing commission” is, quite simply, misleading or deceptive advertising.

That said, let me now explain what a “variable commission” is and why sellers should demand it.

A variable commission is one which is reduced when the listing agent does not have to compensate a buyer’s agent — in other words when the listing agent sells a listing to his own buyer or to an unrepresented buyer, such as an open house visitor. Listing agents like to “double-end” a listing, because doing so can double what they earn on a given transaction.

Sellers certainly want their listing agent to be motivated to sell their own listings, but when that happens,  should the agent share his good fortune with the seller?  That’s the purpose of the variable commission.

Typically, I list a home for 5.6%, committing half of that (2.8%) to paying a co-op commission, but I reduce my commission to 4.6% when I sell the home myself. That way, I still earn more, but my seller pays less.  I want it to be a win/win.

MLS rules requires that each listing disclose the existence of a variable commission, so that brokers representing buyers know what they are up against in the event their buyer must compete with another buyer who doesn’t have his own agent.

Before submitting an offer, buyers’ agents typically ask the listing agent if there are other offers in hand. If the MLS indicates that there is a variable commission, the buyer’s agent will want to know whether any of the offers are from unrepresented buyers and, if so, the amount of the variable commission differential.  If the differential (as with my listings) is 1%, then the buyer’s agent knows that his client’s offer has to be 1% higher than an unrepresented buyer’s offer in order to be of equal monetary value to the seller.

Likewise, when meeting with unrepresented buyers, the listing agent can advise them that the variable commission makes their offer worth 1% more if they don’t engage an agent to represent them.

At Golden Real Estate, we have other rewards we can offer the unrepresented buyer, including “totally free moving” — free use of our moving trucks, free moving labor, gas and packing materials — if they choose to work with us instead of hiring a buyer’s agent.

As a matter of principle, I believe that a variable commission should be part of every listing agreement. However, my own research of sold listing on the MLS found that less than 20% of them indicated a variable commission.  In other words, more than 80% of sellers signed a listing agreement that allows their agent to keep 100% of their commission if they double-end the sale.

My research has also shown that roughly 7% of all real estate sales are double-ended. Thus about 7% of that 80% missed out on a multi-thousand-dollar discount in their real estate commission that they might have enjoyed by listing with, say, a Golden Real Estate agent.

Many homes are sold before they are made active on the MLS. Some, but not all, are put on the MLS after closing, showing zero days on market. I mentioned above that 7% of MLS sales overall are double-ended, but that percentage jumps to roughly 31% for MLS sales with zero days on market. Of those, 70% did not indicate a variable commission.  Many of those sellers, one can surmise, not only did not get as high a price for their home as they might have if it had been put on the MLS as an active listing, but also lost out on a discounted commission.

It should be noted that while the MLS considers a variable commission worthy of having its own data field, the standard listing contract lacks any place to specify a variable commission. If the contract had a section to enter that information, more sellers might ask about it before signing. Instead, unless your agent offers it proactively, as we do, you may not think to ask about including it as an additional provision.

Electric Vehicle Events in Golden & Denver

This Saturday, Sept. 14th, from 10 am to 3 pm, Golden Real Estate is hosting National Drive Electric Week in our parking lot at 17695 S. Golden Road in Golden.  This is our 5th year hosting the event.  From Sept. 14 to 22 there are 307 events around the country, nine of them in Colorado. In addition to ours on Sept. 14th, there are events in Denver on Sept. 19th, Pueblo on Sept. 14th, Longmont and Ft. Collins on Sept. 15th, Avon on Sept. 18th, and Colorado Springs, Durango and Grand Junction on Sept. 21st. Info on all of them is at DriveElectricWeek.org.  What’s so cool about this event is that there are actual EV owners showing their own vehicles, answering questions and sometimes offering rides “around the block” to interested visitors. There may also be dealers who can offer test drives of their EV models. At press time, 19 such EV owners had registered to attend our Golden event.  On the website you can register as an EV owner or as an attendee. We’ll also have a booth from Ecology Solar, which sells home solar systems to fuel your EV as well as power your home, and Pedego Golden, a new bike shop, will be giving free test rides on electric bikes.

Is a Recession Coming? And, If So, How Would It Impact Real Estate Market?

We Realtors have noticed a general slowing of the real estate market over these summer months, so I’m a little surprised that the statistics don’t reflect any significant slowing. The chart below is an example.

Even while the economy as a whole has shown signs of an impending recession through traditional leading indicators, and while showings are down and we’ve seen more price reductions recently, homes continue to sell, and sold prices are not yet going down significantly.

Median sold prices progressed through the $300,000s starting in May 2015, passing $400,000 in April 2018, fell back into the 300s from September 2018 through February 2019, then peaked at $421,000 this past May. They have stayed around that range since June, falling only to $418,000 in August.

Meanwhile, real estate trade publications and websites have featured numerous articles warning of an impending recession, which is causing buyers to hold off on making offers. Last Thursday, NAR’s chief economist, Lawrence Yun, was quoted as saying, “Super-low mortgage rates have not yet consistently pulled buyers back into the market. Economic uncertainty is no doubt holding back some potential demand, but what is desperately needed is more supply of moderately priced homes.” Yun predicted the low rates to continue through the end of the year, but also predicted that the sale of existing homes will not increase. He predicts home prices will rise by 3% in 2020.

Also last week, realtor.com released a survey of 755 home buyers, 51% of whom said they expect a recession this year or next year, and 56% of whom said that if a recession does occur they would delay their home search until the economy improves.

Three days earlier, realtor.com quoted its senior economist, George Ratiu, as saying, “This is going to be a much shorter recession than the last one. I don’t think the next recession will be a repeat of 2008…. The housing market is in a better position.” The biggest wildcard is probably the President’s back-and-forth on a trade war with China and the rest of the world, and no economist (or presidential advisor) can predict that.

Realtor.com went on to say, “Aspiring buyers hoping that home prices will crash, like they did during the Great Recession, are likely in for a rude awakening. There simply aren’t enough homes being built to satisfy the hordes of buyers. There isn’t likely to be a drop-off in demand anytime soon.”

We agree. Call us!

Bring Your EV to Our Event Next Saturday!

We already have 14 EVs registered for the National Drive Electric Week event in Golden Real Estate’s parking lot at 17695 S. Golden Road, Golden, on Sept. 14th, 10 a.m. to 3 p.m. We have all 3 Tesla models plus models from BMW, Jaguar, Chevrolet, Nissan and Hyundai. If you have another brand, please register it at www.DriveElectricWeek.info and come show it off. If you want to be an attendee, you can reguster at the same site.

Just Listed: Home & Studio with 40-Year-Old Gardens

This house is owned by a woodworker and his artist wife. It was just listed at $725,000 by Chuck Brown. Every room in the house at 6404 Benton Street in Arvada features his handywork in alder, oak, cherry and other woods and her artistic touches. The updated kitchen and bathrooms also feature quartz countertops. I can’t do justice to this home in the limited space available here, so please go to www.ArvadaMasterpiece.info for a narrated video walk-through of this 1,585-sq.-ft. 1½-story Cape Cod home, its 1,800-sq.-ft. studio building, and detached 2-car garage with attic, not to mention the 2/3-acre lot with four-season gardens!  This home is a must-see for anyone interested in urban gardening as well as those in need of workshop/studio space with 240-Volt power, and anyone who loves great woodworking! Open Sat. & Sun, Sept. 7 & 8, from 11 to 2.   Call Chuck Brown, 303-885-7855, for more info or to arrange a private showing.

Just Listed: Modern Log Home in North Lakewood

This is a home for people who love wood! The address is 2299 Estes Street, a couple blocks south of Crown Hill Park. It was just listed for $475,000 by Jim Smith. It’s a modern log home, custom designed by the seller in 1977 featuring logs shipped down from Montana, beetle-kill pine paneling from a 1976 infestation in Colorado, weathered snow fence wood from Wyoming, and custom-made hickory cabinets from Kentucky in the 2008 remodeled kitchen, which also features Corian countertops. The logs are visible inside the home, not just on the outside. The 0.37-acre lot is a horse property, too, and a barn/loafing shed is still in the oversized backyard. Adding to the country feel is the gravel driveway, mature trees, and the absence of sidewalks on the street. View a video tour at www.LakewoodHome.info. I’ll be holding it open this Saturday, Sept. 7th, from 11am to 2pm.  Come see it!