One of the more controversial topics to discuss within the REALTOR community is the topic of agent bonuses, a bonus that a seller, by way of the listing broker, would pay to the agent that sells their home, over and above the normal sales commission. Sometimes seller’s, or their listing agents, see this as a way to draw more attention to their listing and to encourage buyer’s agents to show it and sell it. However, there are many conflicting opinions on this topic within the industry which creates some confusion for seller’s (and buyer’s for that matter), so I thought I would take some time to discuss it.
Why not just offer a higher sales commission?
The first thing that comes to mind when addressing bonuses is, if a seller wants to offer more compensation to a buyer’s agent, why not simply agree to a higher commission rate and/or higher payout to the buyer’s agent (the portion of the commission the listing agent shares with the buyer’s agent). Well, this is where some of the problems with bonuses arise. The reason seller’s don’t do it this way is the bonus is usually conditional, meaning it will only be paid, if certain terms prescribed by the seller or listing agent are met, whereas the buyer’s agent commission must be paid at the rate published in the MLS no matter how good or bad the seller feels the deal is they accept. For example, below are some bonus offers from the “agent only” remarks section of the MLS (comments only agents see and not the public):
- *Buyer’s agent bonus of $2000 for accepted contract on or before 8/21/16″
- “ATTENTION!!! $5,000 AGENT BONUS FOR AN ACCEPTED OFFER BY 9/15/16!!! “
- “$1000 Buyer Agent Bonus @Closing if FULL net price Seller accepted contract on or before 7/11/16.”
- “AGENT BONUS!!! $3,000 with successful closing by mid August.”
- “Seller is offering a BUYERS AGENT BONUS PAID DIRECTLY TO THEM of $5000 for bringing an offer that is accepted and closes prior to Sept. 15, 2016!!”
So, as you can see, the bonuses are conditioned upon some sort of “performance” on the part of the buyer’s agent, such as producing an acceptable offer by a deadline, closing the sale by a deadline or even netting the seller seller full price. Therein lies the answer to the question of why not just raise the commission…the seller wants something in return for the additional payment.
What’s wrong with the seller wanting something in return for the bonus?
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Well, from the seller’s standpoint, or the listing agent’s perspective for that matter, nothing. The seller wants their home sold for the best price possible in the least amount of time and is willing to “buck up”. The listing agent has a fiduciary obligation to the seller so is just working to help the seller achieve their goal. Now some listing agents would argue that their seller is just showing their cards by offering a bonus as if they are offering a $5,000 bonus the message is clearly they will take $5,000 less than what they are asking. But, in the interest of not turning this article into a novel, I’m just going to stick with addressing this issue from the buyer’s side.
From the buyer’s perspective, there are several issues that arise from bonuses to the selling agent. The first is, buyers expect their buyer’s agent to look out for their interest which, not only is the right thing to do, it’s required by law, so the idea of their agent having an incentive to hit a price, or meet a deadline appears to many buyers to be somewhat of a conflict of interest. From the buyer’s agent perspective, while getting paid for their services is certainly welcome, many buyer’s agents get somewhat uneasy over bonuses for the same reason as the aforementioned reason from the buyer’s perspective. Most agents are honest and ethical and would not be swayed by a bonus, however, they don’t want the appearance of any improprieties either.
A bonus could backfire on the seller..
Just yesterday I asked one of the top agents in our firm his thoughts on bonuses and he said he did not like them at at all and in fact gave a recent example where it backfired on a seller. He said he has a client that saw a home they had an interest in so it was one of several homes he showed them. He then realized that home had a $5,000 bonus offered for a contract by a deadline which, even though he felt this home was a good fit for his client, made him uneasy helping them overcome their objections on the home. While he knew he was being honest and looking out for his client by encouraging them to move forward on this home, the bonus he would receive if they chose this home over others caused him concern that his client may think that was a motivator, making him reluctant to push them toward this home at all. So, in spite of the fact the seller offered the bonus thinking it would help, it may have actually hurt the seller and could cost the seller a sale. In this case, the agent, right at the outset after learning of the bonus, revealed to his clients the existence of the bonus and his intention to refuse it so the $5,000 could be applied toward a better deal for his clients. This then illustrates another reason why bonuses are not a good idea, in this case, the way it worked out, which is not unusual, is it did not incentivize the buyer’s agent at all, to the contrary in fact, and really just showed him and his client that the seller was definitely willing to come off the price by at least $5,000.
Are bonuses to the buyer’s agent legal?
First off, I am not an attorney, so this is not legal advice but merely the opinion of a real estate broker and 37 year veteran of the industry. There is nothing in the state statutes that affect real estate agents that forbid them from receiving a bonus nor is there anything in the REALTOR code of ethics that prevents it. Having said that, here are some “food for thought” points:
- There is a law that prohibits inducements or incentives to a buyer (or seller), when conditioned upon the purchase or sale of a home but this does not affect bonuses to agents, just to a buyer.
“Using prizes, money, gifts or other valuable consider- ation as inducement to secure customers or clients to purchase, lease, sell or list property when the awarding of such prizes, money, gifts or other valuable consideration is conditioned upon the purchase, lease, sale or listing; or soliciting, selling or offering for sale real property by offering free lots, or conducting lotteries or contests, or offering prizes for the purpose of influencing a purchaser or prospective purchaser of real property;” (RsMO 339.100(13)
- If a title company, mortgage company or other company providing services related to the real estate transaction would offer a bonus or incentive to the buyer’s agent to encourage their client to use their services, that would be considered a kick-back and would be illegal.
The takeaway…
Here’s the takeaway and my suggestions:
- If you are a seller, don’t offer a bonus…put the money you would put toward a bonus toward a price reduction, it will have more impact.
- If you are a buyer, always use a buyer’s agent (an agent actually representing you and not the listing agent – see DontBuyFromTheListingAgent.com for more info).
- If you are a buyer’s agent and a bonus is being offered, disclose it to your client. Who knows, they may be so happy with you and your level of service that they will want you to get the bonus as a “tip” of sorts.
