The Ethics of Higher Commissions

At a time when most real estate agents are concerned with fierce competition and high pressure to cut their commission rate, a changing market in San Diego seems to be doing the opposite - pushing commissions higher. According to a recent article in the Voice of San Diego, there’s a growing (though small) trend within the Condo market for sellers to increase real estate agents’ commissions rather than drop the price of the condo unit. As you might imagine, this has many people talking.

As an example, the article mentions Richard Caty, who sold his 1 bedroom condo in May. He had been willing to drop his asking price by $25,000 to attract a buyer, but instead chose to raise the commission. The end commission was $48,825 commission. At a standard 3% rate, the commission would have been $13,530. And Caty netted about $14,500 less than he would have had he dropped the commission.

Is this new strategy in the buyer and seller’s best interest? On one hand, you can argue that in a buyer’s market, selling a condo can take a long time and with so many options to choose from, it attracts interest from virtually all agents who want the higher commission rate and there’s a strong likelihood that the condo will sell a lot faster.

On the other hand, is this really representing the best interest of the buyers and sellers? It seems to me that this notion of motivating agents through higher commissions has a very good chance of being abused. Instead of agents showing buyers condos that fit well with their needs, they show only the condos with the highest commissions. In other words, there’s a strong possibility that the agent will be more concerned with her commission rather than the needs of her clients. What agent wouldn’t want $35,000 more to close the deal?

It seems like a slippery slope to me. There will always be a handful of bad agents out there who choose selfishness over the wellbeing of their clients. At what point, if any, should there be regulations in place to protect buyers and sellers from agents with bad intentions? This being California, which has rather strict consumer protection laws compared with the rest of the country, I can only imagine industry watch dogs eyeing this to see if the trend continues.