No-Hook Buyer Agreement & Competition

Wildly expanding on what is likely a simple concept

In my last post, I wrote that in the long run, buyer agents are likely to go to a “No-hook” agreement:

The no-obligation agreements mean both the showing agreement — which is required only by the NAR settlement to cover the agent’s rear for showing a home — and the actual buyer agreement that spells out compensation methods and amounts.

The current agreements that have the buyer paying the buyer agent, and making up any shortfalls from seller concessions, can’t last if first principles are true. No buyer will want to be on the hook for paying his agent directly if an alternative exists.

Alternatives will exist, because competition is a thing. If every buyer agent in your market is demanding “on-the-hook” buyer agreements, despite requesting compensation in the offer, then you have a competitive advantage by offering an “off-the-hook” buyer agreement and requesting compensation in the offer.

When your competitive advantage becomes well-known and buyers start flocking to you, then other buyer agents must offer “off-the-hook” agreements in order to compete with you.

In the comments to that post, some interesting discussion happened about whether such a “no-hook” agreement is in fact legal and permissible under the NAR settlement agreement.

And elsewhere on social media and in the comments, there was a very strong variety of “Who the hell wants to work for free?” objections.

I thought both were worth touching on, so wanted to briefly put these thoughts out to the world.

On the “Legality” of No-Hook Agreements

First off, let’s be clear that there is no grounds for denying such no-hook agreements by anybody.

There is no law against such agreements; the NAR settlement is not the law. It is a private agreement between litigating parties to settle the lawsuit. NAR has agreed to change its internal rules and regulations, and the internal rules and regulations of the MLSs that it controls (or have signed on to the settlement), to meet the terms of that private settlement agreement.

Geoffrey Long then commented:

Anyone have concern about an MLS saying a “no hook” buyer agreement violates the rules? Since you are effectively building in “whatever we can get from the seller up to X.” Does that cause concerns?

To me, it should be permissible. You are still setting a max comp. The buyer is agreeing up front. The agent is taking on all the risk. If someone wants to risk working for free, that’s on them.

And Andrew Lohmiller responded:

I think it is a violation. The settlement says that the fee must be easily understood and calculated.

So, what if my buyer agreement says my commission is 25% if I can get it from the seller or 3rd parties but I will never charge you directly buyer.

I guess what I'm getting at is if my fee can be zero, but it will.always be zero to you; then why not make the upside high? Nothing to lose for the buyer right?

I just don't think it's within the spirit of the settlement personally.

I think Andrew is misinterpreting what the settlement actually requires. In fact, the settlement does allow for a 25% compensation fee, with no obligation to the buyer directly.

Let’s Go to the Source!

The relevant section of the NAR settlement agreement reads as follows:

vi. unless inconsistent with state or federal law or regulation before or during the operation of this Paragraph 58(vi) of this Settlement Agreement, require that all REALTOR® MLS Participants working with a buyer enter into a written agreement before the buyer tours any home with the following:

a. to the extent that such a REALTOR® or Participant will receive compensation from any source, the agreement must specify and conspicuously disclose the amount or rate of compensation it will receive or how this amount will be determined;

b. the amount of compensation reflected must be objectively ascertainable and may not be open-ended (e.g., "buyer broker compensation shall be whatever amount the seller is offering to the buyer");

c. such a REALTOR® or Participant may not receive compensation for brokerage services from any source that exceeds the amount or rate agreed to in the agreement with the buyer; [Emphasis added]

There are three requirements:

1. Conspicuous disclosure

2. Specificity — “objectively ascertainable and not open-ended”

3. Cannot exceed the contract amount or rate. (Note: this means the compensation can be less than the contract amount or rate.)

Andrew thinks a “25% commission, no-hook” agreement is contrary to the spirit of the settlement. I disagree. If the buyer is willing to negotiate a 25% commission rate with the buyer agent, that is objectively ascertainable. It is not open-ended. The buyer agent may not make more than 25%; he certainly can make less than 25%.

That is absolutely within the spirit of the settlement, since the lawyers for the plaintiffs (and others who want reform) want the buyer to negotiate with the buyer agent.

The conspicuous disclosure requirement goes to that. The buyer agent cannot hide how he gets paid; he has to specify it and conspicuously disclose the amount. I would argue that the spirit of the settlement (along with the spirit of fiduciary duty) also requires that the buyer agent explain that the compensation is ultimately being paid by the buyer, even if the seller is offering a concession to the buyer, since higher home price results in higher mortgage payments. But that is not in the letter of the settlement agreement.

Nothing about the “no-hook” clause makes compensation open-ended. There is a specific cap: 25%. (Or more reasonably, 2.5% or 3.0% or whatever.) That cap is easily ascertainable and can be calculated easily.

Importantly, whether the buyer is obligated to pay any shortfall or not is immaterial to the existence of that cap on compensation.

Geoffrey Long answers that “different MLSs could interpret it differently if it comes to enforcement.” Sure, they could misinterpret things and somehow ban “no-hook” agreements. If so, that MLS is opening itself up to a lawsuit by the MLS Participant for an anticompetitive violation of the settlement agreement, since there is absolutely zero justification for allowing a buyer agent not to force the buyer to pay.

Of course, as always, ask your lawyer since I am not your lawyer. But I can’t see how anyone with any legal training could read the above clauses any differently.

On the Practicality of “No-Hook” Agreements

This is where things get more interesting, IMHO.

Assuming that no-hook agreements are perfectly legal and permissible, should brokers and agents use them?

Given that I have already predicted that most will use no-hook agreements, it’s worth expanding on that a bit more.

In my original post, I wrote that competition will force buyer agents to move to no-hook agreements because of the money involved:

Consider the math. You offer an “off-the-hook” agreement specifying 2.5% compensation, but with the buyer not responsible for whatever the seller doesn’t agree to. You end up with an average of 1.5% concession offer accepted by the seller and listing agent. If you do two deals at 1.5%, and your competition does one deal at 2.5%, who’s ahead?

Consider the math for the buyer. He can sign with you for “2.5% no hook” and know that he will be out of pocket zero dollars no matter what happens, or he can sign with a competitor for “2.5%” knowing that if the seller doesn’t offer 2.5%, he’s on the hook for the remainder. Who is he more likely to sign with?

I struggle to think of a consumer who would prefer to be legally obligated to pay 2.5% compensation. Everyone reading this is a consumer. In what situation would you rather be on the hook, if you don’t have to be?

The only answer is if there is a qualitative difference (whether real or perceived) between the product or service offered, or a price difference.

For example, I am on the hook with Verizon Wireless. It is a 36 month commitment, and then an annual renewal. I could go get Straight Talk Wireless that has no contract, no monthly bills, no activation fees. In my judgment, I think the quality of Verizon services, its coverage area, its numerous service centers, etc. are worth getting on the hook for three years. I might be wrong, but that’s what I thought. If it turns out that Straight Talk Wireless is equal to Verizon in quality… well, I won’t be renewing Verizon.

The price difference example is in something like longterm lease vs. AirBnB. Sure, I can do a day-to-day AirBnB rental, and therefore not be on the hook, but that’s going to be hella more expensive than an annual rental of the same property.

In real estate brokerage, then, I do think consumers would sign an “on-the-hook” agreement with an agent if they perceive that the quality of service is better than is available from a no-hook agent.

(I don’t actually see any price advantage in real estate by going with an on-hook vs. no-hook buyer agreement, but maybe we’ll see 1% on-the-hook agreements competing against 2.5% no-hook agreements? Consumers may reasonably decide that going with the cheaper 1% option is preferable, even if they have to come out of pocket if the seller refuses to make any concessions.)

Nature of Competition in Real Estate

Which brings us to the nature of competition for brokerage services.

Back in 2008 (holy shit, I’ve been writing this blog for a long time), I wrote a post titled “Imagining the Future” where I touched on how competition in real estate works:

Whatever the Department of Justice might say, fact is that real estate brokerage is one of the most competitive service industries out there. The barrier to entry is so low as to be practically nonexistent. Combine this factor with the various “make it up in volume” business models prevalent in real estate, and you have a recipe for brutal competition.

However, fact is that a volume-based commodity business can only compete on the basis of three things: Price, Luck, and Lies.

Price competition, in 2008, was Redfin with its rebates.

Luck competition is simply that:

So much of what passes for “relationship marketing” in real estate (and in law, for that matter) is really luck-based competition. A friend of mine from law school is a major rainmaker-in-training for a top law firm in NYC. His grades were truly abysmal in law school. I can’t really understand how he passed the Bar. But he happens to be the son of one of the top government ministers in Argentina. He’s bringing in so much Latin American business to his firm that they had to make him a partner. Since none of us chooses our parents, his lucky break in being born to the right father is his meal ticket.  Same thing in real estate happens every day of the week, and twice on Sundays.

Then there is competition based on Lies, aka, marketing and advertising:

For one thing, today’s consumers are practically trained from the time they can walk to disregard advertising. They have learned that advertising lies. That it too often misleads. That the Big Mac on the poster looks nothing like the thing you actually receive in the paper bag.

In real estate, the prevalence of lies (particularly by agents claiming to do everything but cure cancer and solve world hunger) means that even agents who opt for the honest, authentic, transparent approach are often regarded as “just another lyin’ marketin’ huckster”.

In my original post about Amara’s Law, I wrote:

There is a tremendous difference between these two things:

“I am a dedicated and experienced real estate agent serving the vibrant city of XXXX. Through my experience I have developed a deep understanding of the local market and a passion for helping my clients find their dream homes. I am well-versed in the unique neighborhoods, market trends, and investment opportunities that Las Vegas has to offer. Whether you're a first-time homebuyer, a seasoned investor, or looking to sell your property, I am committed to providing you with personalized and professional service every step of the way.”

and

“I have helped 938 buyers in my 20 years of experience. My clients get the house 92.5% of the time, and at an average of 7.2% below list price. I spend an average of 117 hours per client, with 25% of the time spent on search and guidance, 35% of the time on transaction management, 30% on negotiation, and the remainder on counseling you and your family.”

The first is what you find in the average agent website or agent profile. The second is what you hear from real professionals with a track record, with stats and data to back it up.

I believe — and I think most of the industry would agree — that the vast majority of agents use the first kind of marketing, because they don’t actually have any stats or production track record to be proud of. If you’re doing a deal every other year because you kind of fell into it (see above, Luck-based competition), what can you actually use to market yourself?

Generic word salad talking about how wonderful you are. Literally everyone else can and does say the same thing. I have yet to see an agent profile anywhere that says, “I’m brand new and don’t know jack-diddly about this market, but I’ll work hard for you!” even though that would be more honest and transparent.

That second group of agents, with a track record and stats to prove it, may be able to demonstrate the higher quality of service to get the consumer to sign a on-the-hook agreement. The first group? Other than blind luck of happening to fall into a deal with an uninformed consumer who doesn’t know any better, I don’t see it.

Why High Quality Agents Should Use No-Hook Agreements

As I see it, I think even that second group of high-quality agents with a track record and the ability to back it up should and ultimately will use no-hook agreements. Why?

Competition.

These agents are not really competing against the first group of part-timers. They’re competing against other agents who also have a track record and stats to prove it.

What is their incentive to not use a no-hook agreement? To keep competition fair between themselves and their competitors?

No human being that has ever lived wants fair competition; we all want an unfair competitive advantage. Rules exist in sports because we humans all want an unfair advantage if we can get it. We spend enormous amounts of money on gear because it promises to give us unfair competitive advantages. If gear does provide that, the sport tends to ban such gear because the sport has an incentive for fair competition. The competitors do not.

Say I am a top 10% agent, and can prove it. If my competitors are all using on-the-hook agreements obligating the buyer to pay any shortfalls in the 2.5% compensation we agree to, then is it not competitive advantage for me — who can prove quality — to offer 2.5% compensation but with no obligation? Wouldn’t buyers, who are looking out for themselves, prefer to work with me over my competitors?

The risk I am taking is that somehow, I will not be able to get the seller to provide 2.5% in concessions, as my offer will request. Except that risk is the same for me and for my competitor with his on-the-hook buyer agreement. So after the seller only provides 1% in concessions, my client pays me nothing; my competitor’s client has to come out of pocket for 1.5% (say that’s $15K, on a $1m house).

What will my buyer tell all of his friends and family?

What will my competitor’s buyer tell all of his friends and family?

Who is going to get more referrals?

In the immediate short-term, inertia remains very strong. We won’t see many agents want to do no-hook agreements, and buyers won’t have had time to compare notes or tell their friends.

Another consideration, even in the immediate short term: my client bought the house, and I only made 1%. My competitor’s client did not buy the house, because he didn’t want to pay the 1.5% to his agent. I made 1% of (let’s say) $500,000; my competitor made 2.5% of $0. Who came out ahead?

Granted, maybe my competitor’s client bought a different house and he got his full 2.5%. Good for him. Except that while he was still working with that buyer, I moved on to getting another buyer, getting another deal done. Who came out ahead?

The Longer Term

Over the longer term, it seems indisputable to me that if the quality is the same, the no-hook agreement will have an unfair competitive advantage over the on-the-hook agreement every single time.

So I, a top 10% agent who can prove quality, should be able to get more clients versus my competitors — also top 10% agents. I take the risk that I may not be able to get my full 2.5% negotiated contract rate on every deal; my competitors do not. But I do more deals than they do. What’s the point at which my income and my competitor’s income evens out? What is the point at which I make more money than my competitors, despite my taking the risk, because I make it up in volume?

The final point I will make here is this: how is my competitor going to get his shortfall payment? Remember, we both take the same risk that the seller won’t offer 2.5% in concessions. I eat the loss; my competitor has a clause in his buyer agreement obligating his client pay him the shortfall.

What if his client refuses? Is he really going to take his client to court? If he does, am I not immediately calling that former client and telling him about me and my no-hook agreements?

What if his client doesn’t refuse and just pays up? Am I not immediately marketing to those former clients and telling them about me and my no-hook agreements?

Who is going to get more referrals over the longer term?

Conclusion

I have never sold real estate. I have not been a broker. But my wife has done both, and she approves of my reasoning here.

In the short-term, none of us know what is going to happen. But over the longer-term, self-interest and rationality ought to come more and more to the fore. Since real estate is likely to remain a hyper-competitive industry, the no-hook agreement will emerge as the dominant buyer agreement because it provides an unfair competitive advantage to those who use it over those who use on-the-hook agreements.

It will take time for all of that to play out. But I can’t see how it doesn’t play out that way assuming three first principles:

1. Human nature has not changed.

2. Competition is a thing.

3. Incentives matter.

Plan and act accordingly.

-rsh