The Batterymarch Insider
Batterymarch Group LLC is a full service independent real estate brokerage firm specializing in the downtown Boston market. “The Batterymarch Insider” is a brief snapshot of our current market thinking. These are our opinions, so take them with a grain of salt. As always, our “terms of use” apply. We encourage you to subscribe.
Real Estate Brokers Suing Their Clients
When you engage the services of a real estate broker, the last thing on your mind is the thought that the broker will end up suing you. That’s what happened to the developer of the St Regis located at 150 Seaport Boulevard in the Seaport.
Without going into all the nitty gritty, Boston based broker Gibson Sotheby’s International brought a lawsuit against the St. Regis developer. In their complaint, Gibson is seeking to collect commissions for condominium unit sales under a concept known as the “procuring cause of the sale.”
As we understand it, a Gibson sales agent sold two units at the St. Regis to an investor. Subsequently, the investor unsuccessfully attempted to buy several other units through the Gibson agent while Gibson was still the exclusive outside listing agency.
At some point, the developer terminated the listing agreement with Gibson and brought in a new broker who recommended that the developer put ten of the unsold units up for auction. The investor who had previously worked with the Gibson agent bought additional units through the auction. Gibson is now claiming that they were the procuring cause of the units bought at auction and is seeking more than $1.0 million in commissions.
The Ugly Stepchild of the Buyer Broker Rule
The procuring cause of the sale is the ugly stepchild of the controversial buyer broker commission rule that is currently under scrutiny (see “MLS Blinks”). The way the buyer broker commission rule works is that the seller’s broker makes an offer of compensation to any broker that brings a buyer to the closing table. If two brokers claim that they were the procuring cause of the sale, it becomes a jump-ball scenario, and things get ugly.
These kinds of disputes are not uncommon, but you don’t hear about them because they usually go to arbitration or mediation, where the proceedings are carried out behind closed doors. That’s not the case here. It appears that Gibson has no problem publicly dragging their clients (both the St. Regis developer and the investor) through the mud.
One thing that jumped out to us in reading through the Court filings was, what happened to Gibson’s fiduciary duty? To us it sounds like Gibson, through its agent, coached the investor as to how to negotiate against their own client, the developer.
We’re well versed in fiduciary obligations (see Securities and Exchange Commission Request for Data) and we’ve previously cautioned that brokers can contract away their fiduciary duty (see “The Illusion of Fiduciary Duty in Real Estate”). Perhaps that is what’s going on here. It’s our position that if anyone can step away from their fiduciary duty, they probably weren’t a fiduciary to begin with.
It’s not for us to speculate as to who is right or wrong in this case; that’s for the Court to figure out. It is, however, our opinion that suing your clients, and/or dragging them into litigation, is a very bad practice and the marketplace should take note.
Procuring Cause of the Sale – Another Reason to Ban the Buyer Broker Commission Rule
The National Association of Realtors (NAR) defines the procuring cause as “the uninterrupted series of causal events which results in the successful transaction.” In a practical sense, it’s generally assumed that the broker who brings the buyer over the threshold of the property is entitled to collect the commission.
If you’ve ever been house hunting, you’ve probably wondered why your sales agent is spending every beautiful Saturday in June schlepping you through houses while making awkward small talk. It’s not because they’re your new friend, it’s because they want to get paid. It’s a horribly inefficient and antiquated process, and make no mistake, the agent would much rather be at the beach with their family.
The root of the problem is that the sales agents working with buyers are paid through a third party (the seller). Think of the buyer as an innocent bystander when it comes to their agent’s compensation. The buyer writes the check, but the seller had already determined what the buyer’s agent’s compensation would be.
Abolishing the buyer broker rule will not only give buyers a voice in negotiating the amount and terms of transaction fees, but in theory it will also eliminate any gray area as to who is entitled to collect commissions. The last thing buyers and sellers want to do is get dragged into a legal brawl between brokers over who’s entitled to a fee – just ask the folks down at the St. Regis.
Most importantly, it will free brokers and their agents from the shackles of being compelled to stake their commission claim by attending endless property tours. Buyers have the tools and are fully capable of identifying a property that meets their needs, and they can do without the small talk.
Brokers of the future are going to provide an advisory service. Buyers want a broker who can perform due diligence on their targeted property, offer valuation guidance, and advise them in the negotiation process. Yes, there will be substantial fee compression, but brokers will work more efficiently and have a much better quality of life. In short, they’ll become professionals.
The Future is Now
We’re putting our money where our mouth is. We specialize in buyer representation, and up to now we’ve regularly rebated commissions back to our clients at closing – it’s a form of discounting. In the next few weeks, we will roll out our flat fee buyer representation service. It will be our standard premium service at a fraction of the cost.
Going forward we will decline all offers of compensation from sellers and/or their brokers. 100% of the offer of compensation will be passed on to our clients before negotiations even start. We will bill our clients a reasonable flat fee at closing. Best of all, with the new model, it’s highly unlikely that you’ll get tangled up in a legal dispute over fees.
“Exclusive Right-to-Represent” – A Word of Caution
With all the hubbub around buyer agent compensation, the brokerage community is gravitating toward “Exclusive Right-to-Represent” agreements. These contracts are designed to protect the interests of the agents and maintain the high-cost status quo. We view these kinds of agreements as a breach of the fiduciary duty we owe our clients (see our Fiduciary Pledge).
We’re not attorneys and this isn’t legal advice – we urge buyers to not sign any contracts, including these exclusive representation agreements, without having their attorney review it. The first thing you sign is the worst thing you sign.
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About Batterymarch Group LLC – Batterymarch Group is an independent full service real estate brokerage and advisory firm focused on the downtown Boston high-end residential market. We represent both sellers and buyers with a sharp focus on valuation. We also offer sub-advisory and owner’s representation services to financial institutions, family offices, and trustees.
About Andrew Haigney – A 25-year Wall Street veteran, Andrew held senior positions at leading global investment banking institutions where he routinely valued and negotiated complex securities transactions on behalf of institutional clients. Andrew has been an outspoken advocate of a universal fiduciary standard. In founding Batterymarch Group, Andrew brings that same discipline and passion to real estate brokerage.