As the Internet intensifies mortgage rate competition, it seems like more brokers are competing on price than ever before. In turn, more brokers are using their commissions to buy down interest rates.
This is exactly what you don’t want to hear if you’re a brokerage firm executive who relies on percentage-based splits/royalties. Increased use of buydowns is directly threatening the revenue stream of those firms.
That’s why it was interesting to hear of an approach being tried by one particular brokerage company (which can’t be named, unfortunately). Theirs is an approach that reflects the times, but one that also has repercussions for agents’ earnings.
As those in our business are well aware, many brokerages, broker networks and broker franchisors take a percentage of their agents’ revenue. That “split” to the house can be 5%, 10%, 15% or more. The problem is, if an agent gives up half their commission to buy down a rate, a firm with a percentage royalty model sees their revenue cut 50%.
That said, the one crafty firm mentioned above has what it thinks is a solution. It has re-written some of its broker contracts so that its cut is based on “standard commissions.” In other words, the percentage split is calculated on the commission the agent would have received if he/she had not bought down the client’s interest rate.
The ramifications for agents who sign such contracts are clear. If, for example, a normal commission is $1,000 but the agent’s actual commission (after buydown) is only $500, he or she is stung twice. Not only does that agent earn less absolute revenue, they also shovel a significantly greater percentage of their income to the house.
This begs the question: will more brokerages implement this model?
If they try to, it may be at their own peril. Most successful agents won’t stand for lower compensation and higher-effective splits. Brokerage firms who attempt to base their splits on non-bought-down rates will inevitably lose good agents. For those brokers focused on minimizing overhead, the flat-fee broker organizations—like Meridian Financial, Axiom, VERICO and RMA—may seem like especially appealing alternatives.
With the trend in buydowns, percentage split-based firms are sailing into stormy seas. It may be safer to get lean, charge a la carte for certain agent services and technology, and diversify their revenue, versus making their situation worse by charging splits on income that agents never receive.
OK, Here’s my opinion …(and it wont be everyone’s opinion)
If a rate is an advertised special or unique product that the lenders advertise with less commission then that is that… the regular splits should apply on the reduce commission payable on that product. both house and broker earn less on that Advertised product.
BUT, if the broker chooses to BUYDOWN with cash from their commission, that is a different story. The broker, whether they are on a 75/80/85/90% SPLIT, has only their income portion to spend. So why would they assume they can spend more (someone else’s income) on a buy down, than their commission would have paid them? The house or the brokerage would be making their split on the deal anyways.
Let’s assume Most of the lenders allow a maximum of say 10 or 15 bps buy down (yes there will be others that allow more, that’s not the point). So even someone on a 75% split should be able to earn more than enough to cover the buydown. And if you look at the commission sheet received from the lender on a cash buydown case, it clearly states the gross income earned less the buydown (so, write the buy down off). There is no real loss here to the broker. It is a cost of doing business, look at it as advertising to save that deal… Buydowns SHOULD be few and far between, if not, there is an issue with the lenders you are working with. Find a lender with a more competitive platform.
Chances are your split you leave on the table for your broker owner or house is paying for your desk fee and payroll services, marketing, whatever ! AGAIN, just my opinion ! and I am just a measly broker !
In the above comment, When I say broker, I mean the individual (agent) FYI for those back east reading this.
Broker Owner, Brokerage or House being the employer ! :)
Suz says “Why would they assume they can spend more (someone else’s income) on a buy down?” If it weren’t for the agent, the house wouldn’t have the income to begin with. The agent doesn’t “need” the house like the house needs the agent. The house is a service provider and nothing more. If it doesn’t share in the cost of competitive rates, the agent should find another shop to hang their license.
Sometimes it is necessary to buy down the rate in order to keep the deal. If the client goes somewhere else for a better rate then there is no income at all. For some who already put in a lot of work and that being the AGENT… some income is better than none. The Broker House would then also receive NONE. I don’t think that’s a fair commission split but we all have our option to work for a Broker that fits. To each their own… That said Broker may lose some good income earners. I don’t think rate shopping is the best way to do our business verses service provided but sometimes it’s necessary.