This post is for both real estate buyers and sellers. It will explain some of the ideas currently floating around in the wake of the NAR legal settlement. The news is full of speculations that buyers will automatically benefit because asking house prices will go down if sellers do not have to pay the buyer’s agent commission, that commission rates will become negotiable and will become much lower, and that sellers will net out more since they don’t have to pay so much commission.
I must deal with one misrepresentation up front. Despite the idea that commissions were set and not negotiable, the commission that an agent agrees to accept has always been subject to negotiation. Agents often cut their commissions to ensure a transaction gets to closing and the property changes hands.
As a trivial example, I once had a divorcing couple who were selling their house. The man balked at the closing table and insisted that he was due $40 more than the amount on the closing documents. If he didn’t get it, he wouldn’t sign. It so happened that I had two twenties in my pocket, so I placed them on the table in front of him, and he signed it with no further complaint. It’s part of the agent’s job to solve problems within the scope of their license, and that’s what they do. I wouldn’t have cooperated if he had asked for more than I would be paid as part of the closing. Engaging in transactions that cost you more than you make is a guaranteed road to going out of business.
The Current Situation and Its Effects
As part of the settlement of the lawsuit, the National Association of Realtors has removed buyer agent compensation from the Multiple Listing Service (MLS). While some proponents argue this will lead to a more transparent and cost-effective process, the reality is far more complicated. Here’s why removing buyer agent compensation from the MLS could complicate the buying process, result in inadequate representation for some buyers, drive others out of the market, and ultimately fail to lower house prices or agent compensation rates.
- Complicating the Buying Process
Traditionally, the seller covers the buyer’s agent’s commission, simplifying the transaction for buyers without worrying about paying out-of-pocket for representation. Removing this compensation from the MLS could introduce new challenges. Buyers might need to negotiate their agent’s fee directly, adding another layer of complexity to the process. This shift could make home-buying more daunting, especially for first-time buyers unfamiliar with the intricacies of real estate transactions.
- Inadequate Representation for Some Buyers
Many may opt to forgo professional representation to save money if buyers are responsible for their agent’s fees. This action could lead to a significant number of buyers entering the market without adequate guidance, making them more vulnerable to mistakes, misjudgments, and potentially unfavorable deals. Real estate transactions are intricate, involving legal contracts, negotiations, and inspections. Without a knowledgeable agent, buyers might miss critical details that could cost them down the line.
- Driving Buyers Out of the Market
For some, the added expense of paying their agent’s fee might be a dealbreaker. This additional financial burden could drive some buyers out of the market, particularly in a high-cost housing market where every dollar counts. First-time homebuyers and those with limited budgets might be unable to afford the upfront costs, reducing the pool of potential buyers and limiting access to homeownership for many.
- No Impact on House Prices
One of the arguments for removing buyer agent compensation is that it could lead to lower house prices. However, this overlooks how market dynamics work. Sellers are typically focused on the final sale price, not the breakdown of commissions. Even if they don’t have to pay the buyer’s agent, they have little incentive to lower their asking price. The market will continue to operate on the principle of supply and demand, and as long as demand remains high, prices are unlikely to drop significantly. One of the benefits of an open capitalistic market is price discovery. One of the reasons Realtors are helpful is that they are constantly monitoring market results and know the appropriate price range for almost any home. Sellers are going to ask their agent what their home is worth and then list it on the market around that price. They will not ask less because they don’t have to pay the buyer’s agent a few thousand dollars. Everyone will cheerfully pocket that money as part of their proceeds.
- No Reduction in Agent Compensation Rates
Another assumption is that removing this compensation will lower agent fees overall. However, agents, especially in a competitive market, will likely maintain their rates as their expertise and services remain in demand. If anything, agents might need to work harder to justify their fees to clients, but this doesn’t mean they’ll charge less. In fact, with buyers shouldering the responsibility for these costs, agents’ jobs will be more difficult, leading them to increase their rates to compensate for the additional time and effort spent explaining and negotiating their fees with clients.
- No Effect on Seller’s Net Proceeds
Finally, removing buyer agent compensation from the MLS won’t necessarily increase the seller’s net proceeds. Sellers typically focus on their bottom line, and the cost of the buyer’s agent is already factored into the overall transaction. Whether or not the seller pays this fee directly, they aim to sell their home for the highest possible price. Shifting this cost to the buyer doesn’t change the seller’s financial goals or outcomes; it simply redistributes who pays the agent’s fee. It is like taking money from your back pocket and putting it into the front, then thinking you have more cash. Remember, nothing happens; no property changes hands until the buyer puts their money on the table. That is to say, the money the seller pays in commission has always come from the buyer and has always been part of the price. Moving part of it to the buyer’s side won’t change that.
Conclusion
While removing buyer agent compensation from the MLS might seem like a step toward a more straightforward, transparent market, it’s unlikely to deliver the promised benefits. Instead, it will ultimately complicate the buying process, reduce access to professional representation, and push some buyers out of the market, all while failing to lower home prices or agent compensation rates.
The lawsuit is tentatively settled pending DOJ review and approval, as far as I understand. The NAR has implemented the settlement terms and no longer allows buyer’s agent compensation to be shown in the MLS. Buyer’s agents will have to resort to other methods to determine the potential amount they might earn. Buyers can no longer shop for property by asking various agents to help them. An agent can no longer unlock a property without having a signed buyer-agency contract with the buyer that locks the buyer into working with that agent for a set time. On the other hand, sellers will be tempted to avoid offering buyer agent compensation, which will most likely damage the marketing effort for their property. However, it’s still to be determined how large an impact it will have.
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