Be Careful What You Wish For
Author Notes: I’ve sat on this post for nearly a year. In that time, the lawsuits and direction of this national conversation have only gotten worse. There are a lot of well-meaning people tying to create fairness, but I’m deep concerned it will not yield a positive result for consumers. As a Realtor, I want a cost-effective and efficient transaction for all parties. I encourage consumers to follow this issue carefully as it has long-term consequences for our economy and for everyone’s wallet.
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Buying and selling a house is expensive. The most common sales model involves a commission, negotiated between the seller and their agent, and paid to the selling and listing agents at closing. The cost to the buyer is included in the price they pay for the house, and deducted from the proceeds to the seller, generally amounting to 5-6% of the overall price of the house. I’m using an overly precise language because there have been a series of lawsuits nationwide over this point of how commissions are paid and disclosed. As a consumer, the results of these lawsuits initially sound like a way to stick it to greedy, overpaid real estate agents, but the truth is more subtle.
The National Association of Realtors (NAR) has published a list of proposed rule changes based on their settlement with the Department of Justice. Among these you’ll find the following:
permits or requires MLS Participants, including buyer Brokers, to represent or suggest that their services are free or available to a Client at no cost to the client;
What I’m going to say is an unpopular opinion. If you bought a new car, how would you feel if your boss said that they paid for it? I mean afterall, they paid you the money that was used to buy the car, so indirectly, they paid for the car. Seems a bit silly and semantic, right? And yet that’s what the NAR and the DOJ wants us to tell you as consumers. If you are a buyer, yes, certainly it is your money that is paying the commission in the same way it’s your money paying for the house. But at no time were you in a contract with that listing agent and you had no say over the commission. Rather, the seller has entered into that legal contract with the listing agent and it will be less money in their pocket at the end of the transaction to account for the commissions. In this regard, saying that you the buyer are “paying“ the commission is just as silly as the example I gave.
Across the country there is a push to change the model to one where buyers either represents themselves or contracts directly with a buyer’s agent. Think about the dynamics of this for a moment. As a buyer you are forced into the “Sophie’s Choice” of either (a) having to pay an agent at a time when you are already having to bring money for a down payment, or (b) are forced to represent yourself. A buyer’s agent is there to make sure you have complete information, to project-manage the transaction, and to be a strong negotiator on your behalf. The buyer’s agent is there to make sure the phrase “buyer beware” doesn’t become a curse over you. If more buyers are entering into transactions without an agent, I foresee a slew of lawsuits as buyers find themselves at a disadvantage to the sellers.
Let’s talk about money for a moment. Here you are in one of the biggest financial transactions of your life, potentially already concerned about how you are going to make the down payment or afford the mortgage payment, and now you have to come up with even more cash out of pocket? This is a terrible outcome for buyers! What I suspect will happen is protracted negotiations between buyers and sellers over who will pay commission costs. If you’ve ever bought or sold a home, you know there are already plenty points of friction — price, contingencies, closing date, closing costs, etc. — and that’s on top of some of the more esoteric items like fixtures, lease arrangements, earnest money, and so forth. Now we add on a major expense like the commission to the things to be negotiated? Talk about adding more stress to an already stressful situation.
Another potential outcome: buyers begin trying to roll the commission cost into their mortgage, in the same way they might wrap other closing costs. Now we’ve tied those costs even more into the appraisal and you as the buyer get the privilege of paying interest on the commission amount!
The current system feels very unfair, right up until you start comparing the alternative models. What’s ironic, too, is that a buyer who wanted to use commissions as a point of competition (i.e., pay for it themselves) could do that today — so certainly another way to view these proposed changes is through the lens of government overreach.
It’s a fair question to ask whether there are ways to make real estate more cost-effective, but it shouldn’t be to the detriment of the general public. As always, I’m here if you’d like discuss this or any other topics in greater detail. jeff@jeffstrickler.com | (509)540-5027