Practical Thoughts on the NAR Lawsuit

Two years ago at the beginning of the Sitzer-Burnett case, I wrote that consumers needed to be aware of unintended consequences. As media brings the verdict to public attention, it’s a good time to explore what this really means to real estate buyers and sellers. While the media has made this out to be a world-changing moment, the reality is somewhere between nothing is changing and something potentially very bad for consumers.

Let’s address some of the statements made in the various cases as well as found in media commentary.

This is the End of 5-6% Seller Commissions

First and foremost, we have to address the assumption that commissions are always 5-6%. While these are not uncommon numbers in residential real estate, this is not the only possible arrangement between brokerages and the public. Low cost, reduced service brokerages do exist and are often market leaders by transaction count in their geography. Some brokerages or individual agents offer fixed cost options. It’s important to note too that residential real estate is just one part of the broader world of real estate, including commercial, farm and land, and mineral and gas rights, each of which could involve different compensation models and rates for representation.

Sellers can Finally Negotiate Commissions

Sellers have always had the ability to negotiate commissions. While this has perhaps not been clear to some consumers, it has always been the case that sellers had the ability to negotiate both the rate of commission as well as how much, if any, commission would be paid to a buyer’s agent. New form changes for both buyers and sellers in Washington and Oregon simply make this information clearer for all parties.

Agents Steer Buyers Based on Commission

In the past, agents would sometimes ask buyers for compensation directly, for example in the case of a For Sale By Owner where the seller was not offering a commission. In those cases, either the parties would come to an agreement, or in some cases buyer and seller would pursue a sale without representation involving an agent. The main thing about this arrangement that has changed is that now an agent will require a buyer who wants their services to sign an upfront agreement to work together and for that buyer to potentially pay a fee directly. While this is a more explicit system, it does formally lock those buyers to their agent and potentially force them to pay a direct commission.

In terms of agents steering buyers toward homes with higher commissions: while we can’t say this has never happened, it certainly should be alarming to a buyer if they ever found that with their broker. Thankfully buyers can choose who they work with and move on to a broker with higher professional standards.

The End of Buyer Brokerage?

For now, markets in Eastern Washington remain balanced between buyers and sellers. If we see declining interest rates as predicted, some sellers will decide to withhold offering a commission to a buyer’s agent. This is my greatest worry: that buyers already stressed by limited choice, higher interest rates, insufficient incomes relative to home prices, will on top of all that be expected to come up with sufficient funds to pay for representation. It’s possible that some of these costs could be wrapped into a mortgage, pending additional rule changes, but that just means more cost to the buyer. Sellers are not going to reduce the price of a home to account for no longer including this cost.

Get the Popcorn

One of the potential unintended consequences could be a world where more buyers opt to go it alone without representation. In a case where an attorney writes a contract between buyer and seller, only one party is represented - and it isn’t likely to be the buyer. Further, an attorney isn’t a real estate agent. While they can provide excellent counsel on the contract terms, it is generally outside the scope of their knowledge to address hands-on topics like water rights, zoning, flooding, inspections, septic systems, and a host of things that can go sideways in a transaction. That local knowledge across a range of areas is where a professional agent proves their value to a client. In the absence of that expertise, where buyers lack representation, it feels like the setup for many future lawsuits where buyers and sellers are in for terrible surprises.

Like with any professional - your doctor, banker, lawyer, or accountant - you have a choice in who you choose as your real estate agent, and should find one who provides the level of service you expect. Realtors are not interchangeable - each one will provide different strengths, weaknesses, and experiences and as a consumer, you have an opportunity to set expectations with them and determine suitable compensation for their services based on your needs.