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Real estate commission drama & what it means for you

I assume by now that most of you have at least passing knowledge of the current law suits over commissions in the real estate industry, but in case not, I'll attempt to sum it up for you here.

Basically, the way homes are sold in the United States is that sellers sign a contract with a listing broker, agreeing to pay a certain fee if/when their home is sold. Despite the claims of collusion and price fixing that are floating around out there, these fees vary -- in our market, 5% is the most common, though it can go as high as 6% and as low as 3% (that low end is pretty rare, but some discount brokers will cut their fee if they represent both sides of the transaction -- an uncommon scenario if things are done ethically).

When a home is listed in MLS, listing agents offer a share of their commission to the broker that brings the buyer. In most cases, it's a 50/50 split of whatever the seller is paying the listing broker, but that is not always the case -- it's never favoring the buyer agent, but it can definitely be weighted more heavily on the listing side.

In any case, on paper, the current system places the entire fee on the seller-side of the transaction, and buyers generally do not directly pay a fee out-of-pocket to their agents. Of course, at the end of the day, the buyers are the only ones bringing money to the closing table, so even though commission is debited from the sellers' proceeds, really, where is the money coming from if not the buyer?

While I am not an attorney and am wary of wading too deeply into the legal claims behind the current lawsuits, the main issues seem to be:

  • sellers are being "forced" to pay not only for their own real estate services, but also for those of the buyer

  • there is "collusion" around the listing fees by brokerages and MLS's via minimum fee requirements

  • both of these things result in home prices being artificially driven up AND buyer agents are selectively showing their buyers properties based on the fees being offered

I am not going to go down the path of trying to disprove these claims, though let's just say that they are based on an incomplete understanding of how things actually work in real estate, and present a very skewed and cynical picture of the industry. But if you're ever curious, give me a call sometime and I'd be happy to share my take on things :)

Instead, I thought it would be more useful for me to lay out the implications to any of you planning to buy or sell a home in the future, so here are a few potential scenarios:

Outcome A: Any settlements and/or judgements resulting from these cases may have no practical impact on how real estate is transacted. Sellers may continue signing list agreements that provide fees to both the list agent and the buyer agent, arriving at that fee based on what they and their agent agree to (which, btw, is not mandated by brokerages or the MLS). This is actually what I believe will happen, and I know I will be advising my sellers that the best way to ensure they get the full buyer pool will be to offer a buyer agent fee.

Outcome B: SOME sellers may decide they no longer want to offer a fee to the agent who brings the buyer, in which case, the buyer will need to pay that fee to their agent directly. While the sellers may think they're making out with this arrangement, buyers unprepared to pay an agent fee on top of their downpayment, closing costs, and other expenses related to moving, taking on renovations, etc. may simply not consider any properties where a buyer agent fee is not offered, thus reducing the pool of potential buyers for the seller.

Outcome C: It becomes the norm for sellers NOT to offer a fee to buyer agents, shifting that burden onto buyers. While some would continue to work with buyer agents, taking on the additional out-of-pocket costs, some would surely choose to go it alone, without representation. This would leave them to fend for themselves on figuring out home value/offer pricing, finding reputable inspectors, lenders and attorneys, navigating any due diligence around condo associations, repairs to be done, etc., This would put them at a disadvantage relative to sellers with an agent in their corner. It would also make for a potentially painful process for both parties since an important part of a buyer agent's role is to shepherd the transaction through to a successful closing, making sure to-do items get done, deadlines are met, and nothing falls through the cracks.

All of the above is even assuming that an unrepresented buyer would succeed in securing a home. While it definitely can happen, in a competitive market like ours, unrepresented buyers tend not to put together the best offers, and in multiple-offer situations, generally get beat out by buyers working with an agent.

I'm sure there are some other scenarios I haven't considered, but you get the gist.

In any case, what homebuyers can definitely expect --in 2024 if not already-- is to be required to sign an up-front agreement with their buyer agent, stating the agent's fee, and stipulating that the fee, if not covered by the list agent, will be borne by the buyer. And while paying a hired professional for their services should not be a crazy concept, it will definitely be a shift from what we're all used to. Then again, once upon a time there was no such thing as buyer agency at all, and now most of us can't imagine real estate without it...


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