Buyer Beware; Sellers Too

There are many things that have no really good answer, no answer that will fix all the problems. The one good thing is that everybody knows the rules, even if the rules don’t necessarily serve anybody very well. That was real estate commissions, a deal that often gave agents a windfall based on the selling price of a house that bore no relation to the time, expense, effort or skill of the agent.

A deal that put the cost on the seller to pay the full freight, even when that cost went to pay the agent serving the buyer. It put the buyer’s agent in the awkward conflicted position of trying to get the highest price for the seller since that meant the buyer’s agent made more money. It put the seller’s agent in the easy position of getting the listing, getting some decent pics taken and then sitting back until buyers’ agents brought a deal to their door.

It was nuts. It was a terrible system. But everybody at least knew what the system was and could accommodate it in their planning. The seller knew she was going to pay 5% of the purchase price as a commission, and it really didn’t matter whether the selling agency kept it or split it. The amount was still the same 5%, maybe a little more or less, but a known amount. That was the way the deal worked. Until now.

The difference now is the information they are required to disclose and where they can disclose it when it comes to real estate commissions — a charge that had hovered between 5 to 6 percent of the sales price, and until now was typically paid by the seller and split between the seller’s agent and the buyer’s agent.

The changes that went into effect this weekend decouple the two commissions: Sellers are no longer expected to pay buyers’ commissions, though they can still choose to do so, and the proposed commission split can no longer be advertised on the online database commonly used to sell homes, the M.L.S.

This was the settlement reached in a suit with the National Association of Realtors, the trade group that, with some exceptions, controlled how the real estate market worked in the United States.

The new rules went into effect across the United States as part of a $418 million settlement agreement with the National Association of Realtors, a powerful real estate trade group that was successfully sued by a group of homeowners in Missouri who argued that the longtime practice requiring them to pay agents’ commissions led to inflated fees. Brokerages have spent months trying to educate agents and consumers on the looming changes.

Did it lead to inflated commissions? Theoretically, yes, by creating a monopolistic practice to which all realtors subscribed. There was some room to negotiate a lower commission, particularly if the house for sale was high value, but there was no room to change the terms to a fixed fee, an hourly fee or, god forbid, the seller only paying her side of the commission, leaving the buyer to cover his agent’s commission. Did the change work?

But when they were implemented nationwide this Saturday, buyers remained befuddled.

The old system had the benefit of certainty. The new system? Not so much.

In fact, nobody seems to know for sure who stands to win and who stands to lose under the new rules about how real estate commissions are paid.

“The challenge is that state by state, broker by broker, and agent by agent, interpretation is very different,” said Tristan Ahumada, a California-based broker and real estate influencer who runs a Facebook group for Realtors with over 165,000 members.

There are many variations on a theme which may result from this change. Agents may stop showing houses where they aren’t guaranteed of getting paid, or getting paid as much as they believe they should. The issue of who pays may be part of the negotiation for purchase of the home, with buyers offering a price contingent on sellers giving a credit to buyers for the cost of the commission.

For the moment, real estate agents and their brokers/agencies are left to their own devices as to how to deal with this change. Sellers may at first think this change is great and will save them a huge amount of money they would otherwise have to pay that would go to the buyer’s agent, but they will also learn that they may lose potential buyers, whether because the agents won’t show their properties or the buyers won’t pay their price if they have to cover the agents’ commission.

Where will all this end up? Who knows? It may very well end up very differently in different states and markets, as a new way of doing things fills the vacuum left behind by the termination of the old way. But one thing is certain, that as bad and wrong as the old way of dealing with real estate commissions was, at least it was fixed so everyone knew what the deal was.

Now, it’s just chaos and confusion, and there is no assurance that whatever ends up being the new normal will be any better, any more fair, than the bad old ways. Remember, the alternative to bad isn’t necessarily good. It can always get worse.


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7 thoughts on “Buyer Beware; Sellers Too

  1. orthodoc

    My first thought was “how can anybody be harmed if everything is transparent and participation is voluntary”? That thought reminded me that this sentiment is close to our host’s motto, so I looked it up in the upper right: “Volenti non fit injuria.” There I saw a related point right above it: “Legal advice you have to pay for. ” This is related, because it seems to me that if people need the help of agent they can just buy those services (and only what they need) a la carte…. And then I saw the donate button, and that reminded me that I have not hit it for a while (I did now), suggesting that the new arrangements are probably going to have a lot of free-riders (or those who try to free-ride, at least).

    PS According to my search on perplexity, buyers’ agents have a fiduciary duty to act in the buyer’s best interest. so while agents may be tempted to “stop showing houses where they aren’t guaranteed of getting paid, or getting paid as much as they believe they should” that seems to be a violation of the rules. So the question is whether sellers will have confidence in that rule, or rather, to avoid the cost of cheaters, would agree up front to pay the buyers’ agent share too. That’s a question for empiric research, not debate, but my prediction is there will be a pooling equilibrium closing in on zero, rather than a separating equilibrium with some sellers clinging to the belief that paying buyers’ agents make sense. That is because one can always start with a zero buyers’ agent bid, and increase it if the place does not sell (at the theoretical cost of having the house languish on the market until you do)

  2. B. McLeod

    Time was, a seller would go out and stick a “For Sale” sign in the yard, with a phone number on it. I’m guessing the modern version is the people posting properties on FB market. Here in the flats, lower range deals still close without agents, and sometimes by quitclaim. Until the 1980s, banks wouldn’t loan on most existing houses, so there were a lot of seller-carry deed in escrow transactions and buyers who cared what they were getting actually paid a lawyer and/or title insurer.

  3. Mark Creatura

    “Until the 1980s, banks wouldn’t [lend] on most existing houses.”
    What??
    Is this consistent with anyone’s personal recollection? Not mine, but I was a legal infant until the late ’70s.

      1. B. McLeod

        Speaking from a local perspective. That’s how it was here, not nonsense at all. Maybe the result of extensive redlining.

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