Industry News March 20, 2024

What Home Sellers Really Need to Know About the Commission Lawsuits

When I went to pick my son up from baseball practice earlier this week, a friend came up an smiled at me. “Sorry about your pay cut!” I knew what she was referring to, and as I peruse the news reports on the recent NAR commission settlement, I share many other Americans’ frustration at the failure of our journalism to accurately report on the matter. I know racy headlines get clicks and sell papers, but accuracy in reporting is still important.

There are a few things that home sellers need to understand about what changes they can expect, and please understand that these are my opinions, and not the official stance of my brokerage.

  1. The settlement is still a proposal that still has to be approved by the courts. The wording and meaning of the verbiage may still change.
  2. While the (proposed) settlement may put a rest to the issue where NAR is concerned, almost 100 larger companies with enormous market share are not included. Moreover, Berkshire Hathaway has not settled and continues to litigate. If they prevail, that could change things dramatically.
  3. Contrary to the reports, commissions to brokerages aren’t going away, and may not even go down. What will occur is that the commission the seller pays to their listing agent will be unbundled from the buyer agent’s compensation. Since most buyers cannot pay a commission separately, they will elect to roll it into their proceeds of the sale, meaning the net to the seller will be structured virtually identically to how it is currently. We will just see more paperwork to get there.
  4. This is not a slam dunk win for consumers, especially buyers, under the current proposal. Most buyers, especially first time home buyers don’t have the funds to pay their commission out of pocket, and while many transactions can absorb the financing of the commission not unlike it is done now, the most vulnerable of buyers, namely VA (Veterans Administration) and FHA will not have the cash or equity to pay their agent. They will then face buying without an agent in the largest transaction of most of their lives, or figure out how to come up with extra cash.
  5. The proposed settlement will require buyers to sign an exclusive representation agreement with their buyer agent in order to tour homes and make offers. Now think about that sentence you just read. Every prospective buyer who just wants to check out a house is going to have to become contractually committed to their agent they use just to see the property. That contract will stipulate what the buyer brokerage will be paid in commission . That is a gift to the brokerage community, because we all prefer a consultation at the office first instead of meeting stranger alone in empty homes.
  6. Anyone who thinks that buyers will be fine just dealing with the listing agents don’t understand that they work for the seller’s best interests.  Divided loyalty is not good for either party, and buyers dealing with a listing agent will not have an advocate, just a facilitator whose loyalty is to the seller client. Listing agents will not be eager (nor should they be) to have twice the work for the same commission either.
  7. Offers of compensation to buyer brokers will not go away. They will simply not be published in the MLS. I think it is still wise for sellers to offer buyer agent compensation, because it is misleading to think that the buyer broker will be able to collect their fee separately. That should still factor into the seller’s math. Any seller that truly thinks their entire proceeds will be a smaller commission to one agent is ignoring the reality that most buyers don’t have the capital to pay their agent separately.
  8. This will not make housing costs go down. The only thing I have ever seen that causes declines in property values is a national financial collapse like the S and L crisis in the 80s and the sub prime bomb in 2008 that caused the Great Recession. Housing is subject to the same economic forces as any other asset, such as the law of supply and demand. Right now, we are millions of housing units short of what we need. Short supply means high prices.
  9. Commission costs in total will likely not go down either. Making compulsory buyer brokerage contracts the law will give agents a silver platter showcase of their value proposition, and most consumers know that it is folly to make a home purchase a do it yourself project. Good buyer brokers will flourish in this environment, and mediocre ones will leave the industry. That’s good for consumers, and not good for lousy agents. But I can’t see commissions going down in total.
  10. The law of Unintended Consequences will make the journalism on this embarrassing for the media. I’ve already explained that property values and overall commissions will not decrease, but also that cash poor buyers will take it on the chin with this. If it harms the most vulnerable, first time homebuyers who are the backbone of the industry, then I don’t see a win for those consumers.

To sum up, home sellers should not expect some great savings here. The lawyers who are spiking the football over their “win” are the only clear winners here in my view. Savvy buyers will not stop the decades old practice of having their own representation in the largest transaction of their lives, and the best professionals will not work for less in any industry, including real estate.

This will separate the wheat from the chaff as less effective agents leave the industry and the scores of side gig, part time agents will diminish dramatically. The consumers should expect that they’ll get more for their money. In that respect, we all win.