Is This the End of Hidden Buyer Agent Commissions?
By now, I'm sure you have heard about both the real estate commission lawsuits and the recent announcement by the National Association of Realtors. Most of the perspectives offered in the news so far have been made by "industry experts" and other talking heads. As such, I would love to lend my voice to the discussion as an experienced real estate professional who guides buyers and sellers through real estate transactions every day in exchange for being paid a commission (spoiler alert, I am all for the change!)
Let me first explain to you why being a real estate agent is my chosen profession. You see, I'm an influencer 🙂 This is just a newfangled term for being a sales professional. I have a talent for helping people get out of their own way in order to make decisions that will hopefully improve their well-being. I suppose I could use this talent to sell cars, insurance, or maybe investment products, but really I can't imagine anything better than helping people acquire real estate. Not only have I seen with my own eyes how the right home in the right area can have a profoundly positive effect on a family, but add the fact that owning real estate tends to create long-term wealth that can be passed on to generations; there is just nothing else like it.
Another reason I chose real estate is the ability to forge my own destiny. There is no one to put limitations on my success other than myself. This is one of the benefits and challenges of working for a commission. For those of us who have the grit and determination to push through the daily obstacles, there is no ceiling on our success. But at the same time, I have seen so many hard-working colleagues with the best of intentions pour themselves into the job only to find they don't quite have what it takes to make it. Lots of effort with limited success. Working on commission is clearly not for everyone. But what's the alternative when it comes to real estate? Would you be interested in paying a representative by the hour to assist you, like an attorney? Let’s have some fun and play out this idea.
Say you hire some representation to help you buy a home in a competitive market. I'm just going to throw out $150 per hour for this licensed professional. A little more than hiring a plumber and a lot less than an attorney or doctor. So let's say after the initial consultation, showing you several homes, and making an offer on just the right property, the agent has spent about 15 hours on your deal, or $2,250. Now, how will you feel if your offer is not accepted? Will you feel good about the money spent? Was the agent the problem, or was it you not willing to offer enough? How will you feel about this agent racking up more hours to continue the search, or will you be compelled to start over again with someone new who knows nothing about you? Not to mention potentially tens of more hours to close the deal never with a guarantee of success. It becomes easy to see why our current system is commission-based. You and your agent either win together or lose together.
How it Works Now
Up until now, the seller has traditionally paid the commission for both their agent and the agent that brings them a buyer. This commission is pre-negotiated between the listing agent and the seller. Once determined, the commission for the buyer's agent is published in the MLS with the listing. Now the seller has incentivized thousands more agents to bring them a buyer. The buyer's agent only needs to be a member of that MLS to be assured they will be paid upon closing if they bring the buyer. The good side of this system was it was incredibly simple to simultaneously have thousands of agents working for the seller, increasing the odds of a fast sale for top dollar. Another advantage is, generally speaking, the seller typically would have cash available at closing to pay for agent services while the buyer often has little to no cash at closing to pay for representation.
Of course, there are significant downsides, which is the reason why everything is changing. First, the seller usually felt compelled to offer a standard commission rate for the buyer's agent as there was fear if they did not, their house might sell for less or not at all. This also left the buyer with little to no leverage on what and how their agent gets paid. While the buyer wasn't directly paying their agent, the commission was still indirectly paid by the buyer as it was built into the sales price. Maybe the biggest problem with the current system is, since the buyer's agent does not have to convince their client, the buyer, how much they should be paid for their services, that agent may not be as compelled to deliver value beyond an executed purchase agreement and closed escrow.
What's Being Changed
Starting later this year, the MLS will no longer be publishing any commissions that are offered to the buyer's agent. That does not mean sellers won't continue to offer something to the buyer's agent; it just won't be as visible or assumed as it was. The other, even bigger change is that both the Realtor Associations and brokerages that agents work under will start requiring that buyer's agents enter into an agency agreement with their clients. Let me explain. If you have ever sold a house, you know the agent you hire has an agreement that essentially locks you into a period of time where this agent gets to exclusively market your property and represent you through closing for a predefined fee or commission. If you have ever purchased a home, you may just be realizing you never had an agreement like this with your agent; they showed you some homes and wrote an offer (or twelve), then somehow got paid at closing. Going forward, buyer's agents will be required to make you aware of what they're charging, sell you on the value they offer, and get you to sign an agreement just like the listing agents always have.
This is the big change that I am looking forward to and that I believe will ultimately benefit consumers the most. The more competitive agents or any business has to be to win customers, the more consumers and the economy as a whole win. As a top-producing agent in my market with many years and hundreds of clients under my belt, I know that I can offer more and better service than most of my competition. With the old system, buyers just had to say, “Sure, you can show me this house,” and before they knew it, they had committed themselves to an unproven entity. Going forward, I love the idea that I get to explain my entire value proposition to a buyer instead of just being the first person available to open a door. Win, Win!
Last Thoughts
There will be some challenges ahead during this transition that you should be aware of. Let's say you are interested in a house listed for $750,000 and the seller is not offering any commission for the buyer's agent. Let's say your agent has an agreement with you to be paid 2.5% for their services at closing. This means that potentially this $750,000 house will cost you $769,000 with commission. If you have a savvy buyer's agent, they will ask the listing agent to provide some comps to establish their asking price. The listing agent provides a model match that sold for $750,000 one month ago, but now we need to determine if that sale included a commission for the buyer's agent. There is no question that in certain instances, this potential for buyer-paid commission may confuse home values and cause some issues with appraisals and negotiations. It may be an unintended consequence that, at least temporarily, the pursuit to lower the cost to consumers by eliminating compelled commission may actually increase home buyer costs.
One thing is for sure, please take this opportunity to never again work with a buyer's agent simply because they were the first to respond or because they seem nice. Never before has it been more important to buy with an expert. Make them demonstrate why they are the best option for you, how they will save you money and time, and what strategy they will employ to make sure you win when you write an offer on that home you love. We will all be winners for it.
