The War On REALTOR® Commissions
What Is Actually Happening?
Many news and media outlets have reported about this, but what’s the truth?
In a nutshell, a combination of homeowners and attorneys agreed that real estate agents have been “inflating” their commissions due to a policy by the National Association of REALTORS® stating that agents must offer agents a minimum commission for bringing the buyer who ultimately purchases a home.
The argument also included that home prices were increased artificially to cover these real estate commissions.
Is this truly the case? Is this what has been happening? Let’s explore the subject to find out.
Commissions & Home Pricing
What was actually happening and is there a true connection?
The alleged “6%” commission has been talked about for what feels like ages, and that seemed to be a basis (if not the basis) of this alleged “padding” of home pricing.
The theory is that if real estate commissions were reduced, home prices would follow. Unfortunately, this couldn’t be further from the truth and actually challenges the intelligence of economists everywhere.
The raw fact of the matter is that home prices are strictly dictated by the law of supply and demand. As of this post, there has been a years-long shortage of properties for buyers to purchase, creating multiple offer scenarios and extraordinary offers which accompanied.
Appraisals have been increasing steadily due to this market condition, and therefore home prices have not only been on the rise, but are rising with evidence now provided by the banks themselves when they approve a loan for the appraised amount.
As we speak about appraisals, a licensed appraiser will not factor a real estate commission into the value of a property, so whatever “inflating” that is occurring as a result of “high commissions” are not and will not be considered. In other words, a home will fail to appraise at the comparable value of the property plus commissions, and in order for appraisals to be affected by real estate commissions, it would have to have done so from the start.
The Buyers Are Footing The Bill
Quick Math: Commission + Down Payment + Closing Costs = “The Straw”
One of the greatest concerns that accompany the misguided lawsuit includes the responsibility of the buyers. It is argued that the buyer has the highest costs throughout the real estate process and to add a real estate commission to the mix may be the proverbial straw that breaks the camel’s back.
As a result, buyers may become qualified for less, creating a “cement ceiling” of sorts, which may cause property prices to drop, but at the cost of the buyers themselves, rather than “saving money for the homeowners.”
The other consideration is that many homeowners who may benefit from this will become buyers themselves and may be faced with the reality of paying real estate commissions after the sale of their home. When you combine the reduction of property values (due to buyers now being qualified for less), you can see that there is potential for a market decline; but instead of celebrating this newfound “affordability,” the decline will be at the expense of buyer and seller alike.
Thanks, greedy attorneys!
On a semi-related side note, I am fairly certain that the attorneys responsible for the lawsuit collected a “standard fee” from the homeowners they involved, and that the homeowners received a paltry fraction of the total award as a result. How ironic.
Does This Really End Shared Commission?
Will Seller’s Agents No Longer Offer Commission To Buyer’s Agents?
As of this moment the answer to the question is essentially “No.” Homeowners still have the option to offer compensation to a buyer’s agent the same as before. The only real change there will be initially as a result of this lawsuit is that the Clear Cooperation Policy from the National Association of REALTORS® (the portion of the policy that dictates that commissions must be offered to a buyer’s agent, whether it’s 0.01 cents “6%” or anything in between) will discontinue and that the buyer’s agent / broker’s agent commission input section on the agent side of the MLS will no longer be there.
In other words, REALTORS® will no longer be able to share commission-offered amounts on each property through the MLS. It will be up to the buyer’s agent to contact each agent representing each property to see if any commissions are being offered, if not, then it will be up to the buyer to pay any commissions in whatever way it was discussed during the initial consultation between buyers and buyer’s agent.
Alternatively, REALTORS® may opt to share commission information on websites other than the MLS to discuss commissions to buyer’s agents, however, the Department of Justice may be looking to put an end to that idea as well, preventing any discussion of buyer agency commissions across the board with the exception of person-to-person communication. More on that as time goes on.
How Do Buyers Pay Commissions?
Buyers have a few choices and options which may work
As time goes on and more buyers are faced with the reality of paying buyer agent commissions, the question of how they are going to pay and what methods are available for them to pay come to the fore-front.
There are currently a few ways in which a buyer can pay these commissions with the least hassles possible:
- Build it into the offer
(Offer is for $500,000, minus REALTOR® commission) - Build it on top of the offer
(Offer is $500,000 plus REALTOR® commission) - Pack it into the mortgage
(Mortgage of $500,000 plus REALTOR® commission) - Pay the commission out of pocket
(Write a check at closing)
These are some worthwhile options that any buyer should consider as a result of working with an agent. In my opinion, packing it into the mortgage will have the least impact on expenses. Remember, whatever commission you are paying your agent, it’s divided by 30 years (assuming a 30-year mortgage). So let’s do some quick math: If your REALTOR® commission comes to $5,000, then your monthly mortgage amount increases by approximately $14.00 per month. That may seem reasonable.
Are Buyers Really Using REALTORS®?
Lastly, do people rely on REALTORS® anymore or do they go at it alone
This is the main question that everyone has on their minds, will the “buyer’s agent” suddenly become extinct?
Let’s first analyze whether or not buyers are interested in using buyer’s agents to begin with. According to the MLS (the main system where home sales are logged), Nassau, Queens, and Suffolk counties have the following information between 5/1/24 to 5/28/24:
*3 Bed / 2 Bath Single Family, Non-Distressed Homes Data:
- Nassau 5/1/24 – 5/28-24:
51 Total Sales – 37 Used A Buyer’s Agent (72.6% of Buyers) - Suffolk 5/1/24 – 5/28/24
119 Total Sales – 105 Used A Buyer’s Agent (88.2% of Buyers) - Queens 5/1/24 – 5/28/24
26 Total Sales – 15 Used A Buyer’s Agent (57.7% of Buyers)
As you can see from the data provided above, the majority of buyers prefer to use an agent and are aware of the fact that using an agent is not “free.” They are aware of the fact that commissions may come from the buyer directly and yet as many as 88.2% of all buyers (in Suffolk) have elected to purchase using a REALTOR®.
The buyer’s agent is not going anywhere and buyers are well aware of the benefits and bonuses a buyer’s agent brings to their purchasing journey. There is great and valuable information in the buyer’s agent.
