The latest federal court ruling on real estate broker commissions may land a ‘direct hit’ on first time Homebuyers. Here’s what’s concerning about the recent lawsuits involving antitrust accusations.
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The personal stories of one Realtor’s battles and triumphs in the highly-competitive Bay Area Real Estate Market, seeking to illuminate and humanize the very real ups-and-downs of homeownership.
“Does the recent antitrust settlement change the fee structure in your proposal?” the email inquired, referring to the listing appointment Sarah and I had presented a few weeks ago.
“Not immediately,” is the short answer (the appeals alone should take years to wind through the courts).
But to be sure, the biggest topic for discussion at every Real Estate Brokerage in America this week, including COMPASS, is the class-action lawsuits that are taking aim at how Brokerages, and in turn, their Realtors®, are paid. As it currently stands in the state of California, the Seller pays BOTH sides of the commission. (In point of fact, the Sellers pay their own brokerages, who, in turn, pay the Buyers’ brokerage.) The arguments allege that commissions are the same across ALL brokerages and therefore they create antitrust issues. (Actually, commissions are negotiable by law, may vary widely from company to company, and from Realtor® to Realtor®, and are transparently stated on page one of the listing agreement). Additionally, the lawsuits argue that Sellers shouldn’t have to pay the buy-side commission and that paying both sides substantially drives up their costs.
The impact on first-time Homebuyers
Agree or disagree, the reality is that the unintended consequence of this “win” is that it will dramatically affect the ability of first-time Homebuyers to step into the marketplace, reinforcing a systemic inequity among the “haves” and “have nots;” a discrepancy that has, regrettably, existed for decades in lending practices, appraisals, redlining, discriminatory HOAs, social bias, and downright unmasked prejudice. (The history of real estate, and who gets to own what and where isn’t exactly clean.) Given that the cost to purchase is already high, adding another 2-3% in commission onto the buy side will undoubtedly make it nearly impossible for many to afford the going rate at all.
Moreover, lenders won’t fund this additional expense as a loan doesn’t cover fees outside the purchase price. As it stands, the affordability factor with respect to residential real estate is at its lowest point in 40 years. If home ownership is the intended goal for a strong middle class, do we really want to pile on additional expenses? (No, we do not.)
But let’s assume the “pay to play” model is upheld by the courts (it’s probable), the upshot is that Buyers who can afford “to play,” will simply subtract their Agent’s commission from the price they offer on the property. In much the same way that the costs to replace sewer laterals, roofs, or kitchens and bathrooms are often calculated, Buyers will likely reduce any commissions they must now pay as well. (Wouldn’t you?)
As is too often the case, those who will feel this change most severely are primarily Buyers and Sellers on the bottom rung, as restructuring the cost to do business will decimate the buying pool at the lower end. Consequently, first-time Homebuyers will be sidelined and Sellers will have far fewer Buyers competing for their properties. (First-time Homebuyers become Sellers, who become Buyers, and so on, and so on . . . thus, this ruling potentially has a substantial ripple effect.)
Looking at the future through this lens, savvy home Sellers would be wise to continue to pay the Buyers’ Agent’s commission to attract as many Buyers as possible AND to incentivize Agents to show their homes. (Agents are self-employed and rely on commissions, so don’t expect them to show a property that offers NO compensation.) In other words, no matter how you steer the ship, both sides of the commission will most likely still be coming out of the Sellers’ pockets. (It’s six of one; half a dozen of the other.)
What’s likely to happen is that Agents may turn away Buyers who cannot “pay to play,” again, creating a vast inequity between those Buyers with advocates, and those without. In a worst-case scenario, Buyers may choose to represent themselves – an outcome that will put unrepresented Buyers at a HUGE disadvantage as most of them will have no idea what questions to ask or where the red flags exist.
Be forewarned: Sellers’ Agents have a fiduciary responsibility to the Seller – not necessarily to an unrepresented Buyer. From there, it’s just a hop, skip, and a jump back into the world of “Buyer BEWARE!” (As an aside, 12 states have NO disclosure requirements when it comes to real estate: Alaska, Idaho, Kansas, Louisiana, Mississippi, Missouri, Montana, New Mexico, North Dakota, Texas, Utah, and Wyoming.)
Finally, the argument that Realtors® make too much money may be up for debate, depending on where you sit, but as we are essentially working as counselors, advocates, contract negotiators, project managers, directors, decorators, landscape designers, marketers, social media influencers, housekeepers, financial advisors, etc, etc., etc., and are often supporting teams to manage each of those roles, I’d argue Realtors are paid appropriately for the skills they bring to bear, and in fact, more than earn their fees. (If you want the cheapest fare, by all means, you are welcome to hire a discount Brokerage and suffer the consequences. Not all Agents are created equal.)
Realtors carry a great deal of risk, work for months on end with Buyers or Sellers who do not consummate deals (no sale, no compensation), pay all of our own overhead and expenses, have no paid vacations or sick leave, accrue no benefits, work 24/7, navigate through highly emotional transactions, often work with unrealistic expectations, and must decipher reams of disclosure that didn’t exist when contracts were limited to just a few succinct pages and no one was required to disclose anything about the house. (Those days are long gone.) Believe me, experienced Realtors® earn their keep!
But as a first shot over the bow, the class-action lawsuits, naming multiple Brokerages throughout the U.S. are a direct HIT (“You sunk my battleship.”), and with potential rewards in the BILLIONS, should we now expect aggressive lawyers to aim their sights on insurance brokers, stock brokers, financial advisors, travel advisors, sports and entertainment agents, and any other “commission-based” profession where standard fees may apply, irrespective of whether they are actually negotiable or not? (Get ready.)
BTW, most class-action law firms take a STANDARD 40% settlement fee, while the actual plaintiffs see a mere pittance. Can we go after lawyers for their “standard” rate? (I’m just asking….)
How can we help you?
Julie Gardner & Sarah Abel | Compass Realty
Not just Realtors, but consultants in all things house and home, we’re here to educate, explore, examine and refer . . . In short, you may count on us to take care of your home as if it were our own and anyone who knows us, knows we take pretty darn good care of our homes.
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