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Breaking Down the Commission Headlines and the NAR Settlement

The news right now around real estate is ripe with "The 6% Commission is Dead" or how buying and selling real estate is about to become a whole lot cheaper. 

Sounds tantalizing, right? Because often news is sensationalism and this one is no different. 




Did something actually change? 

Yes, a little. 

NAR (the National Association of Realtors - the trade organization that makes a real estate agent a 'Realtor' by a separate code of ethics and educational criteria) settled a case that brought about a few, minor changes. 

1. It eliminated any requirement that listing brokers or sellers must make offers of compensation to buyers brokers. 

2. It prohibits sellers and their agents from making offers of compensation on the MLS and disclosing any compensation and requires the elimination of all compensation fields on the MLS. 

3. It requires MLS members working with buyers to enter into written agreements with those buyers. 


So what changed? 

Not much. 

Particularly in Pennsylvania and around greater Philadelphia where much of this was already the case. 


First, lets Review Commissions



Generally, a seller hires a Listing Agent (Seller's Agent) to help them sell their house. That agent agrees to do so, for an agreed time period, and IF they do so, asks to get paid usually 5-6% of the final sale price. However, the brokerage (company) and agent (person/team representing the seller) has the final say WITH the seller what they all agree to charge. 

But thats not 6% of cash going to that agent. 

Generally, they offer HALF of that to someone who brings a buyer (like a finders fee). Here in PA, thats a Buyer's agent, usually, who has an agreement with their Buyer client to help them find a home and negotiate a deal. 

So the Listing Agent pays them the 3% out of their commission - all paid for by the Seller's proceeds only at Settlement/Closing. 

So does the Listing Agent walk away with 3% of the sale price as their paycheck? Generally, no. 

Of that 3% of the sale price they might have to give 25% or more to their broker and franchise (the company like Compass or Coldwell Banker or Berkshire Hathaway...). 

They also need to be reimbursed for all of the marketing they have paid for, out of their own pocket, such as listing photos and videos, floorplans, staging or staging consulting, online/digital advertising, print advertising, etc). Often, a large portion of a listing agent's commission is actually used to market and sell the house. 

And after all of that, of course, we pay taxes like everyone else. 

So for some rough math, lets say someone is selling a house that goes to settlement for $500,000 and they have paid their listing agent 6% of the sale price. 

6% = $30,000 

- 3% to Buyer's Broker = $15,000 

- 25% and $500 to their Broker (this varies wildly) = $4250 

- 1% on marketing = $3,000 

- Taxes ~$2300 

= $5450 take home 

That means after all of that, the listing agent actually walks away with around 1% of the sale price (as might the buyer's agent). That would be fine if we could discuss, list, negotiate any settle a house in two weeks or less. But often, this paycheck comes after months of working for a client. 

And, for that Buyer Agent- while they may not have to pay for marketing a home (though they often pay for things for their buyer in the course of a relationship), they have spent MANY hours, often evenings and weekends, with buyers at homes and in offer scenarios, which means their hourly rate is often pretty low. 


Back to the News


So the change from this traditional structure? Here - not much for now other than how commission information is shared. 

Our MLS - Called Bright MLS - which serves as a huge source of listings all in one spot for agents to share and most effectively advertise their listings - has always allowed for commissions to be negotiated. Previously you had to offer a penny to a buyers agent to list the house but now its $0. 

PA is one state that has LONG had a buyer's agency agreement in place. For around 25 years, we have had a separate agreement for buyers to negotiate their commission with their own agent. Most agents who agree to represent a buyer charge 2-3% of the house purchase price. The agreement says anyone can pay that - and often its the listing agent who does (from the 5-6% listing commission paid at settlement by the seller). 

So that is all still exactly the same. 

The only difference here is that the settlement makes it so the listing agent can't write into the MLS how much they are offering to pay the buyer's agent. But thats only in the MLS! 

So that just means if the buyer's agent goes and shows 4 homes, instead of getting a print out that shows the each of those homes will offer 3% commission, now they just have to call, text or email the listing agent and ask - or go to a separate website where the commission will be listed not on the MLS. 

Its just another step to get the information. But the commission will still be there and available if nothing else changes.... 




So what could change? 


Well the headlines and the general discourse surrounding suggests that sellers may want to stop offering buyer broker/agent commissions all together. 

On the surface, that makes sense, right? Why would the seller pay for the representation on the other side? True - at face value that doesn't make sense. 

So many sellers will begin to ask "Who can I list with that will give me the lowest commission? I'm not going to pay for the buyers' agent commission out of my money!" 

(Funny since most of them will have benefited from that when they purchased their homes) 

But many top tier agents who offer high levels of service and high levels of expertise may not agree to list homes without offering a buyer's agent commission. 

That's our prerogative as agents who run a business. 

That's part of our marketing strategy. 

If you, the seller, aren't interested in high levels of effective marketing, then that's why there are plenty of fee-for-service or discount brokerages. There already have been those options for well over a decade! 

Lets say Seller #1 lists their home with a traditional broker who gets paid 6% - 3% to a buyer's broker. Seller #2 does not offer a buyer's broker commission. $0. 

So when The Buyer decides to look at the two homes, their agent will say "Seller #1 is offering to pay my commission. Seller #2 is not. That will be on you to now pay." 

So Seller #2's house just became much more expensive to the Buyer and thus less enticing. 

This was why the settlement agreed to not list commissions in the MLS anymore. They thought AGENTS would steer their buyers towards homes where they would get paid/paid more. However, this isn't how this works in real life. 

In PA with the Buyer Agency Contract, this is not steering - this is the Buyer having to look at their entire out of pocket expense that they agreed to when hiring representation. That representation can either be rolled into the cost of the home or paid out of pocket. Right now, its usually rolled into the cost of the home. 

And that makes it cheaper because the average buyer gets a mortgage so that commission cost is made over 30 years.

But if a Buyer has to pay out of pocket for their representation, then their cash level lessons and the house actually DOES become more expensive because they had to pay to be represented. (Further, its extremely unlikely that the cost of the home will be reduced by 3% to make up the difference) 

In other words, the cost has been pushed onto the Buyer as another out of pocket expense. 



So the Bad...? 


With real estate being already highly unobtainable and expensive, at least here in Greater Philadelphia, that's just one more thing making buying a home more difficult if not impossible. 

What's worse? This will widen the chasm between the wealthy and the average home buyer. Wealthy home sellers won't mind paying for Buyer representation because they know its a good investment and one more high level of marketing. Wealthy home buyers also won't be limited to paying for their own representation, if needed, as many are offering cash offers on homes anyway. 

But home buyers with very little cash (like FHA and VA buyers) and many first time home buyers will not have the out of pocket available to pay for their own representation. That means they will either seek out, and pay more for, the homes with this rolled in, skip the homes without paid representation or have to forego representation. 

And what happens when they don't have someone representing their interests? They will lose bidding wars. Or they will overpay for homes without the right market data. They will fall into pitfalls of having to follow through with offers when they agreed to Pay X but could only mortgage Y when the appraisal falls short - having to bring the difference or walk away from their $15,000 deposit. They will not get the inspection they needed on the septic system. They will miss out on their dream neighborhood they didn't know existed because it wasn't on the market yet but not be able to get out of their current home. ETC, ETC, ETC. 

Those home buyers will get stuck or not even get their foot in the door more often than the wealthy home buyers who can pay for representation. 

As NAR described offers of compensation (buyer's broker fees) in their article on the settlement, 

"Offers of compensation help make professional representation more accessible, decrease costs for home buyers to secure these services, increase fair housing opportunities, and increase the potential buyer pool for sellers." 

It COULD get much more expensive and competitive to buy a home. Sellers are not going to start lowering their sale price by 3% all of a sudden because they don't have to pay the buyer's broker (again - they never HAD to) so the buyer's agent commission could just be one more expensive part of buying a home. 

OR, the market dynamics will relatively stay the same and home sellers who chose not to offer a buyer's broker fee will have a harder time selling - as is the case right now. 

(Further exploration on these ideas and others can be found in this fantastic Housing Wire article) 



The Good? 


Competition is always good. This is an industry that pivots and survives. So if buyers do have to start paying for all of their representation out of pocket, it means they will be more discerning with who they work with. 

Buyer's agents do not just open doors (unless they are fee-for-service and thats all you are paying them to do). So good agents will have to be even better and the bad agents who offered little value to their buyers will be a thing of the past. 

Thats good. Competition and market demand will make agents better. 

My hope is that consumers will, on average, want to continue seeking service and expertise for their biggest purchase over cost (see WSJ article on this here) and that it can be done in an affordable way for the average buyer. No agent wants to take equity away from their clients - our job is actually to add it and create value from advice, expertise and professionalism that provides the best scenarios for our clients and the best value. If this just pushes us to do more of that, all the better. 

Fingers crossed. 






 


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