Buyer agent commission controversy

buyer agent commission
Annual mean wage of Real Estate Brokers (infographic from bls.gov)

One of the hottest controversies in real estate that you have yet to hear about is who should pay buyer agent commissions. Agent commissions controversies have been around in one form or another for decades.  The commissions issue typically becomes front and center when the housing market is doing well.  This time, however, the buyer agent commission controversy is gaining steam and has the potential of changing (and possibly upending) residential real estate and online real estate platforms.

The debate is center in an anti-trust class action law suit filed against the National Association of Realtors and a number of major real estate brokerage brands.  As I reported last month, the law suit alleges that the defendants engaged in “anticompetitive practices.”  Among the alleged issues listed in the law suit, includes a “Buyer Broker Commission Rule” that requires buyer agent compensation for a home to be listed in the MLS. 

Regardless of how a listing agreement “structures” broker commissions, the perception and general acknowledgement is that the (buyer broker) buyer agent commission is paid by the seller.  The seller typically pays the listing broker a commission, which is shared if another broker represents the buyer.  This commission “pass-through” is responsible for the growth of online platforms selling home buyer leads and contacts.  It has also been responsible for the growth of real estate groups that act as “buyer mills,” which rely on high volume leads generated via online platforms and other means.  It can be argued that because of Buyer Broker Commission Rules, the billions of dollars that are generated and spent on home buyer leads (as well as buyer rebates) can be traced back to the home seller. 

Home sellers are not the only victims.  A study (jstor.org/stable/24887258) conducted by Joachim Zietz and Bobby Newsome (A Note on Buyer’s Agent Commission and Sale Price; The Journal of Real Estate Research; 2001, Vol.21 No.3 p.245-254) revealed that buyer agent commissions had a positive effect on home sale price, but only on lower-priced homes.  The conclusions suggested that buyer agents “do not act in the best interest of their clients because of the institutional structure of sales commissions.

Is it possible that the MLS perpetuates steering and anticompetitive behavior?  A recent study by Barwick, Pathak and Wong (Conflicts of Interest and Steering in Residential Brokerage; American Economic Journal; 2017, Vol.9 No.3 p.191-222) has shocking conclusions that resonates with those who are wary of the residential real estate industry.  The study pointed out that real estate commissions are higher the US than other industrialized countries.  The authors concluded, “Properties listed with lower commission rates experience less favorable transaction outcomes…they are 5% less likely to sell and take 12% longer to sell. These adverse outcomes reflect decreased willingness of buyers’ agents to intermediate low commission properties (steering)…”  They “provide empirical support for regulatory concerns” because the data indicates buyer agents will steer their clients towards homes paying higher commission.

Home sellers can learn from home builders about marketing and agent compensation.  Home builders figured out buyer broker commissions a long time ago.  They will not pay advertised compensation to buyer brokers who don’t show up with their clients.  And during hot markets, they pay a modest referral fee in lieu of commission. 

All things considered, the issue of buyer broker commission is a complex issue that depends on multiple factors, including market conditions.  However, increasing awareness is inventing new business models and lower buyer broker compensation expectations. 

Original located at https://dankrell.com/blog/2019/05/24/buyer-agent-commission-controversy

By Dan Krell
Copyright © 2019

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

Negotiating agent commissions

negotiating agent commissions
Brokerage models (infographic from nar.realtor)

It’s no secret that residential real estate agent commissions are decreasing. Market forces has created new broker models that has put downward pressure on commissions. Many agents embrace consumers negotiating agent commissions.

If market forces are working in negotiating agent commissions, and commissions are decreasing, you might wonder about a recent class-action law suite.

If successful, an anti-trust class-action law suit filed March 6th could potentially change the landscape of the residential real estate industry.  The law suit alleges that the National Association of Realtors and a number of major real estate brokerage brands engaged in “anticompetitive practices.” 

According to the law firm Hagens Berman (hbsslaw.com), “the lawsuit alleges NAR and the Big Four have enacted a set of anticompetitive policies intended to prevent competition among real estate brokers, as well as stopping buyers and sellers form negotiating commissions, including: Only allowing listing brokers to list a property on an MLS if the listing broker makes a unilateral, non-negotiable offer of compensation on the MLS to buyer brokers. Prohibiting buyers and sellers from negotiating buyer broker commission. Prohibiting brokers from disclosing commissions offered on MLS. Allowing brokers to take both buyer and seller commissions, if the buyer is not represented by a broker. This anticompetitive activity has been devised at the national level and enforced at the local levels.”

I am not an attorney, but I have been listing and selling homes for over seventeen years.  These thoughts are my own. I am not speaking for anyone except myself.  I am offering insight from my professional experience.

On the face of it the lawsuit assertions are false. First, the allegations make it sound as if home sellers have no choice in how they sell their home except to use a full-service exclusive real estate broker.  As I wrote just last month, home sellers have many options in selling a home.  Besides selling “By Owner,” there are multiple broker options as well, including (but not limited to) MLS placement services, limited services and à la carte. 

These assertions also make it sound as if a home seller can only get an “exclusive right to sell” listing agreement with a real estate broker.  But again, the home seller has options in the type of listing agreement and broker agency type.  Because my space is limited and the issue of brokerage representation is technical, I won’t expound on the types of listing agreements and home seller representation.  However, each type of listing agreement has specific benefits and disadvantages.

Furthermore, commissions have always been negotiable. And market forces have been in favor of consumers negotiating agent commissions. The lawsuit’s assertions about real estate commissions are misconceived and cliché.  The matter of real estate commissions can be complex and depends on a number of factors, which can include (but is not limited to) market conditions, type of representation, types of services provided, among other things.  Additionally, home sellers are not the only party to a transaction that negotiates commission.  Home buyers who are represented by a broker negotiate the buyer agent commission as well.

The internet has created an empowered savvy consumer.  Like other industries, public access to information (internet) has been a major factor in reducing real estate broker fees and commissions.  Both listing broker and buyer agent commissions have decreased.  The internet has allowed home buyers to find home listings on their own regardless of advertised buyer agent compensation, including non-MLS listings such as home builder and FSBO listings. 

Although the NAR has yet to issue a formal statement, NAR vice president Mantill Williams was quoted as saying on Fox Business’ Bulls and Bears program, “We think this lawsuit is baseless and it has no merit. The state and federal courts have considered challenges to the MLS and they’ve concluded the Multiple Listing Service actually benefits consumers.”

Original published at https://dankrell.com/blog/2019/04/02/negotiating-agent-commissions/

By Dan Krell. Copyright © 2019.

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Home sale choices

home sale choices
Home seller snapshot (infographic from nar.realtor)

Having a choice is good.  For many, have having a choice represents freedom.  For others, choice creates angst out of fear of making the wrong selection. Dr. Barry Schwartz wrote about this phenomenon in his book The Paradox of Choice.  Dr. Schwartz describes that having too much choice can create negative well-being.  This phenomenon also exists in real estate.  There are many home sale choices!

Consumers have more home sale choices today than ever before.  However, choosing the best option for you can be confusing. Making the wrong selection can result in remorse. How do you choose between a full-service agent, a limited service broker, à la carte broker, private placement broker, or sell by owner?  How do you know decide among your home sale choices?

Recently published research further supports the value of hiring a full-service real estate agent.  A study conducted by Rutherford, Rutherford, Springer, and Mohr (Limited Service Brokerage: Positive Broker Intermediation?; Journal of Real Estate Research: 2018, Vol. 40, No. 4, pp. 551-595) compared the outcome of using a limited service brokerage to a full service real estate agent.  The results indicate that although the limited service brokerage time on market is similar to the full-service agent, your home sale price is likely to be less with a limited service broker.

Although there have been conflicting studies in the past, Rutherford’s recent study confirms that using a limited service brokerage is likely to sell your home for less.  The authors concede and discuss other factors that may influence results, such as housing market conditions.  Studies that reported positive outcomes of limited service brokerages may have occurred during the go-go market prior to 2007. 

How much commission should you pay? 

Conventional wisdom says that full service agents are “full-price” (whatever that is) and expensive.  However, that’s no longer true.  Many full service, high quality agents charge as much (or as little) as discount brokers.  A 2015 study by Barwick & Pathak (The costs of free entry: an empirical study of real estate agents in Greater Boston; The RAND Journal of Economics; Vol 46, No. 1, Spring 2015, p.103–145) indicated that increased Realtor competition has forced average commissions to decrease over the last few decades.  Of course, they found that the decreased commission structure of the full-service agent good for consumers and the housing market.  They also concluded that decreased commissions would increase quality by decreasing entry into the industry for the wrong reasons.

To make better home sale choices, educate yourself. 

Understand what services are available and what it costs.  You should ask yourself if the services can meet your expectations of helping you through the process of selling your home?  And, how will it impact your sale, time on market, and price? 

Unfortunately, the National Association of Realtors doesn’t do enough to educate consumers about their choices when buying and selling a home. Including negotiating reduced commissions and buyer rebates.  And I wouldn’t expect they will any time soon because of their mission statement (posted on their website nar.realtor): “The core purpose of the National Association of REALTORS® is to help its members become more profitable and successful.” 

So how do you choose among your home sale choices?  Be a savvy home seller.  Don’t stick to “conventional wisdom.”  Explore your needs and expectations.  Investigate your choices and ask questions.  Don’t fall for sales tactics. And don’t be afraid to negotiate commission

Be a savvy home seller

  1. Don’t stick to conventional wisdom

    Explore your options. There is no “one size fits all” home sale plan.

  2. Search for an agent that meets your needs and expectations

    What are your plans? How fast of a sale do you expect? In what condition is your home? Interview several agents with different approaches to your home sale.

  3. Ask Questions

    Every agent has their own process. Some are hands on and responsive, while others hand off your sale to their “team” and you never see them again. Can you call anytime, or are their limited times? How will the agent meet your expectations?

  4. Don’t fall for sales tactics

    Many real estate agents spend lots of time and money learning sales tactics to get the listing. Many have developed polished presentations that are very convincing. Call the agent’s past clients to find out if they over promise and under deliver.

  5. Negotiate listing commission

    It’s a very competitive market. Although some agents won’t negotiate their commission, many will. Some will limit their services when they reduce their commission, while others offer full service.

Original published at https://dankrell.com/blog/2019/02/17/home-sale-choices

By Dan Krell. Copyright © 2019.

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

Consumers changing real estate agent commissions

real estate agent commissions
Real estate agent commissions (infographic from visual.ly)

Consumers have most likely complained about real estate agent commissions since the advent of real estate brokerage.  However, before the turn of this century, most did not question the real estate agent commissions they paid because they chalked it up to the cost of selling a home.  Times have changed, such that having a conversation about commissions and compensation is a common topic when agents and consumers first meet.

Real estate agent compensation is evolving as fast as the industry.  The US Bureau of Labor Statistics (bls.gov) reports the median annual wage for real estate sales agents was $44,090 in May 2016 (The lowest 10 percent earned less than $22,230, and the highest 10 percent earned more than $112,570). The BLS states:

“An agent’s income, therefore, often depends on economic conditions, the agent’s individual motivation, and the types of property available. Income usually increases as agents become better and more experienced at sales. Earnings can be irregular, especially for beginners, and agents sometimes go weeks or months without a sale. “

Before the turn of this century, there was more conformity in real estate agent commissions because most agents were not negotiable in the compensation they charged.  However, modern agents have adjusted their business models and are open to negotiate how much they will be paid.

There are also many real estate broker compensation structures from which you can choose.  Some brokers offer limited services, and some offer fee-for services, which includes a MLS placement service.  Some fee for service brokers offer à la carte services, where you can choose specific services for which you want to pay.  Most “full service” agents still charge a percentage, but the percentage can vary from agent to agent.  Full service agents can also vary on the extent of the “full” service they provide; however, many will be open to negotiate their commission rate.  Regardless of model, get the agent’s services in writing and hold your agent accountable.

The increased market pressure on agent compensation is actually good for the consumer.  It doesn’t only lower the cost of the real estate transaction, but it also increases the quality of services.  This was the finding of an empirical study by Panle Jia Barwick and Parag A. Pathak (The costs of free entry: an empirical study of real estate agents in Greater Boston; The RAND Journal of Economics; Vol 46, No. 1, Spring 2015, p.103–145).  Their study investigated three scenarios that are chipping away at the traditional real estate agent compensation models: lower commissions, commissions based on break-even costs, and improved information about agents’ past performance.

Barwick and Pathak found some interesting outcomes from their research.  Besides concluding that there are consequences for fixed real estate agent commissions, they also discovered that the easy entry into the industry (i.e., the ease of getting a real estate license) reduces the quality of service.  Furthermore, the increased competition among real estate agents caused by easy entry into the industry is not beneficial to a home selling or time on market.  They also concluded that

“…lower commissions reduce transaction costs, which might lead to a more liquid housing market, improved asset allocation, and better housing consumption. Flexible commissions also provide a channel for consumers to choose services tailored to their preferences.”

Their results suggest

“…that a 50% cut in commissions would result in 40% fewer agents, social savings that amount to 23% of industry revenue, and 73% more transactions for the average agent.”

Realtors should embrace the discussion about compensation and real estate agent commissions with their clients.  It offers the agent an opportunity to demonstrate their accountability.  It also promotes transparency and the services we Realtors provide, and builds the trust that is lacking in the industry.

Original published at https://dankrell.com/blog/2017/05/19/changing-real-estate-agent-commissions/

Copyright© Dan Krell
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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.