Disruption is a powerful driver of innovation and it is often great at lowering prices. The new rules in real estate are disrupting communication about real estate commissions. The latest change will prevent listing agents from communicating any buyer agency compensation offered from sellers to buyer agents in the MLS (Multiple Listing Service).
More conversations about buyer commissions will take place between sellers and buyers and their agents. Agents will have to have more conversations about how each transaction will compensate each side. Some think this will drive down commissions. Commissions have always been negotiable, and low cost brokerages have been around for buyers and sellers who want rock bottom commissions.
The MLS is the place where agents market listing details, other agents and the public use it to see what homes are for sale. The MLS is paid for by REALTORs and plays a major role in the real estate ecosystem. It creates the aggregate feed that powers sites like Zillow and Redfin. The MLS empowers consumers to make informed decisions about the housing market, it not only shows what is for sale, it stores information on past sales, allowing everyone to research real estate prices even without a REALTOR.
I am a huge advocate of homeownership, I want everyone who wants a home to be able to afford a home in the community they want. What I see in the housing market is that sellers want to sell their nest egg for as much as they can. Supply and demand are what keep driving home costs up, not commissions. Let’s say the changes result in a market where sellers are no longer compensating buyer agents at all. First time home buyers are already struggling to secure down payments and closing costs, so the idea that they will have extra funds to pay commissions from their side of the closing table doesn’t seem to factor in their needs. Putting that aside, aren’t sellers just going to expect to keep any extra money they are not paying the other agent for themselves?
Both buyers and sellers seem to want guidance and service from their own agents. Agents market a home, help prepare a home for sale, they help stage and photograph homes so that buyers can envision living there themselves. Agents oversee completing all of the legal contracts needed to get into escrow. Each state has standard industry contracts which are constantly updated based on new laws and legal cases. Industry contracts, like the MLS, are created with fees and dues that REALTORs pay.
A common justification for the new settlement is that commissions are higher in the US compared to those in Europe. Of course, we have different market dynamics and higher costs in the US. Most agents are 1099 workers, we are self employed and pay our broker, taxes, and buy health insurance on the open market. Out of our commission, we also pay all of the cost of doing business - things you need for your home to sell in the best light: marketing materials, professional photos, post cards, print and online ads.
It seems like there are some who think that the dollar amount of commissions should be frozen according to what they were in the past. If we made $15,000 gross commission in 2002 when a home cost $500,000 - today that home is $1,000,000 or more but the thinking seems to be that agents should earn the same $15,000 or so today. When home prices rise, our living costs, and our costs of doing business also rise. We have mortgages too.
Lastly, almost all REALTORS are operating on a speculative basis. We will work diligently without guaranteed compensation until a transaction is successfully closed. Not every client representation agreement results in a closed sale. If a buyer’s agent shows a buyer twenty homes and that client decides that rates raised too much and they don’t want to buy anymore, we just stay in touch and move on to the next prospect. This speculative nature of the profession means that agents invest substantial time and resources into marketing properties, showing homes, negotiating (and re-negotiating) deals all with no guarantee of earning compensation. This inherent risk is a fundamental aspect of the real estate business.
Consumers have grown accustomed to the ease of accessing comprehensive real estate information through the MLS and to having industry standard contracts for their transactions. What will change? Prices, services? I don't know. I do know we’ll keep working, following the rules, and delivering services that buyers and sellers tell us that they want.
by Lisa Kroese