Real Estate Rules
2023 brought a big headline for real estate: the National Association of Realtors lost a high-profile lawsuit related to how real estate agents get paid. An avalanche of other headlines ensued, each wondering what changes lay ahead for the industry. Here are a few thoughts on the evolving process of buying and selling homes.
The Basics
Traditionally, real estate agents have been paid for their services via a commission based on the sale price of a home. A home seller, upon listing their home, would agree to pay 5% to 6% of the sale price of their home to the Listing and Buyer’s agents, typically split equally.
The commission covers the Listing Agent’s cost of preparing the home for sale and managing the listing and closing process. It covers photographs, virtual tours, signage, and staging.
For the Buyer’s agent, the commission covers their time and transportation expenses involved in showing multiple homes to a Buyer.
The Critique
The critique of this traditional system is that the Buyer has no say in how much they pay for their agency services. The Seller has the ability to negotiate commissions with their agent, but the Buyer is stripped of a say in the process.
The lawsuit against the National Association of Realtors (NAR) specifically focused on a requirement stating that Sellers were required to pay a Buyer’s agent commission. In many jurisdictions, a home could not be listed on a Multiple Listing Service (the database that stores and tracts the status of all homes) unless it offered a Buyer’s agent commission.
The court ruled that this practice was illegal because it restricted the options of the market to respond to a Buyer’s preferences.
Thankfully, the Northwest MLS that governs the Lake Chelan Valley has been a progressive leader in the industry. It implemented changes in 2022 allowing a Seller to list without offering a Buyer’s agent commission. And it rolled out even more changes in 2023 to encourage even more flexibility.
So now, as a Seller in the Lake Chelan market, you have the option of paying a Buyer’s agent commission or not.
The Realities
However, just because it is possible to list a home without offering compensation for the Buyer’s agent, it isn’t clear when or if this will become a regular practice.
Typically, when using a Buyer’s agent, a Buyer will purchase a home. The agent will get paid and his or her time and expenses will be covered. But often – especially in a second home / vacation market like Lake Chelan – Buyers don’t make a purchase decision and the agent goes unpaid for their efforts.
The present system offers enough of a premium to a Buyer’s agent (2-3% of the home price) that it allows an agent to be generous with their time. Good agents sell enough homes to offset client relationships that don’t lead to a sale. These agents know that while not every client may chose to purchase, there will likely be enough sales in any given year to provide a livelihood.
The Uncertainty
Imagining a new model that accommodates the risks and uncertainties of the house buying process for the Buyer’s agent gets complicated.
Would Buyers pay agents by the hour to see homes? This would be especially hard on first-time homebuyers who can have limited cash flow.
Could a system be imagined where Buyers view homes for sale without an accompanying agent?
Would Buyers pay agents by the hour for negotiation and home valuation advice?
These are but a few of the questions to be addressed by the market in the years to come.
The Path Ahead
For the immediate future, it is likely that Sellers will continue to pay the Buyer’s agent commission in some form. This will either be via the traditional structure that is declared outright at the time of a home’s listing. Or, if Sellers chose to not offer Buyer’s Agent compensation, it is likely such compensation will be requested in a Buyer’s offer on a home.
In either case, the amount of the commission and how it is paid will be visible and known to all parties. This transparency could set the stage for more creative ways to imagine a real estate transaction.
Or we may find ourselves in a few years continuing with the current structure. We may find that having the Seller pay for the costs of both agents – one way or another – is still the most elegant model for compensating agents in the home buying process.
