Buyer Beware: Lawsuits Challenge Traditional Buyer Agency Commissions in Real Estate

Back in 1999, when my husband and I bought our first home, we were advised not to tell our agent the highest price we were willing to pay because the agent’s goal was to sell for the highest price possible.

Was that right?

Well, even to this day, I don’t know. It depended on who the agent was working for. Were they representing us (the buyers) or them (the sellers)?

The Old Way: Sub-Agent for the Seller (Figure 1)

Previously, the agent working with the buyer was actually a sub-agent for the seller. This led to confusion among buyers and sellers regarding representation.

Current Way: Buyer Agency Emerges (Figure 2)

However, around the 1990s, the real estate landscape began to shift, and the concept of buyer agency emerged as the new standard. This meant that the buyer’s agent was now primarily responsible for representing the interests of the buyer, rather than the seller.

Lawsuits Challenge

Fast forward to today, and we find several lawsuits challenging the traditional practice of sellers paying the buyers’ agent commission. For instance, on July 11, MLS PIN consented to pay a $3 million fine and modify its rules to eliminate the requirement for sellers to offer compensation to a buyer’s broker. The Department of Justice (DOJ) is pursuing a case against the National Association of REALTORS (NAR), as well as the Sitzer/Burnett class action lawsuit.

Starting to See the Effects

The effects are starting to be seen. Examples include:

– Buyer agency commissions are now publicly displayed on websites like Zillow and realtor.com.

– More agents are requiring a signed Buyer Representation Agreement with commission agreements secured up front.

Already, a few MLSs do not require buyer agent compensation and some sellers in these markets are refusing to offer it. Needless to say, there is outrage on social media. The agents are angry claiming they do not want to work for free and it would, therefore, affect the marketability of the home. Buyers are not able to absorb this cost. Showings would be drastically reduced, which would negatively affect the seller’s bottom line.

So, what are the potential implications of these changes?

Buyer Pays the Commission (Figure 3)

One possible outcome is that buyers may be required to pay the commission to their own agent. However, considering the already rising home prices and interest rates, it might be challenging for buyers to afford the additional cost of hiring their agent.

Buyer Chooses Not to Hire an Agent (Figure 4)

Another option is that buyers may choose to forgo having their own agent altogether. Even before these lawsuits, some buyers attempted to negotiate directly with the seller’s agent to secure a lower price for the home. Without the seller having to pay the buyer’s agent, the buyer hopes the listing agent will reduce their commission so the seller would be more inclined to lower the selling price.

Buyers Are At Risk

With no agent to represent them, buyers lose valuable guidance and consultation on their unique situation. Listing agents are focused on representing the seller’s interests and may share the buyer’s information with them. This could harm the buyer’s negotiating position and there is nobody there to help protect their best interests.

Navigating the Process Alone

This situation is particularly worrisome because purchasing a home is likely the most significant investment in one’s life. The process is complex, emotionally charged, and heavily regulated within the real estate and mortgage industries. For first-time homebuyers, navigating this alone can be intimidating.

Constant Change and Differences Between States

Even experienced buyers and sellers find it challenging to keep up with the constantly changing laws, contracts, and standards of practice. Different states have different regulations, making it more complex to ensure compliance.

The Lender Perspective

Another aspect to consider is the lender’s perspective. Since buyers usually put down a down payment ranging from 3% to 20% (with an average of 6% for first time homebuyers and 13% for repeat buyers). The lender is financing a significant portion of the purchase price. Thus, lenders have a vested interest in protecting their investment.

Currently, buyers cannot finance the commission into their mortgage. But this might change in the future if lenders want the buyers to have appropriate representation. This could bring back a similar situation as today, albeit indirectly. Buyers could secure a lower home price as sellers are no longer obligated to pay the buyer’s agent commission. However, this commission might then be financed into the mortgage, effectively increasing the total amount paid by the buyer.

Prices May Fall

Moreover, this change could potentially lead to lower home prices overall, as buyers may negotiate harder for reduced prices, and some might even avoid the market altogether due to commission-related concerns.

Time Will Tell

True changes are still years away and the outcomes remain uncertain. The ongoing lawsuits challenging the traditional buyer agency commission structure are causing significant shifts in the real estate industry.

Summary

It’s essential to consider the potential implications on buyers, sellers, and the overall housing market.

The industry may witness significant changes or we may wind up back where we started. We’d love to hear your thoughts on how you think this could shape the future of real estate.

Team Karen DeGasperis

Experience Living in Scenic San Diego