Amazing question here. It has been on the minds of many sellers and buyers, I assure you. I am fielding this question on a daily basis. Let me start by saying that commissions were never fixed at any rate. The reality is that in different parts of the country agents would ask for different commission rates, usually capping out at 6%. Currently, the commissions are paid by the seller out of seller proceeds. If the commission rate was 5% of the selling price of the home, the 5% would be paid to the listing office by the seller. The commission would then be divided 4 ways. The listing office, who carries the burden of the expenses, would divide half of the listing side of the commission (2.5%) with the agent who was designated to represent the seller. The listing office, from the 5% collected from the seller, would offer the remaining half of the commission collected (2.5%) to any real estate firm that had a designated buyer’s agent who produced an offer for the seller’s home that the seller chose to accept. Again, 5% paid by the seller, divided between the listing office, their designated seller’s agent, the office of the buyer’s agent and the designated buyer’s agent from that office. A mouthful I know.
What was interesting to me as a business person was that the typical purchase and sale deposit was 5% of the agreed upon price. Real estate franchises, corporations or general practices made 5% the normal expectation for a Purchase and Sale deposit. It sure does make sense for the industry. Typically, the office you hire to sell your home holds 5% of the purchase price in escrow per the Purchase and Sale agreement.
This was always interesting to me because that was exactly the amount charged for services rendered. This practice made it feel like the seller was not paying a commission because they never physically wrote a check for services rendered. The payment would show up on the settlement and the commission would be distributed from the amount held in escrow that was deposited when the Purchase and Sale contract was signed. This type of distribution can no longer occur under the new case law.
Sellers can offer whatever compensation they want to (which has always been the case) to the buyer’s agent firm to compel them to show the property and, hopefully, produce an offer. The seller’s agent firm will no longer be the distributor of that buyer’s agent fee. Any money held on deposit and in escrow will be distributed back to the seller at closing minus the seller’s agent agreed upon fee. The seller, through the settlement statement, will be paying the buyer’s agent firm directly at the closing, post filing at the Registry of Deeds, I assume.
Now, does all that lower fees to the seller? Probably not, in most cases. Why? You tell me how to compel a buyer’s agent to show a property if there is no compensation offered. Is the buyer agent’s fee now a dial on the deal board that could turn if a seller doesn’t like an offer? Yes. Can a listing office publish what the buyer’s agent fee is? No. Will every buyer’s agent now have to contact every listing agent to see if the seller is offering compensation to the buyer’s agent for their services? Yes. If the call comes in and the listing agent says that the seller is not offering compensation, how does that motivate the buyer agent? I say it does not. That said, will buyer’s agents have contracts with their buyers just like seller’s agents have contracts with their sellers describing what their fee will be for services rendered? Yes, but please know that has been the standard for years.
So where does that leave us? Well, I believe that buyers will be asking sellers to pay a commission to their buyer’s agent as a term of the offer. Don’t get me wrong here. Some buyers may be willing or able to pay the buyer’s agents for their services without it being a condition of the offer. Leaving them with some advantage in the marketplace when it comes to their specific offer in a competitive multi-offer bidding process. Others may simply keep it as a condition or term of the offer. That said, almost all the people I come in contact with not only want but need representation to advocate for their respective positions. Without an advocate in a real estate transaction I assure you that more than 2.5% per side will be lost to the unrepresented party no matter your business prowess or academic pedigree.
I think this whole lawsuit is about Wall Street trying to leverage itself into a better position. When the ability to publicize a seller’s cooperating compensation is eliminated, the playing field becomes skewed and may offer big business an opportunity to get more involved in what is actually an emotional local business. The truth is that knowledge and intel cannot be had unless you are a part of the community. The truth is that selling your home is a very personal experience.
I assure you that as this develops, my fellow Concordians, I will speak the truth. If I can get my client’s commissions down and get optimal results I certainly will. That said, if doing so puts my clients at a large disadvantage I will be clear about that as well. I do not work for other agents or agencies. I work for you and your family and that is all that I care about.
And so, let’s see what happens in the next part of this story.