One of the hottest controversies in real estate that you have yet to hear about is who should pay buyer agent commissions. Real estate broker commission 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 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 lawsuit filed against the National Association of Realtors and a number of major real estate brokerage brands. As I reported last month, the lawsuit alleges that the defendants engaged in “anticompetitive practices.” Among the alleged issues listed in the lawsuit, 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 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 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 in the United States than other industrialized countries. The authors concluded, “Properties listed with lower commission rates experience less favorable transaction outcomes…they are 5 percent less likely to sell and take 12 percent 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.
Dan Krell is a Realtor® with RE/MAX Success in Potomac, MD. You can access more information at DanKrell.com