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By Ryan Huggins
There has been a lot of discussion regarding the unapproved Stitzer settlement with the National Association of Realtors ("NAR") and what the changes will mean for the industry and the general public. After much discussion and debate on this topic, it was time for me to weigh in. In short, I think this will be bad for Realtors and horrible for the consumer. Keep reading to find out why.
We cannot have a conversation about the changes without first touching on how things were. The first thing we must define is what is a "Realtor." Is it someone who helps people buy and sell homes? Well, yes and no. Simply put, a Realtor is a real estate licensee who is a member of a not really optional trade group. I go into more detail in my Q&A article discussing the differences between a Realtor, Licensee, and a Broker. With that said, this case was only against NAR so NAR's settlement does NOT apply to people outside its organization.
While each state's practices vary, in California the commissions worked as follows. The seller and agent would agree to pay a negotiated percentage of the home's sale price to the listing Broker, who in turn offered a portion of that to the buyer's agent as compensation for bringing in a willing and able buyer. This was discussed upfront with the sellers in the Residential Listing Agreement and it was all very transparent.
The buyer would buy the home with their money, then at closing that money would become the seller's and escrow would pay out the participating Brokerages per the commission instructions which the seller signed and agreed to. This is the way it has been for the 40+ years we've been in business. At the end of the deal, the buyer did not have to pay their agent directly for representation.
Back when home prices were in the $400,000s for a move-up four-bedroom home, a commission would be around $12,000. In today's market where that home is over a million dollars, that commission can easily be $30,000. That seems like a lot of money and I understand that. In a good transaction, where everything runs smoothly, it seldom gets thought of, and in a contentious transaction (or one with an incompetent buyer's agent), it often seems like way more than it should be. What happened in the Stitzer case, was two-fold. First off, from the accounts I've heard it was a very contentious transaction and the seller was very unhappy at having to pay that agent. I've had deals like that too where I did more to keep the deal alive than the buyer's agent did and still ended up having to pay them. Secondly, the listing contract had pre-printed commission amounts on it. Now, mind you this is in a different state in the Midwest somewhere, but any Broker can tell you that a pre-printed commission amount does not bode well for the "all commissions are negotiable" law. So I definitely see why they were sued, but this should have been a single suit to the office. NAR has never advocated for pre-printed commission and has quite regularly spoken against anything of the sort.
Starting August 17th, there are two main changes that go into effect. The first change is that buyers will now have to pay for their own representation directly. The second is that buyers will have to enter into a representation agreement prior to seeing any homes. I'll break these down along with their possible repercussions.
The concept of a Buyer Representation Agreement ("BRA") is nothing new. The form has been around in California for at least 10 years now and about half of the country already mandates a BRA be completed. On the face of it, this is a positive change. It was something that I even voted for pursuing earlier this year at the Winter business meeting of the California Association of Realtors, out in Monterey. This helps eliminate issues of buyers working with multiple agents without the other agents knowing about them and it helps explain the roles and responsibilities of both parties to the buyer. The agreement we were asking for back in Monterey, was something that would require a BRA to be signed at any time prior to writing an offer. This makes sense. By this time you know what house you like and what the compensation will be. The BRA that existed did have a spot for buyer agent compensation, but it was optional and you could accept whatever the listing Broker offered. I have a friend in a network group whose agreements accepted whatever was paid for the first three months and after that, there was a minimum required fee. Most buyers were in a home long before the three months were up.
How the settlement changes things is that the BRA will now be required prior to showing a home, which would be before a buyer may have had a chance to determine if that agent would be a good fit for them. Yes, a non-exclusive contract is possible, but do you honestly expect an agent to do that when their ability to put food on the table demands an exclusive contract? I don't. Furthermore, this agreement no longer allows for the agents to accept whatever compensation the listing Broker is offering and it limits them to a specific amount (either a percentage or a dollar value). Couple that with the removal of commissions from the MLS, Zillow, Reatlor.com, Redfin, etc., and now a buyer is being asked to pay a fee and they'll have no idea what, if anything, the seller is willing to offer! But don't worry, it only gets worse! I'll cover that next.
So now you have a buyer who has just agreed to work with an agent they only just met and they've agreed to pay them. Keep in mind that in the current pre-settlement system buyers have free representation. Now do you think that the buyer's agents are going to all of a sudden take less than they were making prior just because the payee changed? No, neither do I. Let's take the example of a first-time home buyer. I personally work primarily listings, but my listings often get purchased by first-timers. Where I operate the average entry-level home, in move-in condition, starts at $1m and goes way up from there. The buyers who have been coming in and purchasing these homes have been having to borrow from family, 401ks, various other retirement accounts, and dig deep into the couch cushions for any loose change to be able to afford the purchase price. What is the likelihood that now they're going to be able to afford an additional $30k on top of this to pay their agent? My guess, a snowball in a blast furnace would have a better chance.
The media says a lot of things and the vast majority of them have been lies. That is why they're called "Fake News" after all. Home prices will not drop just because the seller only has to pay their agent. Why? Because the price of a standard home sale never factored in commissions. But what about the media saying commissions will drop 30% now? That's another lie. On the listing side, nothing will change as far as what the Brokerages charge for their side of the service. If any commissions shrink, it will be on the buy side.
In the post-settlement world, the buyer's best and worst option would be to submit an offer with a request that the seller pay their agent's commission through a "concession". Now you may have heard the phrase "the concession loophole", well this isn't that. The loophole is a listing agent saying that their seller is willing to pay concessions and it just happens to be a certain percentage or dollar value. It just can't say "towards buyer's agent commission" in the concession description to be legal... but this doesn't fool anyone, let alone the DOJ who is likely to come down on this.
Asking the seller to pay your obligation is an easy way out however, if there are multiple offers now you're at a disadvantage if any of the offers are asking for less of a commission or none at all. And again, you'll have no way of knowing what the seller is willing to do, or even if they are willing to do anything in most cases. Now let's say you get your commission paid for and let's say it's $30,000, do you think a seller is going to entertain your repair request asking for additional money? Yeah, neither do I. So now you are left with having to potentially fix items and pay for them on your own.
So you find your dream home and you can barely afford it. You write a lovely buyer letter and the seller picks your listing but says no to paying your agent and you can't afford to do both. What now? Well, this is where it gets really bad. The California Association of Realtors has advised its members that in this situation the buyer's Broker is to sever their agreement (in other words don't get paid) and release the buyer to go on their own to buy the house. So now not only do you have an agent who has put in a lot of work finding you your dream home and getting your offer accepted only to now have to release you and receive no compensation but now you the buyer are being released to navigate one of the most difficult and largest transactions of your life with no support. Yes, this guidance is crazy.
The best option for a buyer is going to be working with the listing agent.
I foresee several changes in the industry. First and foremost, I foresee the vast percentage of buyer's agents leaving the business. Buyer's agents are going to become a commodity item that only the upper-classes will be able to afford.
On the listing side, I see agents having to discuss with their clients a tiered commission structure where they have a varying amount that they charge if they just represent the seller, if they represent the buyer, or if the buyer has no representation. This has always existed, it's called "Variable Rate Commission" or "List Broker Advantage" but now that disclosure is being removed from the MLS. Yes, even less transparency. The prior draft of the Residential Listing Agreement from the California Association of Realtors actually had sections for this in it, however many felt it was poorly constructed and convoluted... but it was better than nothing!
I foresee open houses being a thing of the past, or at least scaled way back and I foresee agents allowing other companies to host their open house going completely away.
I foresee agents no longer working with buyers or being extremely picky about the buyers they do work with. This will further reduce the ability of buyers to have their own representation. I had a call from a Zillow Premier Agent sales rep this week who stated that "a large number of agents nationwide" were not renewing their premiere agent status and were telling Zillow they were ceasing to work with buyers because of the settlement. For those not familiar with what a Premiere Agent is, it is a program where agents bid to have access to leads when buyers click a button for more information on a house. That lead is sold off to at least three agents, depending on how much they bid for the lead.
I see single-agent dual agency, aka "going directly to the listing agent", as the only way buyers struggling with affordability will be able to afford representation, as the seller MAY have already agreed to pay that expense.
What really "Grinds my Gears" about this settlement is that, per the Vice President of NAR's speech to the California Association of Realtors at their Spring Legislative meeting in May, is that NAR created this settlement FOUR YEARS AGO when the lawsuits first started and sat on this steaming pile of garbage thinking it was good. This just further goes to show how out of touch NAR is with how business is done and what their member's needs are.
