Above, Budge Huskey
Nearly two weeks ago, the National Association of REALTORS® announced it had entered into a settlement agreement with the class action plaintiffs in what is known as the Burnett vs NAR case, pending final approval by the court.
The basis of the suit is rooted in the most common way in which residential real estate is transacted in the country, which is sellers hiring an agent to represent their interest for a professional fee, and then offering compensation to an agent who brings the buyer as an inducement to get their home sold.
Since the settlement announcement, there have been numerous articles and stories in the media on what this means for buyers and sellers. Regrettably, most reflect a profound lack of understanding of the real estate business as well as mistaken claims. In these next few minutes, I’d like to share some of the statements I’ve read, and then share a more accurate perspective.
1) The settlement forces real estate brokers to reduce their compensation. False.
The settlement in no way establishes any standard or limitation on REALTORS® for what they may charge, nor the services they elect to deliver. REALTOR® fees have always been fully negotiable, and there has never been any collective bargaining or collusion. REALTORS® may cooperate on transactions toward a common goal, yet are fiercely independent and highly competitive with one another. In every market, you will find real estate representation at almost every price, and just as many different levels of service and competency. I would argue there is more variation in real estate pricing than in almost any other product or service one will ever purchase. Now there are comparisons to what fees are in the U.S. vs. some other countries, yet in many of the countries referenced the real estate professional is an employee with benefits and often salaries with bonuses. The vast majority of real estate professionals in the U.S. are 100% performance paid through commissions.
2) The settlement will, for the first time, allow sellers to no longer pay compensation for an agent bringing the buyer. False.
There has never been any obligation for a seller to pay buyer agent compensation at any time, yet it has been a historical practice that’s worked exceedingly well since the advent of modern residential real estate. (The settlement) merely prohibits any reference of buyer compensation from the seller on association-owned MLS systems. The reality is that today, well before the intended settlement date of this coming July, any listing could be displayed on the MLS whether it offered buyer agent compensation or not. .
3) The settlement will prohibit sellers from paying a commission to a buyer’s agent. False.
The practice of whether to pay a buyer’s agent is totally a seller’s decision and nothing changes in terms of options. Many of us would suggest that the most important outcome is the successful sale of the property on the seller’s terms, and having the greatest incentive to buyers agents to show and sell the home the best way to achieve their goals.
4) The settlement will now relieve sellers of any financial burden of buyer agent fees. False.
Although sellers can elect not to pay any buyer agent compensation, that doesn’t mean they will avoid the economics. Buyers may easily write into any offer a contingency requiring that the seller cover the cost, or may request other concessions such as closing cost assistance in the dollar amount they are paying their representative.
5) The settlement ultimately reduces the total cost of transaction services as sellers will no longer pay buyer agent compensation. False.
Should sellers now choose to compensate only the listing agent, it merely means that buyers, rather than sellers, will now have to pay for their own representation if they don’t require the seller to pay as a contingency of the contract. REALTOR® services are not free, nor should they be. Just because two parties may now share the cost of services rather than one doesn’t mean the total cost of the transaction has been lowered.
6) The settlement will serve to meaningfully lower real estate prices and make homeownership affordable again. False.
General values in real estate are determined by the fundamentals of supply and demand, not REALTORS®. Yes, the commission represents an expense of a transaction, yet these also include title fees, closing fees, mortgage-related expenses, property taxes, association fees, etc. Should real estate commissions theoretically be reduced by 1% as a result of compression, that $500,000 home will now only cost $495,000. Hardly the difference as to whether someone may afford the home or not. The real reason homeownership is increasingly less affordable is that home values have risen dramatically in many markets in recent years.
7) The settlement is a fantastic win for buyers who will now be able to negotiate the fee for representation. Highly questionable.
For those who have purchased one or more homes over the years, it is more than likely you were quite happy to have the seller compensate your agent so you didn’t have to. For buyers who had to scrape up enough money for the down payment and closing expenses, having the commission paid by the seller and incorporated into the price of the home allowed the buyer to finance the amount over time rather than coming up with thousands of additional dollars at closing. The reality is that most mortgages are ultimately sold to Fannie and Freddie, and both have no provisions for commissions to be financed. In fact, the VA loan program expressly prohibits the borrower from paying any form of commission in a real estate transaction. So just how is a veteran who has honorably served his or her country now better off without representation? I don’t think so.
8) The settlement will result in significant restitution to real estate consumers who were “harmed” over recent years in their transaction by REALTORS®. False.
The settlement figure is huge, yet when one divides the amount by the number of potentially qualifying consumers it works out to about ten bucks per person. The only people truly profiting are the class action attorneys who have submitted a request to the court for over $80 million in legal fees.
As a real estate professional for over 40 years, I have worked with thousands of REALTORS® who represent the public in what is most likely their largest investment. While being the first to acknowledge those for whom the industry would be better off without, they are in the minority. What I have consistently witnessed is the incredibly hard work, countless situations where the agent has gone above and beyond to do things and pay for things he or she shouldn’t, manage complex transactions and calm emotions, build relationships based on trust and care, help buyers realize their dream and sellers to maximize their return and turn the page to the next chapter, and yes, sometimes serve as housekeepers, caretakers, repairmen and countless other roles with their sellers and buyers always being their primary concern. Every day I am proud to work with them, and the public is better off because of them.
The brokerage community has always adapted when necessary to best represent buyers and sellers in the sale of real estate whenever there is a shift in the environment, and no doubt it will do so again. In the interim, parsing between truth and fiction should be an expectation for all as they draw their own conclusions.
