The Death of 6% Commission!?!

Is it true that selling a home no longer costs 6%? News broke on Friday about the end of 6% commissions and heralded the coming age of home sellers saving thousands of dollars on the sale of their homes. But, as is often the case, the truth is a bit more complicated. Or a lot more complicated in this instance.

The idea that it no longer costs 6% for an agent to sell your home is nonsensical. First off, that was never the case. Real estate commissions are negotiable. As they always have been. There are some agents that charge that much. And there are agents that charge more than that. But there are others that charge a fraction of the cost. Some even charge a flat fee from a few hundred to a few thousand. That is the free market. A “standard” commission of 6% is illegal. It is price fixing and is a violation of the Sherman Act. Every company sets their own rate. I have discussed this in previous articles such as this one

What Sets Us Apart

Here at BlackJack Realty we do things a bit differently. We have different commission rates depending on the level of service home sellers want. If you want fancy 3D tours and video walkthroughs and custom websites to promote your home then that will cost you 6%. However, many homeowners opt to skip a lot of those marketing techniques in order to save some money. 

Well the News Says…

So then, why is the news media stating the opposite? Well it is hard to say, but one reason might be because they like sensationalism and a headline such as “The 6% Commission on Buying or Selling a Home is Gone” will generate more traffic which results in more ad revenue. But the real reason for these stories and headlines is probably a fundamental lack of understanding on how commissions work. 

Real Estate Costs

When you hire an agent to sell your home, you agree to pay them a certain percentage. The agent then agrees to share their commission with the buyer's agents. If another agent brings a buyer to the deal then the seller’s agent splits the commission with the buyer’s agent. The seller’s agent is the one paying the buyer’s agent, not the seller. So when these articles state that sellers will no longer pay for the buyer's agent they are wrong because that was not the case to begin with. Nothing has changed in this aspect. If you pay your agent 6% they could then do whatever they wanted with that including offering some of it to buyer’s agents. But the vast majority of the time seller’s agents would offer to split it because they knew that it would increase the pool of buyers and be more likely to result in a successful sale. 

How Commercial Real Estate Works

Let’s compare this to commercial real estate. In commercial RE agents charge similar commissions. In fact, I think 6% is a lot more common on the commercial side. But they will often lower the commission based upon the sales price. For instance, an agent selling a $2,000,000 office building will typically charge 6%. But if it is $20,000,000 they will usually charge a lower percentage. The higher the price the lower the commission percentage. But there is a big difference in commercial where it is very uncommon for an agent to pay a buyer’s agent. Most of the time if a buyer wants their own agent, they will pay for it themselves. There are a number of reasons for this but a lot of it revolves around the way the commercial side of things works. In residential real estate there are millions and millions of potential buyers. In commercial, there are only so many people that have the funding and know how to buy high dollar investment properties. So in residential, the buyer could be anyone which means the agent has to have a large net for their marketing to reach. By offering compensation for buyer’s agents they are casting the widest net possible and asking other agents for help. In commercial, there might only be dozens or maybe a few hundred potential buyers for a property. So instead of spending a lot of time and money on marketing, they instead turn to their trusty rolodex. Commercial real estate is run by networking. Agents maintain a list of investors who buy a certain type of property and have the financial ability and experience to do so. So when they have a property to sell, they pick up the phone and call through their list of investors. Now, that isn’t to say that they don’t also work with buyers. Instead they just do it differently. If they have a buyer looking for a certain type of property, they will call the owners of properties that match that criteria and see if they are interested in selling. So this leaves little room for buyer’s agents. 

Office Building

So What’s the Story?

So, you are probably wondering what all the hubbub is about then. Well, a couple years ago there was a lawsuit filed by a couple sellers claiming that they were overcharged for commission because they were forced to pay for the buyer agent's commission. This was a class action lawsuit and it resulted in a number of copycat lawsuits from other sellers. But, as we went over before, they weren’t paying the buyer agent’s commission, instead their agent was sharing their commission. These lawsuits ignored that fact and in the end the sellers won. The National Association of REALTORS, which was the main defendant, along with many of the big brokerages appealed the lawsuit. On Friday, it was announced that a settlement had been reached. Now, this settlement isn’t a done deal yet. It has to go before the judge and be approved. Some of the settlement is financial. But it has a couple pretty big changes to the industry which is what the media has latched onto. 

The first is that agents will be required to have a signed agreement with any buyer they are working with. This is the way things have always been with sellers. We cannot market a property without a signed contract. Makes perfect sense. Now we have to have one for buyers which is something that always existed, but many agents didn’t prioritize it. To me, this will be a slight annoyance and will put a wrench in our business. With sellers, they are hiring you to sell their home and expect you to pay for marketing so it only makes sense for there to be a signed contract. With buyers, you should eventually have a signed contract but not right away. A number of the buyers we work with are new to us. We often meet them for the first time at the first home that we show them. Now we will have to ask them to sign a legally binding contract before they have ever met us. Most buyers are not comfortable with that. Myself, I will usually give the buyer one or two “free” showings for us to get to know each other so that we can mutually decide to work together before I require a contract. Now, I will have to tell someone over the phone that I have only spoken to for a few minutes that they need to sign a contract. And for many, that will be a hard pill to swallow.

But the other big change is the one that the media has latched onto, but it doesn’t mean what they say it means. Right now seller’s agents put in the Multiple Listing Service the commission that they are offering to buyer’s agents. This can be a percentage or a flat amount or even 0. This way the buyer agents know what they will earn. Now, this does put us in tricky situations at times. Ethically and legally speaking, we are not allowed to base any decisions on this. If your client is looking at 2 homes and one is offering 3% and the other is offering 2% it is unethical and illegal to pressure them one way or another. It should not make a difference one way or another. But humans are self interested and offering a lower commission will often result in less interest in your listing. The way around this is to require the buyer to pay the difference, but I don’t do that and I just accept whatever I get. I don’t push my clients one way or the other and try to represent their interests to the best of my ability. I also tell all the agents under me to do the same. At the end of the day, a happy client will send us more business to make up for the difference in commission. 

So really, this is the biggest change. The commission will no longer be advertised. For some reason the media has decided that this means that seller’s will now pay less and that buyers will have to pay for their own agents. This won’t work. There is a reason that the system was the way it was. It was an evolution. I have an entire article on the history of buyer agency and I recommend you check it out. But the short of it is that prior to the 1990’s there were no buyer’s agents. Buyers were on their own. They would go to the seller’s agent and hope the seller's agent treated them fairly. 

So why don’t buyer’s pay for their own agents? Well, for the majority they can’t afford to. And this has only gotten worse with the skyrocketing prices. Few buyers can put 20% down like they used to. Most buyers are putting between 3-5% on a home now. And then closing costs can be another 3% or so. If we added another 2-3% for buyer’s agents they would no longer be able to afford buying a home. And this would result in buyer’s going back to seller’s agents directly and again getting taken advantage of. And this getting taken advantage of is not illegal or even unethical. A seller’s agent has a fiduciary duty to get the best deal for their client. They must look out for their clients best interest which means the buyer is at a disadvantage. Think of it like going into court without a lawyer, but the other side does have a lawyer. Is that lawyer going to try to get you to come out on top? No, they have to do their best for their client. This is no different when it comes to real estate. You want someone looking out for your best interests, not the interests of the seller. 

The way the system works now, the price of the home is inflated to cover commissions and other closing costs. So in the end, the buyer is paying the commission, they are just doing it through the price of the home. And then the commission is bundled in the mortgage and is paid over 30 years. 

What the Future Holds

So, what does all this mean to the future of real estate? Well, we don’t really know just yet. What we do know is that, as mentioned above, buyer’s often cannot afford an agent. Well what if they ask the seller to pay for their agent? That is fine, except that loans have caps on the amounts that sellers can pay on behalf of the buyer. A conventional loan allows up to 3% in seller paid closing costs. And sellers are often paying some of the buyer’s closing costs already so there is a high likelihood that they won’t be able to pay some or even any of the buyer’s agent commission. 

There is a bigger problem though. The Veterans Administration does not allow veteran buyers to pay any commission at all. So if the buyer is using a VA loan it would be illegal for them to pay for their agent. So they would be left not being able to have an agent at all. 

But here's the thing. The settlement doesn’t prohibit seller’s agents from sharing their commission, it only prohibits the amount being advertised in the MLS. So what will most likely happen is that buyer’s agents will have to ask the seller’s agent the amount of commission before writing the contract. So in the end it won’t be much different than it is now. 

I know this is all complicated which is generally reflected in the media’s misrepresentation of the issue. Hopefully this has explained it well enough for you to understand the issue. But ultimately, I recommend not listening to what the media says and asking your local real estate agent. If you have any questions or if we can be of any assistance please feel free to reach out. We are only a call/text/email away!

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