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. Here are myths and the facts presented by many of the experts and attorneys I have heard or talked to who have read the entire settlement from front to back.
Myth #1: The settlement forces real estate brokers to reduce their compensation.
Fact: 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 US 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 US are one hundred percent performance paid through commissions.
Myth 2: The settlement will, for the first time, allow sellers to no longer pay compensation for an agent bringing the buyer.
Fact: 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. This 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.
Myth 3: The settlement will prohibit sellers from paying a commission to a buyer’s agent.
Fact: 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.
Myth 4: The settlement will now relieve sellers of any financial burden of buyer agent fees.
Fact: 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.
Myth 5: The settlement ultimately reduces the total cost of transaction services as sellers will no longer pay buyer agent compensation.
Fact: False
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.
Myth 6: The settlement will serve to meaningfully lower real estate prices and make homeownership affordable again.
Fact: 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 there’s also 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 home ownership is increasingly less affordable is that homes in our market have risen dramatically in value in recent years.
Myth 7: The settlement is a fantastic win for buyers who will now be able to negotiate the fee for representation.
Fact 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 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.
Myth 8: The settlement will result in significant restitution to real estate consumers who were “harmed” over recent years in their transactions by Realtors.
Fact: 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.
Now is not the time to go it alone!
