Yesterday, the long-awaited Class Action Lawsuit, Sitzer/Burnett, got underway. The central claim of the plaintiffs is that industry players, including the National Association of Realtors and national real estate companies, conspired to create the Cooperative Compensation Rule to artificially set commission prices.
In other words, when a seller hires an agent to sell their home, the industry standard is set at a 6% commission - payable as 3.5% to the seller's agent and 2.5% to the buyer's agent. Over the years, these percentages have become accustomed to being discounted by agents to try and entice sellers to sign the listing agreement with them. However, even if the selling agent takes a 5% commission, the buyer's agent still retains their 2.5%. Therefore, the selling and buyer's agent both receive 2.5% commission, upon the close of escrow. *There are instances where listings agents may go lower than the buyers commission and it is up to the discretion of the seller and his represented agent. There is not a law that requires a mandatory 6% commission, therefore set commission is always negotiable. So, why is the standard 2.5% for the buyer's agent? The traditional thought is if the listing agent and seller give up some of their proceeds, it will bring qualified buyers to the property. Imagine if the seller or listing agent decided to pay the buyer's agent a .05% commission? On a $1 million dollar home, that would only be $5,000. Now remember, all Real Estate Agents are Commission Only. Therefore, their livelihood is based on every home they sell.
Setting this commission structure is similar to anything desired in the world. For example, if you go out to buy a new car, you pay for the quality of the car you receive. Similar to homes, if you desire the best home that you can afford in the market, you will want your agent to do their best work to acquire that home for you. There is a value for the service they provide.
With that said, the Sitzer/Burnett Class Action Lawsuit, would change how commission is paid in the typical transaction. Although the verdict may be years from being delivered, if Sitzer/Burnett were able to sway the jurors, the practice of a commission set by the sellers, would change this practice forever. The new practice would have the buyer of the property pay the commission to their represented agent. This would be called the Buyer-Broker Agreement. Upon reading this idea, it may make sense, however, take into account the cost it would be to pay your agent to represent you. In today's economic environment, most people cannot afford homes because of the upfront costs to purchase a home, E.G Down Payment, Interest rates, Personal Reserves, Etc. Imagine now, a buyer is required to pay 2.5% commission on a median home price in the pay area of $1.8 million. That would be an additional $45,000 that the buyer needs to have saved to purchase their new home. If the standard 20% down on $1.8 million is $360,000, an additional $45,000 would be a 12.5% increase. In today's society, where most people cannot afford a home, a 12.5% increase to their upfront costs, will only make home purchasing more difficult.
As mentioned at the beginning of this blog, this case may take years to resolve, but one can see the point of contention this creates for future homeowners around the country. Fortunately, Intero is a subsidiary of HomeServices of America, a Berkshire Hathaway Company, which provide opportunities to allocate money to study the direct impact this change would have on future homeowners. To read this study and understand the potential direction the Real Estate Industry may be heading, read Proposed Change to Commission Structure Threatens Equitable Access to Housing