Article contributed by Geoff Smith, Branch Manager, Assurance Financial. Dec 8, 2023.
I cannot count how many times I've been told that major changes are coming to the housing industry, only to find out later that I'm still doing things the same way. That's why I usually ignore such claims, working with the idea that I'll deal with it if it becomes reality. That said, the recent court ruling throwing shade on the way Realtors collect their commissions is having some affect on the perspective of the importance of that profession, and I feel it's time to speak up.
The ruling by a federal jury in Missouri basically said it is unfair practice to require a seller to pay a buyer's agent's commission in order to list the house on the affiliated multiple-listing service, MLS. For those who do not know, in a typical real estate transaction, the seller pays a 6% commission to be split evenly between the buyer's agent and the seller's agent.
The Wall Street Journal's Editorial Board published an article in favor of the ruling. Usually I agree with their opinions, but this article was silly, maybe more intent on trying to do their part to lower home values in the country than provide meaningful help to the consumer. Half the article basically says 'they don't do it this way in other countries, so why are we doing it that way here?' What kind of an argument is that? Just because 'other countries' are doing it one way, does that really make it better? We've been doing a lot of things better than most countries for a long time.
The article said "in other countries buyers rarely use brokers. Mortgage lenders and seller's agents handle negotiations, appraisals and closing. Buyers can generally figure out what to bid based on the closing sales prices of other homes in the area." Is that really what we want? A novice homebuyer negotiating with professional agent? On what is probably the largest personal investment of her or his life?
This way of thinking really undervalues the role of the Realtor. This assumes that these listing agents are all saints, with the judicial discipline to work on both parties' behalf, despite the fact that they are hired by the seller. The quote I just included from the article makes it sound like buying a home is as easy as buying a pack of socks. Just go online and pick one out. Surely a listing agent would promote not just the good qualities of that house, but they'd promote just as strongly if the house was in a flood plain, that the homeowner's association is about to levy a special assessment and that the new addition was done by the homeowner without a permit. I'm sure that listing agent would be happy to recommend an honest home inspector that would let you know that the furnace is about the go out and that the roof needs replacing. Right? Of course not. That's why there needs to be checks and balances and why a buyer needs representation.
A good agent gets to know their buyer. They figure out what they want in a house, a neighborhood and a community. They understand how much they are comfortable paying. Then they go out and use their expertise to find that house, figure out what it will take to get it under contract and look under every nook and cranny, both figuratively and literally, to ensure there are no surprises down the road for their clients. They help organize the professionals - the lenders, attorneys and inspectors. They let you know things you cannot find out on Zillow. Like, just because a house has the same bedrooms, bathrooms and square footage as a house up the street, that doesn't make it just as valuable. The house up the street might have an updated kitchen, a screened-in porch and hardwoods throughout the house.
A good buyer's agent would point out the parts of a contract that would make a house less attractive, whereas a listing agent would be incentivized to gloss over those points. For example, do you think the seller's agent would point out that the seller checked "yes" to the house being flooded recently? Probably not, but a good buyer's agent would. Oh, and by the way, I've been a party to deals where the seller has outright lied on a Seller's Disclosure and the buyer's agent caught it. So think about that for a moment. Would it be easier or harder for a seller to lie on a Seller's Disclosure if there was no one representing the buyer?
Now of course, there are bad Realtors out there. Just like there are bad mortgage bankers, bad company executives, bad HOA presidents and bad college football officials whenever Georgia plays Alabama(ahem). You have to make sure you pick a good one. But if you think a Realtor isn't earning his or her commission, you're just not thinking it through.
A couple years ago all the talk was that these I-buyers, Zillow and the like, were going to put Realtors out of business. We don't hear much of that anymore. Most of them got out of the business. But there was a really good lesson that came out of that. If you sold your house to Zillow or another I-Buyer, yes, you had to do less work. But you lost thousands of dollars.
Those I-Buyers were charging, in most cases, way higher commissions than the Realtors' 6%. Sometimes they charged 9% and 10%. And they always paid much less than those sellers would have sold their house for if they put it on the market. My good friend Mitchel Palm, with Smart Real Estate Data, actually took a large sample of houses sold to I-Buyers and compared what they sold for versus what other similar houses sold for that used an agent. What he found was that not only did sellers pay a higher commission to the I-Buyers, but they sold their houses for tens of thousands of dollars less than what they could have if they'd used a Realtor.
One last point I'll address here is the point others are making that the buyers should pay their Realtors' commissions. Well, if you want to stifle the first-time homebuyer market, that'd be a great way to do it. The whole purpose of having the commissions come out of the seller's net profits is to lubricate the housing industry. To create more demand for the houses people are selling. There is a very large percentage of homebuyers who could not buy a house if in addition to the down payment and closing costs they had to pay for the 3% commission. If you want to drive a larger wedge between the haves and the have-nots, this is a great way to do that.
I cannot really imagine this happening. The Federal government and the lending agencies(Fannie Mae, Freddie Mac, FHA, VA, USDA) are always looking at more ways to make it easier for first-time homebuyers to own a home. They do this for two reasons: those who own a home rely less on the government in retirement because of the nest egg they've created; and those who own homes invest more in their community. And if buyers are required to pay that commission, you'd see the wheels of first-time homeownership grind to a near halt.
It's easy to want to blame the Realtors and accuse them of taking advantage of the market. And there are bad Realtors who do certainly get paid way to much for doing a poor job. But for the good ones, they earn their weight in gold. You're not buying a television. This is a deal worth hundreds of thousands, or millions, of dollars for a thing that will generate at least that much in assets someday. Not to mention that it will be the place your children grow up in and remember, or the place you live out your final years. It's not a widget. It's your home. Get help.
Written by:
Geoff Smith
Branch Manager, Assurance Financial
770-674-1433
Visit his website here