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Realtor Commission Lawsuits

Will Realtors commissions go away or be drastically reduced?

No, Realtor commissions won’t go away. I don’t even think they’ll be drastically reduced. Not on an hourly earnings basis anyway. Read on to see what I mean.

As everyone knows by now various class-action lawsuits have been filed against the National Association of Realtors (NAR). And also against various real estate brokerages. I have even heard of lawsuits against large Realtor teams.

One case resulted in a U.S. jury finding the NAR and some residential brokerages liable for $1.78 billion in damages. This verdict can be tripled under U.S. antitrust law to more than $5.3 billion. The defendants have indicated plans to appeal the verdict and seek reduced damages. These lawsuits have the potential to impact real estate commission structures. And buyers and sellers are talking about this.

What do I think?

Commissions will change on the buy side. I think there will be little impact on the sell side. If you are mostly a listing agent, you are safer than Realtors who work mostly with buyers. Buyer agents may have to:

  • Negotiate their commission down but limit what work they do for the buyer to offset the reduction in revenue. The days of unlimited work and being always available as a buyer agent may be over.
  • Offer à la carte services in a strictly defined fee for service scenario.
  • Fees may increase in some complicated scenarios!
  • Do a much better job of explaining all that they do, and what their value is.

Realtors leaving the industry is good news?!

In the future buyer agents may see less buy side focused Realtors in their markets. And hence less competition. Reduced commissions on the buy side may clear out part time realtors and low volume producers. This means full-time active buyer agents may do more deals for less commission. But it will be similar revenue on an hourly basis as compared to what they have earned in the past. Limiting job duties in a fee for service setup may mean buyer agents feel less revenue pain than first thought.

Lawsuit plaintiffs argued Realtors suppressed competition and maintained commission rates. They say this is unfair given the diminishing role of buyer brokers in an era where many buyers find homes independently online. But if you work in the real estate or mortgage industries you know that buyer agents do a lot more than just find the home. This is why I believe the new model will be a strict fee for service scenario.

Buyers used to have Realtors find their new home and the buyer agent earned 3%. And it was paid by the seller. Some homebuyers have the perception that all buyer agents do is fill in the blanks on the contract. And then collect a large check. If you really know what a buyer agent does, as I do, you know that’s false. But it’s time to realize that buyers may not think you are worth your split of a full 3% commission to be a buyer agent.

What Do Buyer Agents Even Do?

I read an article that said, “If sellers think about it long and hard, they want to expose their property to as many people as possible. And who brings potential buyers to the door? Realtors.” That is incorrect. Who brings potential buyers to the door is the internet. So it makes sense that a buyer agent may reduce their compensation as a result of less work. But a buyer agent getting paid fairly must occur for other buyer agent duties to happen, such as:

  • contract negotiations
  • vendor referrals
  • transaction management
  • document review
  • local insights
  • research on comparables
  • post closing support

And being paid directly by the buyer may or may not make sense. Compensation may still come from the seller, but it may not be the traditional 3%. Sellers may look at what they have to compensate a buyer agent as part of whether or not they’ll accept an offer. I think Realtors have historically done a poor job of explaining exactly what they do, the hours they work, and how they get paid. And now we are where we are.

How Do Realtors Really Get Paid

The legal challenges represent a moment of accountability for the real estate industry. I would embrace it if I were a Realtor. Buyer agents need to start to think of themselves more as real estate consultants. Outside of the home search which is now done by the internet, they need to decide what they think their time is worth for all of the other homebuying steps they add value to. There is much more to what a buyer agent does than simply finding the home, as I show above.

I think the accusation of price fixing in the real estate industry is absurd. Real estate commissions are negotiable, and have been for a long time. However, despite that, it does appear that change is coming. Class action lawyers smell blood in the water. These lawsuits are growing and the real estate industry is likely to have to revamp how they charge fees on the buy side. Realtors should consider adapting their business models and strategies.

Embrace Transparency: Clearly communicate your value proposition to buyers and sellers.

Explore Alternative Business Models: Consider flat-fee agreements, à la carte fee for service scenarios, an hourly fee structure, or other alternative commission structures.

Leverage Technology: Use technology to streamline operations and reduce overhead costs.

Focus on Specialization: Specializing in niche markets or types of real estate transactions to justify commissions through expert knowledge and specialized services.

Educate Clients: educate clients about the complexities of real estate transactions and the value Realtors bring to the process.

I don’t see homebuyers representing themselves and negotiating against the listing agent. That would be foolish. And in many cases they would get taken advantage of. But might they use a buyer agent that would bill them hourly? Or an à la carte fee for service scenario? Might they seek a buyer agent that would take a lower flat fee commission, like 1% or 2%? I can see all of that happening. But buy side Realtors will have to strictly define and limit what functions they’ll perform, due to alternative compensation models.

Recently, I have seen listings showing 1% to the buyer agent! I think sellers have started to learn about these lawsuits and assume they have leverage. They’re not likely to take as much commission away from the listing agent. Sellers know their own agent needs marketing dollars. And they know listers needs to do certain things to get the house sold. So they’re going to take more money away from the buyer agent.

The market will figure this out. And the most equitable compensation models will be determined. But it may take many years and lots of experimentation.

Should you seek out listings more than buyers?

Seeking more listings may seem like the obvious answer. But I would not ignore buyers. And I would not put my head in the sand, and hope the issue goes away. There will be some degree of change. And that’s OK. I think professional realtors who still want to represent buyers will find a way to make this work for them. They’ll find proper compensation plans to reimburse them for the hours they work.

Conclusion

Most businesses and compensation models evolve over time. Now is the time to consider change.

To contact me to discuss your Realtor business plan click here to schedule a call or you can email me directly.