Likely the Largest Story in Residential Real Estate in Our Lifetime is Playing Out Right Now

Morton Homes Realty April 3, 2024

Julie and I have been in this generally crazy business for thirty years. We have seen more than we would have ever thought conceivable, yet Change is the One Constant. We will give you our knowledge of the evolving developments and some thoughts and perspectives on how we see it settling out. And yes, the proverbial dust is still up in the air, so this is just our educated opinion. Many people are writing their perspectives on the topic, and we will include links to some of those postings.

We do not see the headline above as hyperbole. There have been many changes – some seemingly large ones. Some will suggest that the codifying of Fair Housing laws would have been monumental. Maybe so. My perspective is that anyone with a conscience or integrity would have already been employing such policies simply as an honorable person. I suppose this was a mandate for all the other people to live to a higher standard or be accountable for it. I’m not sure legislating morality has ever worked, but doing so is probably why GOD felt it worth a try when giving Moses the Ten Commandments written in stone.

This change is more structural. This change will empower both consumers and industry practitioners with the opportunity of self-determination – the greatest right any of us should have. Interestingly, the lawsuits against the National Association of Realtors and some of the largest franchises have caused the evolution. And it is an evolution, not the revolution the proponents may claim. In our opinion, the precepts of the lawsuit were misguided. The claims the suit set to address were misinformed. The processes they want to impose were already available. The verdicts of the suits demonstrated that the juries and judges had insufficient knowledge or awareness of the true functioning of the industry. And yet, the outcome can be a win for everyone and for transparency against static precepts and convoluted responsibilities.

The general premise has been that the decades-old standard operating procedure in the industry, whereby the Seller and Listing Broker agree to the overall commission paid to the Brokers involved, is a restriction of trade – against the Buyer. The argument has been that a Buyer could have been harmed by potentially overpaying for a home because they were not able to negotiate the commission to be paid to their Buyer’s Broker – presumably lower, and therefore, the overall cost of the home could have been lower. However intuitively logical, it would be fundamentally impossible to prove the premise. Theoretically, that could be true, but in the end analysis (you will see below), that is only one possible outcome. We propose that the end result for the consumers, the Buyer, and the Seller, will be basically the same in theory and in a dollar-valued outcome. The possible resulting “value” to the consumer is arguably quite different.

So how is this such a monumental change that it is, as we state in the headline, likely the largest change in the industry in our lifetime? It empowers consumers to indeed be consumers. If they choose to do so will be the big question. To be a consumer, a buyer or seller should evaluate the value of what they spend money on to ensure they are satisfied with the likelihood of receiving the expected value. Yes, the ruling and resulting change in the industry’s standard operating procedures will be that buyers sign a buyer representation agreement that stipulates the services to be rendered and the cost(s) of these services. This is more transparent than the prior system. The new policy places the responsibilities and value of the Buyer’s Broker squarely on the side of the Buyer. Interestingly, these Buyer Agency Agreements have existed for years – decades. They are common practice in Commercial Real Estate. However, residential realtors did not tend to use them. They seemed to be an imposition on the relationship with the Buyer. The notion that the residential real estate world will adopt a level of professionalism already prevalent in the Commercial world will be refreshing to many of us. Forcing the use of such written Agreements will hopefully diminish the recent trend of “Internet Leads.” We will explain these and why we hope they will die an overdue death.

In conventional procedures of the past, Sellers, with their Seller’s Agent (aka Listing Broker), set the commissions to be paid. The overall commission is identified in the Listing Agreement, and the Buyer’s Agent Commission (BAC) portions are unilaterally set. The seller’s agent’s commission is either also specified or inferred as the difference between the overall commission and the BAC to be paid. The Buyer and Buyer’s Agent have no say or input in this arrangement. The lawsuit against NAR addresses the Buyer’s inability to determine the commission they want to incur to purchase a property. Interestingly, it never acknowledges that the Buyer’s Agent was not a part of the discussion about how much they are paid. The premise was that if a Buyer’s Agent wished to influence their commission they would have to do so with a separate Agreement with their Buyer. That was logical but somewhat impractical when using the Buyer’s Agent Agreements was not common practice.

Complicating the situation further, the retro-fit logic of how a Buyer’s Agent was paid made for what likely seemed to be a lack of transparency – and a question as to where loyalties were truly placed. Technically, The Seller was paying their Seller’s Broker the entire commission, and that broker was, by industry (and multiple listing co-op) agreement to pay the Buyer’s Broker. Therefore, the Seller (not the Buyer) was technically paying the Buyer’s Agent. That always seemed convoluted to us and many informed buyers. We can’t tell you how many times our buyers walk out of Closing (when they finally pay attention to the detailed dollar amounts), realizing that the Listing Broker had kept a greater percentage of the commission than they were paying the Buyer’s broker, and told us we got “Robbed” since we did a majority of the work through the process. The new protocol fundamentally cleans up who is paying the Buyer’s broker (the Buyer) and therefore cleans up who’s interests the Buyer’s Broker truly represents. Shockingly, we have seen realtors dance around this issue when challenged.

To this point, the new system has accomplished transparency in two regards: who is paying the Buyer’s Agent commission and to whom the Buyer’s Agent truly owes fidelity – the Buyer in both regards. Great. As this is not a precept of the lawsuits, I suppose it is a nice unintended consequence.

Now, why does this ruling not address the stated harm that the Buyer may have paid more for a home than they could have? I will also explain why, in real terms, they are likely to now pay more for the same home.

It is all just MATH. The reality is that if a home was going to be listed for $1,000,000 (all numbers are simply for illustration and simple math), the overall commission was to be 5%, and the Seller’s Broker was (by common convention) going to split the commission equally; 2.5% to the Buyer’s Agent and retain 2.5% themselves, the commissions would be $50,000 overall and $25,000 to each broker. Presumably, under the new system, the home will be listed for $975,000; the same home with the revised commission obligation to only pay the Seller’s Broker commission. The Buyer will presumably pay their Agent a commission of 2.5%, $24,375. Yes, due to the impact of multiplication on a smaller amount, the Buyer’s Agent is paid $625 less. This lawsuit was not initiated to solve the multiplication impact and $625 on a million-dollar transaction. The point we are making; the net dollar amount impact on both the seller and Buyer is essentially nothing.

Presumably:

The sellers walk out of closing with the same net dollars, $950,000,

The buyers walk out of closing having spent the same dollars for the home, $1,000,000 ($999,375)

in both the old and new scenarios.

So now, the unintended consequence is that the buyers may pay more for the same home. Due to human nature, the Seller is resistant to sell their home for less than $1,000,000 regardless of the commission to be paid by them. So the home is listed for $1,000,000. The Seller pays their Agent $25,000 (the same 2.5%) and walks out of closing (for illustrative purposes, all other expenses ignored) with $975,000 – an additional $25,000. The Buyer pays $1,000,000 for the home and $25,000 (the same 2.5% commission) for a total cost of purchase of $1,025,000. So who did the lawsuit help? Not the Buyer as claimed. Not the realtors. They come out the same. It, in anticipated real-life practice, will help the Seller. The fact is, there will be no way to prove this unintended gain or loss situation, as homes will sell for what people are willing to pay regardless of the Math.

Or does the old adage still hold – “the Value of a home is what someone is willing to pay for it.” People can only buy what they can or will afford. Mortgage lenders are not expected to change their qualification requirements which will likely keep a lid on excessive price escalation.

So other than the Seller possibly walking out of Closing with more money, does anyone else Win in all of this? A few lawyers will no doubt make fortunes off the lawsuit(s). A few consumers will make some money, but history suggests that individual parties of Class Action Suits rarely see significant sums of money. In our mind, there is an unintended true winner. Interestingly, us. It will be us when we are representing the Buyer. As a Buyer’s Agent, we were not able to have an agreement with our client as to the value of our service and our resulting compensation. Now we do. We didn’t expect to make any more than we should have traditionally. An interesting situation has developed over the past couple of years with some Buyer’s Brokers to game the old system. They would have the Seller sign a Listing Agreement with a stated overall commission and then would not split the commission equally. This may have been disclosed or buried in the Listing Agreement. The fact is we, as the Buyer’s Agent, had no say in the matter – None. Now we will. Now, when our clients feel we were worth every cent we were paid to represent them, we, and they, will have discussed and agreed to this ahead of time.

Actually, the Buyer does win. Or should win. The Buyer will know they are paying their realtor. They will have a greater belief that their realtor is working only for their best interests. Yes, the Buyer does get the opportunity to be a good Consumer. They can place whatever value on their realtor’s service(s) and pay accordingly. Of course, this presumes that the buyer is a good consumer. Yes, there may be price pressure on the Buyer’s Realtor’s commission. Some realtors do not intend to provide valuable service, and their clients will put the resulting value on that. Some Buyers will put little value on the realtor’s services, and the only realtors willing to work for those people will likely not be the top realtors. This is nothing new. It was already the case for Sellers and Seller’s Realtors. But again, there is more transparency in the new system. The verdict will be out for a while on whether Buyers will be Good Consumers or not.

Professionalism. Buyers in the Commercial Real Estate arena intuitively expect nothing less than professionalism from their real estate broker. The new system whereby Buyer’s Realtors will have to outline their services and present their value should bring a more professional evaluation of that relationship. In our opinion, the Residential Real Estate arena has largely lived off of social rather than professional relationships. More often than not (actually close to most of the time), we hear “consumers” rehiring a realtor because they are a friend, family, or some other social relationship. Rarely do we hear they the consumer is hiring their realtor because the realtor is the Best. The best at what? Well, anything the consumer may find of value when working in the real estate world. We understand that a good interpersonal relationship is valuable, but not at the exclusion of professional talent. I know many doctors. I know I want the best when I need one. Fortunately, we know many of the best doctors as friends – and while that is an added value, it does not trump talent. We come from professional, results-oriented real estate backgrounds; David from home building and land development, and Julie from commercial real estate (Julie is also a second-generation real estate company owner). We can only hope consumers will demand more professionalism from their real estate representation. Buying or selling a home is a business endeavor; it should be treated as such.

So now the overdue death of Internet Leads. Diving into an analysis of Buyers as Consumers of real estate realtor services, we will discuss the recent development of “Internet Leads.” When someone is researching houses on platforms such as Zillow, Redfin, Broker.com, and many others, there are prompts such as, “would you like more information on this home?” or “Would you like to be connected to an agent regarding this home?” I don’t know what most people think those prompts mean, but the reality is if they say “Yes,” they will be passed to a company or broker who is paying for that introduction – a “lead.” The broker who ends up with the lead may (usually) know nothing of the home. They certainly don’t know anything about you as a buyer of that home. We have watched as potential buyers meet, for the first time, on the sidewalk or driveway of the home. How do we know this? Because, we have been asked by realtors if we are the Buyer they are supposed to be meeting. Or we are asked if we are the realtor the interested Buyer intends to meet. If you think this relationship is of any value, I would be interested to hear how. I can write another whole newsletter on stories based on our experiences with other brokers and consumers meeting at houses. None of them suggest there is any value in that approach. So now, those brokers will have to ask the unknown “buyer” to sign a Buyer’s Agency Agreement right there on the sidewalk or driveway. Sadly, we know some will. Hopefully, we hope the practice dies a quick death so consumers will be encouraged to find a quality realtor who will take the time to understand their needs and requirements. We also hope this will lead to more qualified buyers since the realtor will presumably develop an understanding of their client’s ability to purchase the home they are pursuing.

In the end, the Seller may also have several unintended beneficial consequences of this new system. We have already said they may walk out of closing with more money. They may have better-qualified buyers. But very subtly, they may also end up with more potential buyers. Remember the scenario where the Seller’s Realtor presented a comprehensive commission to the Seller? We will present a couple of downfalls in that which should be avoided in the future. Let’s say the broker hoping to get a Listing decides they are going to reduce the commission below what may be customary in order to win (or buy) the Listing in a listing appointment (or as a friend)” Maybe they will split the commission – but at the lower rate, they negotiated (that a buyer’s agent had no input on). Or maybe they will have kept a larger portion of the commission, again without input from any Buyer’s Agent. The industry states that all realtors are to show their clients all homes they are aware of that meet the client’s needs or identified desires. As realtors comply with this intuitively appropriate concept, they expose themselves to the manipulations of other brokers’ commission programs. Do realtors inappropriately avoid such listings? The Buyer’s Agent Commission is disclosed in the broker version of the listing. It is available for them to see and react to. Do realtors react to it? Human nature is what it is, so it is logical to think some may. In the event that a realtor chooses to avoid a home with a lower-than-desired BAC, who loses? The industry, and we, suggest both Buyers and Sellers likely lose. The Buyer may not be shown a home they would have liked. The Seller may not have had their home shown to the potentially interested Buyer (s). This new system will end these potentialities and hopefully give marginally greater access to buyers and sellers to one another.

So, in Conclusion, is this the greatest change in residential real estate in our lifetimes or not? You, the consumer, will decide. Chose to be a Good Consumer. We will be happy to work with you.