The inconvenient truth about Buyer's Broker Commissions and what to expect next..

[AJ Wong]

Don't look now but another seismic shift is coming to a real estate market near you.

As you might have heard, there have been several recent class action law suits and even Department of Justice guidance that could change the US Real Estate market as we know it. 

The condensed issue centers around decoupling of agent commissions, or no longer allowing seller's to pay the buyer's broker. 

The argument is convoluted on both sides, but there is credibility that seller's should not be paying a buyer's representative to negotiate against their interests. Like it or not, this is valid, although possibly not as the protection the department intends. 

In many countries, usually only listing brokers are compensated. Listing brokers often represent both sides, and walk a dual agency line.

Clearly this could be contradictory to the protections that the US legal system is attempting to provide. (Mostly affordability.) Especially for first time or entry level homebuyers...what is the point of 3% down if buyers will require another 2-3% out of pocket to cover their broker's fee? 

Buyers and sellers could theoretically save sale and purchase costs, but only if the value of the asset is predetermined and mutually agreed upon. The challenge is when there is a valuation or property condition discrepancy, who is going to advocate on the buyer(s) behalf?

Beyond what is right and wrong, is what is most likely to occur..my forecast is based on an initial knee jerk reaction and subject to evolve..

My prediction is that buyer(s) will still want (and need) to be represented, but likely at a lower average cost. 

In the past twenty years the average RE commission has declined. Once upon a time the standard commissions for both sides was 6%, that has since dropped in many areas to 5-5.5% This is to be expected as the technological improvements and the information available to buyers and investors is more accessible and in theory the quantity of work demanded to identify a buyer a suitable property is lower. 

In the current market structure, all parties including the lender expect the property to appraise for the sales price. 

So, for example a $500k sales typically includes 5% ($25k) in RE commissions (2.5% to each side). The property has to appraise for the sales price with 2.5% ($12,500) 'built in' for the buyer's broker fee. 

What could happen is that seller are no longer permitted to compensate the buyer(s) brokerage directly. As a result the property will sell for $487,500 and lenders will alter their guidelines to 'roll in' the buyer's brokerage commission, provided the property appraises for $500k. Similar to upgraded features to a car loan or seller concession. 

The net result will be the same, but the way the transaction is structured will change. As buyer's broker commissions became more transparent (and the responsibility of the buyer) the average commission will be reduced, and likely be relative to the sales price. 

In short, buyer's brokers will earn less but potentially perform less work with less responsibilities. 

As main Real Estate brokerages consolidate, those buyer brokers that remain will increasingly transition to flat fee brokerages or self brokerages to preserve the majority of their reduced commissions. 

The harsh reality is that the current RE Brokerage model is dead. Arguably the entire purpose of having a RE License is to protect the right to commissions and the NAR's intent (National Association of Realtors) was to protect the right of brokers to this compensation. Historically the NAR has been opposed to the negotiation of RE commissions or flat fee services.

Personally, this could not be worse news for my buyer/investor focused growing business, however my role is not going away anytime soon..

For example, there have been numerous instances where the amount of price negotiation exceeded my compensation or transactions that without my (or a professionals) participation would likely not be as efficient, feasible or successful. Real Estate investment is risky, buying without a broker can be riskier.

A value add broker earns their due, even if that compensation looks lower in the future. 

Some of the changes are needed, I'd be happy to write a contract for a fee..and another if that one falls through..those that are able to adapt will, including the mortgage lenders that truly drive the marketplace. 

What do you think the impact of the recent NAR and DOJ lawsuits will be?