This state of the market article is different, because it’s more specific to my recent experiences, and looks at how the market has been affected by “the lawsuit”, which, among other things, prohibits Real Estate Agents from using the MLS (multiple listing service) to advertise how much a buyer agent will earn for helping a client buy a house.
As many of you know, there was a large class action suit brought against some major brokerage firms and NAR, the National Association of Realtors. In a jury trial, NAR basically lost, having to pay $418 million dollars, as the jury found that NAR and the brokerage firms violated antitrust laws by requiring agents who listed homes for sale on the MLS (multiple listing service), to state how much buyer agents would be compensated for helping a buyer find and then purchase a house.
It’s sort of a strange case, as is the outcome, but that happens with juries. Although real estate agents won’t be able to post how much commission buyer agents will be paid on the MLS, they can list it in plenty of other places. Also a bit odd is that the heart of the case is that commissions are fixed, while in fact they can be anything. Commissions have always been negotiable. I don’t necessarily mean negotiable like someone could come to me and want everything I do (cleaning, staging, professional visual media, real-time seller dashboard, top quality graphics, social media, etc. etc.) but pay a discounted commission they might get out of someone who takes vertical photos with their phone, without making any attempt to tidy the listing. But a seller can certainly opt to pay less as the total amount of the commission paid (reducing the amount paid to a buyer agent)–they always could. The interesting thing about ‘right now’, and for the last couple months, many sellers have asked me what ‘the lawsuit’ means for them, and when I explain, and share with them that if I were listing my own property for sale now, I would absolutely pay the buyer agent the same thing I made coming in to this purchase, 2%. By the end of a thorough conversation, with no pressure from me, every seller I’ve talked with in the past few months, has come to their own conclusion that they’ll do the same.
A good article is from the Worcester Business Journal, which basically states that this court ruling will have very little if any impact on the Massachusetts housing market, because the market is so tight and home prices are so high. People selling their houses aren’t worrying about commission rates because the home prices they can get currently are so high. For instance, sellers certainly don’t want to trade a 1% commission difference for a lower sale price. It’s worth reading the article, and much of the data comes from the Warren Group, a well respected real estate data firm.
I did see what I consider a few problems with the article, centered around the “listing price”. It states that the cost of the buyer agent’s commission is figured in already by the sellers when they set their list price. I’m not sure but probably this concept came from the court case, and if so, it’s incorrect. First, the listing price isn’t the selling price, and in fact, if you set the listing price too high, people won’t come to see your house, and you’ll actually make less money. It’s more like a starting price, and the housing market takes over from there. The other problem with the concept of ‘figuring in the commission cost’ is that sellers don’t have that much control over the selling price, so they can’t “just bump” the price to cover a 2% commission. If they could just increase the price for the house without rocking the boat, they’d bump it a whole lot more than just 2%.
Right now this court case has had virtually no effect on the Massachusetts housing market. Longer term, however, it’s not clear how buyer agents will be compensated, and that will have to be resolved.
Although I have a small team (myself, a buyer agent, an administrative assistant and a transaction coordinator), I’m the listing agent on the team. I don’t see where any of the settlement actually involves consumer protection, which really irks me. I anticipate seeing buyers who are interested in my listings, showing up without any representation, which changes the dynamics for both me and for the sellers, neither in a positive way.
A good way to explore what is happening here is to step back, and realize that although it seems unique, the real estate market is really not much different from all the business to business (B2B) transactions that go on constantly in our economy. Where it is different is that it is very unlike the usual business transactions experienced by people in their everyday life.
As an example, if consumer Joe Blow needs to buy groceries and perhaps a toothbrush, he certainly doesn’t need an agent to help him. He also doesn’t need a mortgage, a down payment, or his credit checked; and those groceries and toothbrush aren’t going to be with him for many years, and they won’t be going up in value nor resold years later, so again, no agent is needed.
So the real estate market is not like a trip to the grocery store. In fact, it’s more similar to a large company purchasing ERP software, which is something the average person has no clue about, including what ERP stands for.
ERP stands for Enterprise Resource Planning, and it’s the software that handles a company’s backend, which includes inventory control, supply chain, order processing, billing, accounts payable and receivable, and a lot more. 70% of the world’s large companies have an ERP system, and the worldwide market was about $75 Billion in 2023. The average implementation time is over six months (in my experience the process is at least a year).
So how is Real Estate similar to purchasing ERP software? It’s similar because both employ agents, although “a rose by any other name’. The companies that have developed the software, which includes Microsoft Dynamics, SAP, Oracle, and Infor (to name just a few) have sales representatives who sell these products to businesses, which requires a deep knowledge of the product. These sales reps, who are really more like consultants, are analogous to listing agents. Both are selling an expensive product to their counterparty, by making the product look as good as possible and getting the price right. Both are usually compensated by a commission.
Since buying the wrong ERP system, or implementing it incorrectly, is usually a near death experience for a company, the company also hires an agent, who is often a consultant, and whose job it is to make sure the ERP system being considered handles all the particular quirks and needs of the purchasing company. This consulting position is directly analogous to a buyer agent. Here the compensation methodology differs, since the in-house consultant is usually not paid by commission, but rather at a hefty hourly rate.
There are many similarities between the Real Estate business and any other business, but there are two big differences, other than just differences based on the product being sold (software vs. a house).
The first big difference is that the barriers to entry into real estate jobs aren’t as rigorous as getting a job with a major software company. To become a real estate listing agent requires taking a 40 hour pre-licensing course and passing a test with a state portion and a national portion. It’s really not that difficult and you can decide to do it, it’s entirely possible that you could have your license in just a few months if you are a quick study, while becoming a sales rep in other industries requires actually being hired by a major company.
However, to be a successful listing agent requires more than being a sales rep for a usual company. At a software company, the sales person just gets the sale, but then everything else passes off to someone else in the company, and it’s no longer the sales person’s problem. A listing agent in a real estate transaction, on the other hand, is involved with everything related to selling the property, even if not very glamorous–from climbing under the deck to look at water problems, to getting rid of a lifetime’s worth of trash, to worrying about a septic inspection and advising and connecting with professionals along the way.
The other big difference involves the buyer agent, and goes to the heart of “the lawsuit”. How is the buyer agent to be compensated, if not by commission as it has been historically? Large companies can afford to pay a consultant, but individuals typically cannot. At this point no one knows the answer, but here are some thoughts on the situation:
A buyer agent is important, and almost indispensable (assuming they are good) to a home buyer. The buyer agent is someone who looks out for the buyer of the house or property, and helps them come up with a combination of price, dates and terms that a seller would consider a good offer. This is the person whose responsibility it is to know the area you’re considering buying in, asking “how old is the septic?” or “What’s that big thing under the sink?” Etc. They also help negotiate the price, either up or down. “That open house was really crowded. If you want to make an offer, it has to be strong…etc.” Or, “Let’s really research comparable sold homes. A similar house two doors down recently sold for considerably less”.
Keep in mind though, that just like in any other business, some people are great at their jobs and some aren’t, and I think this is where the problem with commissions for buyer agents started. A great buyer agent finds problems, solves problems, and helps hold transactions together. Others just mail it in.
When choosing a buyer agent, you want someone knowledgeable about the area you are considering, they need to be on top of what houses are going for, and they need to be experienced in writing successful offers. In this market, houses are going fast, so if you find a home you really want, you must make sure you put your best foot forward. Very importantly too, and this is hard to judge (and perhaps hard to find), you want someone who cares more for you than for their commission.
It’s hard to separate the wheat from the chaff, when you are hiring an agent, but it’s worth putting in the effort. Ask people you know, check online reviews, see who has sold a lot in your area.
The listing agent’s job is a bit more complex, so it’s easier to differentiate listing agents simply by asking what services they provide. There are still some agents around that set it and forget it, meaning they stick a sign in the ground, post it on the MLS (Multiple Listing Service) and watch as it syndicates to commercial sites like Zillow and Realtor.com, and that’s it. Check online reviews. Reviews will tell you a lot.
When interviewing a listing agent, you should ask whether they pay for professional photos, which look much, much better. Will they have the house professionally cleaned? Do they stage the house? How will they market the house? What’s the agent’s reputation in the market? Is the agent experienced?
Remember, if you are selling your house, at the end of the day it’s the money in your pocket that matters, not the commission rate. If you get all these services from the listing agent, and it nets you $20,000 more than the $500,000 (for example) list price, you scored, because going with a cheaper agent who only charges, for example, 4-½%, but takes their own photos, leaves toilet seats up, and barely neatens up the place, and then gets you only the list price if you are lucky, saves you just $5,000. You may not know it, but you left $15K on the messy table in the kitchen. Remember–It’s really easy to sell a home if you price your house cheap enough, but that’s far from the goal for the sellers.
This still leaves the problem of ‘how will buyer agents be compensated?’ Right now we can continue as always, but soon it’ll have to be figured out. Buyer agents serve an important role. For one thing, often overlooked, people have to know about the houses which come on the market. Your thought will be, “well, we can just look on Zillow or Realtor.com and see what’s available”, and that’s true. Unfortunately though, the business model for these online companies to make money is selling their leads to buyer agents! They aren’t showing all the available homes just to be nice. They have a button to click to “contact an agent”. People think they are contacting the listing agent for the house they are interested in, but that’s not what’s happening. They are contacting a buyer agent who pays for that lead.
The results of this settlement are going to reverberate for a while, and we’ll have to see how it all works out. It very well might end up almost exactly where we started, but just not utilize the MLS to show what buyer agents are offered. Another possible outcome is that there are fewer buyer agents, but the best ones become more like consultants, handling multiple clients and maybe billing by the hour. That would work great, and maybe be even better for wealthy buyers, but not so well for people without the money to pay a consultant.