On Tuesday, October 31, 2023, the real estate industry felt a rumble to a system that has been in place for over 100 years with the guilty verdict in the Sitzer Burnett trial. The jury awarded over $1.7 billion in damages, which, under Missouri law, triples to over $5.3 billion in total damages.
There have been many opinions thrown out there, so I thought I would add mine.
Here in North Carolina, I don’t think we will see a significant change in how we do business in the near future. Why? Because we have given sellers the option to pay or not pay the buyer agents for years.
As part of the current listing agreement (form 101 for those so inclined to review it) includes a provision in paragraph 8 where the sellers and the listing agent agree as to how the buyer agent will be paid and what amount. It has been there for years.
Here is the problem: If you have sold your house in the last ten years, did your listing agent point that provision out, or did they just pre-print the form and have you sign it?
A few things for those in the general public reading this:
- Realtors pay to be a member of the National Association of Realtors, the North Carolina Association of Realtors, and the local Association of Realtors.
- The local association normally provides the Multiple Listing Services (MLS), where your listing is advertised to the other member agents.
- As part of that advertising, the MLS tells the buyer agent how much they will be paid if they represent the buyer in the transaction.
The accusation from the plaintiffs was that real estate companies (not individual agents) conspired to keep sellers paying the buyer agent commissions to compete against them.
What happens if the seller doesn’t pay the buyer agent commissions?
For example, let’s use a $500,000 home just to keep the math easy.
I take the listing at 6% commission and agree to pay the buyer agent 2.4% (like I have for years).
That means that the seller is paying me 6% of the gross sale price, and out of that, I am going to pay 2.4% of the gross sale price to the buyer agent company (commissions are paid to the company, not the individual agent).
The buyer agent company then pays the agent from the total 2.4% share of the gross sale price based on the “split” the agent has with the company.
Some agents argue, “The seller doesn’t pay the 2.4%; the listing company does.” Technically, that may be true, but that 2.4% was part of the total sale price and paid out of what would have otherwise been the seller’s money.
That means the buyer agent side is getting $12,000. That is currently being paid from the seller’s proceeds. If the buyer has to pay that, it changes the complexion of the transaction.
If the buyer paid a 20% down payment, then the buyer had to bring $100,000 to the closing table in their own cash. This is on top of closing costs like attorney fees, inspections, and other items included in the process.
If the buyer now has to bring an additional $12,000, that is over $112,000 the buyer must have in cash. That is a 12% increase.
Many buyers today struggle to come up with the 20% down payment, and now they must save 12% more on top of the down payment.
What about the buyer who has to take an FHA loan because they don’t have 20% to put down?
FHA buyers put down only 3.5% of the sale price as a down payment. That buyer only has $17,500 to put down on the $500,000 house. If that buyer must pay the buyer agent commission out of pocket, that means the buyer must now have $29,500 in cash plus closing costs. That is an increase of 69.5% from the original $17,500 needed!
Mortgage lenders typically do not allow a buyer to finance the commissions unless it is included in the sale price. If they do, it is added into the “debt to income ratio” (aka DTI), and that could cause some to be over the debt limits.
We have already been battling debt limit ratios for years due to the quick acceleration of home prices when wages are not keeping up with the increases.
The bottom line for sellers is, to be careful what you wish for because you may get it. If you don’t pay that 2.4%, are you ready to lower your home price by that 2.4%? If the buyer can’t afford to pay the commissions, how much longer could your home sit on the market?
I’m not trying to scare or intimidate sellers. These are real issues.
What if every seller goes for sale by owner?
Here is one that some have not thought about in the real estate industry.
What if sellers no longer hire listing agents and just agree to pay the buyer agent who brings the buyer?
We haven’t seen the concept of open listings in over 30 years in North Carolina. That could happen if sellers decide they don’t need a listing agent.
Sellers don’t realize how much goes into prepping a listing, marketing a listing and the expense of the process.
Some may just decide to hire a photographer/videographer and have nice photos taken then list the property on Homes.com or Zillow and pay a buyer agent that brings an offer.
It is not likely this will happen because inexperience in selling a home can cost a seller tens of thousands of dollars if they don’t know what they are doing. But there will be some that decide to try it.
Listing agents must be willing to articulate the value they bring to the table.
Other Economic Impacts
In the last 5 years, corporate investors have bought millions of homes for their portfolios by paying cash. They often outbid first time home buyers because the first timers couldn’t compete with the “all cash/no appraisal” offer. Sellers took the money and ran. Good for them, but bad for home buyers.
Now as prices continue to increase even as talks of recession are continuing across the US, those home buyers are less likely to be able to buy a home right now.
The other option is for buyers agent to “race to the bottom” with commissions. Are you willing to work for a home buyer that only wants to pay you one percent or less? How many people who work a 9-5 job would take a 2/3 cut in pay to do the same job? Based on the “Great Resignation” of the past couple of years, I would say few are willing to do that.
Will some sellers refuse to pay the buyer agent going forward? Absolutely. Nobody can be blamed for trying to maximize their profit. Fortune 500 companies do that every day. Why would some individuals not try to do so?
Will agents need to become better at explaining why the seller paying the buyer agent commission is a good thing? Absolutely. Being articulate enough to explain why there is value in paying $12,000 to make $500,000 does not take a hedge fund manager.
As they have for years in North Carolina, sellers will have a choice. If the seller refuses to pay the buyer agent:
- Some buyer agents may choose to not show that home to a potential buyer.
- Buyers will refuse to look at a home because they can’t afford to pay the buyer agent commission out of pocket.
- Sellers may have to take less money to make a deal.
- Will they choose to pay a licensed agent to “facilitate” the transaction and help through the process? If so, how much will a transaction broker charge?
There are many more questions that have yet to be answered and we will be discussing this for the foreseeable future because the Moehrl trial is next and it starts in February!