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HOME SELLERS SAVE MONEY?
Home Sellers Save Money! It does sound good for a home seller, doesn't it? Can you hear the small kid on the corner selling newspapers calling at the top of his lungs? He's in his knickers and cap while all the hustle and bustle of people on their way to work pass him by.
Can you imagine saving thousands in commissions to a realtor (r) when you sell your house? How awesome is that? It sounds like a great thing in a time of high-interest rates, high sales prices, and home ownership becoming less and less affordable.
First, let's review the case. Essentially, Sitzer | Burnett is an Anti-Trust case against the National Association of Realtors claiming that NAR is engaged in price fixing for real estate broker fees through the use of their marketing platform, the MLS. The claim is that NAR encourages a 6% fee to be assessed and billed to sellers. It goes on to say that NAR's MLS platform promotes the commission between brokers which inflates the prices and costs to both buyers and sellers.
This is an opinion piece and only represents my perspective on this. As a licensed Realtor (r), I have sworn to protect the general public from harm in real estate transactions and to promote the interests of those who wish to sell real estate. With this being said...
Think about a couple of scenarios for a moment.
SCENARIO 1
You need to Sell a property for 500,000, and let's assume a 6% commission (as that's the fee argued in the case).
That's $30,000 total or 3% per buying and selling side of the deal, right? In the current world, most transactions have the seller absorbing this cost from the sale proceeds. (FYI - listing agreements are between a Seller and the listing brokerage. All commissions are paid to the brokerage that has the listing agreement. In many agreements, the listing brokerage may include a clause allowing them to share a portion of their fee with another brokerage that procures a buyer. These are always negotiable.)
If this case passes and becomes legal precedent, then a listing broker (for argument's sake) would only charge a 3% or $15,000 to the seller. Big Win for sellers, right? It does sound nice, I agree, and let's dig a little deeper.
What if the seller buys a $750,000 house (a 50% increase over their prior sale)? They now have 2 options.
1. They can buy the house with NO representation as a buyer. The listing broker is contractually obligated to the Seller to get the best price for them with no contractual obligation to the buyer.
2. The buyer can pay a fee to a Buyer's broker for representation. If the Buyer's broker fee is 3% in that scenario, the buyer is now paying $22,500 on top of 2-3% in closing fees from the lender, the insurance company, and etc.
This argument creates a situation where a seller, who is currently paying 6% or $30,000, will potentially increase their fees by 25% or an additional $7500 when they buy the new house. Under the current system, if the seller bears the cost, it actually saves that seller money when they become a buyer.
SCENARIO 2
If a seller doesn't want to pay the additional buyer's broker portion, under current rules, they can negotiate the commissions they feel are wasteful. Listing brokers can market the property to individuals, and buyer's brokers (roughly 90% of all transactions) may not show any houses that they aren't being paid on. The Seller has effectively reduced their marketing traction by cutting out 90% of the buyers who have opted to utilize buyer's representation.
In a changed world with buyers paying for their representation at closing, first-home buyers will be even less likely to buy a home due to even greater affordability issues. They currently have a difficult time saving for down payment and closing costs. If this new idea passes it could double their out-of-pocket cost to buy a house and sellers will remove 30-40% of buyers from the market. This scenario awards property ownership to the elite and wealthy while leaving the average prospective homeowner out in the cold.
It's a double-edged sword any way we look at it. The argument is near-sighted as it only looks at one aspect of the "costs", and yet it is understandable. The sticker shock is high to sellers and doesn't seem fair. We have to look at the entire picture, not just the selling side.
WHAT DOES THE FUTURE HOLD?
I don't think it will make it through the appeals courts. If it does pass, be prepared to see more lawsuits from the buyer's side in a few years who are now in an even worse affordability crunch.
Also, be prepared for a real estate market that could potentially collapse under these rules. If you cut out 30+% of buyers from affording homes, a very large percentage of the national GDP will go with it. This change could spell disaster on multiple levels.
If you're a home seller and favor this ruling, think through the entire picture of real estate sales. There is always a buyer and a seller involved. At any given time, you are either a buyer or a seller. If you only pay the fee when you sell, it balances out. Consider it like kicking the can down the road and your sales fee includes access to more buyers when it's time for you to sell the property you probably didn't pay for buyer representation on in the first place.
Another scenario that may play out is a reduction in the number of qualified real estate professionals who can make a living selling homes. The average real estate broker makes around $60,000 per year and sells between 4-6 houses per year. If 50% or more represent buyers currently, these brokers will be forced out of work. In Albuquerque, that has the potential to represent several thousand brokers.
In New Mexico, we passed legislation several years ago allowing for Buyer Representation. Prior to that time, buyers had no representation and were taken advantage of by the sellers and seller's brokers (who represent the seller, not the buyer). There were a lot of problems and lawsuits (adding to the costs) as a result. You may expect that landscape to repeat itself should this pass.
Remember, every seller is a buyer at some point. With real estate costs rising a Buyer can potentially pay a High Fee to buy appreciated ("over-priced") properties and another commission at an even higher value when they sell, only turning around to do it again. That sounds even more costly than the current system.
This lawsuit sounds good on the surface, AND the unintended consequences can wreak havoc on the real estate markets as well as the national and local economies if there are fewer buyers that also means less demand, which could cause values to drop costing sellers trillions of dollars in Equity.
Could that scenario lead to more foreclosures? You only have to look back to 2008-2010 to see that more sellers with negative equity are likely to allow a foreclosure than come to the closing table with cash.
We have to be careful what we wish for...
