Real Estate Round-Up: Asset or expense?

The word “commission” in the context of real estate conjures up a different opinion or reaction from everyone. Some sellers see it as an expense, rather than an investment in their success. Buyers often don’t even think about it, because it is something that the seller pays, but do they really? To Realtors, it is how we get compensated for the service and expertise we provide.

I’ve said it before, and I’ll say it again, not all Realtors are created equal, so it makes sense that not all commissions are created equal. There will always be discounters. That business model will work for someone who isn’t expecting personal service, enhanced marketing or strong negotiating. Those sellers see the Realtor as an expense rather than an asset.

Sellers who recognize the importance of strong representation, throughout the entire selling process, will also see their Realtor as an asset that helps them get more for their property, is aware of the hurdles that can occur and has the tools and expertise to help navigate the entire transaction.

Recently a class-action lawsuit was filed against the National Association of Realtors and four of the largest brokerages and corresponding 21 MLSs over the course of five years across several major cities, including Dallas, Washington, Cleveland, Las Vegas and Denver. In the suit – Moehl v. National Association Realtors – the defendants are accused of “conspiring” in a scheme to require sellers to pay the brokers representing the buyers of their homes “inflated” commissions.

The lawsuit in question centers on a rule imposed by the NAR, which pertains to multiple listing services, the database of properties listed for sale in a particular area. The plaintiff argued this is how most homes in the U.S. are sold and most MLSs are controlled by local NAR associations.

When a property is listed on the MLS, the guideline in question requires a seller to not only compensate the agent listing his property, but also provide a “nonnegotiable” offer of compensation to the buyer’s representative, which according to the lawsuit, “saddle(s) home sellers with a cost that would be borne by the buyer in a competitive market.” The plaintiff argued that without this rule, buyer brokers’ commissions would be negotiated by the buyers and would be lower.

The solution, as seen by the plaintiff, was for the buyers to pay their Realtor’s fee, separate from the funds they use to purchase the property. It is an interesting assertion given that a solution already exists but is not often utilized.

Buyers can enter into a Buyer Representation Agreement with their Realtor, similar to the formal agreement between the seller and their Realtor. The BRE, spells out the terms of their relationship, the geographic area covered by the agreement and any compensation that the Realtor agrees to receive for their service.

The BRE addresses the claims of the lawsuit and was created to provide a tool to make the compensation a buyer’s Realtor receives consistent, regardless of the compensation offered on the MLS.

Think of it this way; buyers want to see five different properties. Some of those properties offer compensation A, some offer compensation B and some offer compensation Z. A buyer that has signed a BRE with their Realtor, would pay their Realtor additional compensation on top of the purchase price to make compensation A equal in amount to compensation Z.

The presumption is that the Realtor would be motivated to show and sell the buyer any property that fit their requirements, even “For Sale by Owner” which might offer no compensation to Realtors. An additional component to remember is that, Realtors, under the Realtor Code of Ethics are obligated to show their clients every property offered for sale, regardless of the compensation offered.

This tool, and the goal of the lawsuit, shifts some or all of the burden to the buyers for the compensation of their representatives. It will only work if the buyer has adequate funds available for their down payment, their closing costs and the additional compensation.

Many buyers, especially first-time homebuyers, barely have the funds to cover the down payment and the costs associated with the transaction, let alone additional funds for compensation. Many buyers ask for seller assistance with their closing costs. The additional compensation cannot be financed, so more buyers would be sidelined or would end up with the sellers’ Realtor representing them too.

Dual representation, another hotly debated topic, can work, but it is not preferred by sellers or buyers. Homebuyers benefit greatly by having a Realtor on their side with legally defined obligations. Buyers could also choose to go it alone, which seems like walking a tightrope with no net.

Consider these final thoughts. Sellers negotiate the total commission when they sign a listing contract. The total compensation is spelled out in the Residential Listing Agreement, with specifics of how much is paid to the sellers’ Realtor and how much of that compensation is paid to the buyers’ Realtor. Sellers are entitled to make decisions about commission, which may impact the outcome of their sale.

I do believe that buyers understand that they are ultimately paying the commission, because it is their purchase that makes it possible for the seller to have proceeds to be able to pay commissions to both Realtors. The gross number is probably close to the same, but currently it is structured, so it is wrapped in the loan and does not require the buyer to have additional funds outside of the purchase to provide compensation to their Realtor.

Commission will always be negotiable; make decisions that have a positive impact on the one real asset you have in the transaction, your Realtor.

Kim Murphy can be reached at [email protected] or (760) 415-9292 or at 130 N Main Avenue, in Fallbrook. Her broker license is #01229921, and she is on the board of directors for the California Association of Realtors.