Changes to How Contracts and Representation Work

Hi everyone, maybe some of you have heard about some of the changes to how contracts and representation work across the nation. Here’s a brief catchup if you’re out of the loop:

I won’t have all the answers because it’s still so new, but I did actually sit in on a seminar last week listening to experts give their takes, and best guesses. The judge hasn’t signed off on the settlement yet, there could be more changes, it doesn’t start until July, and it may be pushed back more, so…  Lots in the air still. Nevertheless, some of the bones of it all are starting to come together, so I’ll just give my take. I’m also required to say 47 times “I’m not a lawyer, and not allowed to give legal advice, so if you’d like any legal advice you need to go talk to your own lawyer…”

First off, let’s start with a primer with how things DID work, for those that might be a little hazy. For over 100 years, the system has been more or less stable. Usually a seller hires a seller agent, and enters a listing agreement. In that listing agreement, the seller agrees to pay 6%.  Upon the sale of the home, 3% of that goes to the seller agent, and 3% goes to the buyer agent. Those numbers don’t have to be that amount, and certainly have always been negotiable, but various forces have kept those numbers near that amount for a century. More or less competition and local norms have dropped that number to nearer to 2.5% each in some areas, for some durations of times, but by and large, over the entire nation they’ve stayed nearer 3% for each agent. The new court case argued, however, that the seller will no longer commit, in the original listing agreement weeks or months before the home is purchased, to paying this 3% buyer agent commission. It does not say the seller cannot pay this commission, it just says it cannot be set from the beginning. The local MLS’s (multiple listing services) also cannot advertise a pre-agreed compensation for the buyer agent, as they have done. The lawyers argued that this formed a type of collusion, boxing out sellers who didn’t want to operate this way, and that this process was making homes more expensive for buyers, who were still functionally paying buyer agents through their higher home prices.

But buyer agents will still end up getting paid, I’m sure, but how and how much? My opinion is that, once things settle down, the actual functionality of the process will change very little. Although TECHNICALLY, until now, the seller has been the party paying for buyer agent commissions, there’s really always been some ambiguity. No one pays anything until the home closes, so it’s basically paid “at the cash register.” When you buy something at, say, HEB really what matters to you (the buyer) is the net amount you pay, and what matters to HEB (the seller) is how much net they walk away with as well. It kind of doesn’t matter who is technically the one paying the sales tax, because it arguably directly impacts the wallets of both. If there was no sales tax (a transaction fee) then HEB would be able to charge higher prices and earn more money, because the consumer could bear it. If there were no transaction fees then the buyer could arguably pay less on their final ticket as well. Functionally, the sales tax at the grocery store inhibits the wallets of both. Transaction fees almost always affect both parties. Who was paying buyer agents before the shake up? Both parties were. For that matter, who was paying the seller agent? Also both parties.

After the shakeup, the transaction fees will still come from both parties, functionally, but we will just end up merely having different labels for the line items. Who is technically paying the buyer agent will depend upon how the purchase contract is negotiated… which will basically just mean how the line items are labeled. Again, both will hurt a little from it, but who is FUNCTIONALLY paying these transaction fees is still arguable. What would change the bottom line for both buyer and seller is if the value of the input of those involved decreases. That begs the question: “are realtors, lenders, title agents, etc WORTH the money they’re being paid?” I’m aware that some will answer that question with “no,” but I’ll relay a few counter arguments here.

1) Functionally: Buyers and sellers have ALWAYS been able to negotiate their commission, at any point. There’s no truer axiom than “everything is negotiable in real estate.” Not only that, we’ve always been REQUIRED to have clients sign a document emphasizing that everything is negotiable. Even though it’s always been negotiable, as mentioned above, the general norms for compensation have stayed pretty stable for over 100 years. Some would argue that’s because the industry has everyone in a choke hold, but others would argue that the public is willing to pay it because they recognize the value and expertise provided by those involved. You can decide for yourself, but my point is that customers have already been voluntarily participating in this compensation structure, functionally, for a century without change. Changing the labeling of the line items may not change that overall functional structure.

2) Value: While it does seem like there is occasionally protest from a seller about the value provided, I rarely ever hear this about buyer agents. Just this morning (I’m not making this up), my clients were conversing about houses they liked and snorted “well this one is only offering 2.5% to the buyer agent, so even though I like it, THAT one’s out!” I told them “no, no, don’t mark off a property because of me. I just want you guys to have the best home.” Still, just the fact that this occurred was telling, and I honestly don’t think it was contrived. They appreciate the service I’m offering, and the massive hours I have been putting in for them. I think even seller’s themselves recognize this about buyer agents, and I’ve heard them say so on many occasions, things like “sheesh those buyer agents are out there working hard, driving around all over creation, putting up with all kinds of nonsense… I don’t want to discount them.” They also say “I don’t want to be blacklisted either, or have my home spoken poorly of. Let’s keep that compensation at 3%.” Sure, some of my stories may be a little cherry-picked, but they’re definitely not “made up.” I hear this type of thing all the time, and I also feel quite confident of MY own value. Honestly, not every agent is worth that 3%… but I am. I have the experience of hundreds of home transactions and hundreds of hours of continuing education. Not only do I steer them around countless landmines, but I also often end up saving them more than my compensation. I can sleep at night knowing that’s usually true–functionally I don’t cost my buyers anything.

For my sellers… you get a similar amount of expertise, sweat, and tears, although it might not be as glaringly obvious sometimes, especially if things go right and your home sells quickly. That is one difficult part of the selling side of real estate. If you do your job well, it sometimes looks like you did very little. It is also worth noting though that I have multiple people on payroll handling all kinds of nuts and bolts, and those people have to be compensated as well. I know perhaps I’m not emphatically answering the question “are agents worth what they’re being paid,” but I do want to pose that there is at least a strong case to be made. What’s more, realtors don’t make NEARLY as much as most people think, and likely work way more hours than most think. When agents miss your call, it’s not because they’re vacationing in the Riviera. That’s mostly just TV show stuff, not real life… not for the vast majority.

3) Assigning line items: Well, all that above being so, who will TECHNICALLY be paying for the buyer agent’s commission? I think that will become very “case by case,” but after things settle down norms will eventually be established. We don’t know those norms yet, but I suspect that most contracts will just be written so that the sellers pay the buyer agent’s commission, for a conventional amount, and things will mostly be right back where we started. The main difference will be that that will be established at the point of sale (when the purchase contract is agreed), instead of weeks or months before when the house is listed with a selling agent. I have the same feeling: it SEEMS fairer to not require the seller to commit ahead of time what they’ll pay the buyer agent, rather, they can just decide on that amount at time of purchase. Again, though, after norms settle down I think things will be functionally similar to now.

Another thing that’s worth noting is that according to my seminar last week, about 50% of homes are selling right now with some form of seller concession in the contract. That means that whether it be cash for closing costs, cash for repairs, cash to buy down loan points, etc it is already common practice for buyers to ask the seller to pay for things in the purchase contract. Adding the buyer agent’s commission as a line item labeled “seller’s concession” is really nothing revolutionary for contract writing, and many contracts will just be written this way. Will there be other contracts with different terms, written a hundred different ways? Sure, but there will also soon be general norms established for who pays what, and how those payments are labeled.

A prime example is that currently, in Austin, the seller pays for the title policy probably 90+% of the time. Is it stipulated anywhere that it has to be that way? No, absolutely not. Convention has determined who has been assigned this title policy line item. The title policy cost still takes from both parties’ wallets, and who the line item is assigned to is a little (functionally) beside the point, in my opinion. It just “FEELS” bad when you see a line item is assigned to your name; I get it. It might be helpful to realize though that if we shuffled the deck and assigned all the line items differently, it might still end up that both parties end up netting the same amount of money in the end, regardless of who different line items are assigned to. That’s how the give and take of supply and demand work in a market economy. Two parties essentially negotiate a net price for each, and who pays the transaction fees in the middle are somewhat incidental, to a certain degree. The transaction fees arguably are not one of the central factors affecting the agreed up on net prices.

4.) Buyer’s representation agreements: What will likely be the case is that most (or many??) buyers out there who are house-shopping will already have “buyer representation agreements” with their agents. Buyers Rep Agreements can vary, but most are currently written to stipulate that their agent gets 3% compensation. This 3% will first be attempted to obtain from the seller, or if not, the buyer themselves owe it. That being the case, the buyer has a strong incentive to make sure they write their offers so that their agent’s compensation is in the offer contract. If these buyer rep agreements have widespread norms, the offers/purchase contracts will likely have similar norms. Again, none of this is required, but conventions form. As long as the buyers and buyer’s agents engage in conventional agreements, so offer contracts will also become conventional along the same lines.

Another force that makes these conventions become pervasive is the synchronizing effect that big brokerages have. Some big brokerages (like Keller Williams or Compass) may stipulate their buyer agents have certain buyer rep agreements. Buyer clients don’t have to accept those terms or work with their brokerage’s agents, but there end up being generally uniform terms applied widely across the nation. It only takes a few big brokerages with the same uniform terms, gathering momentum, for norms across the entire nation to solidify. After you have a large percentage of buyers all synchronized with the same buyer’s representation terms, it will likely have the effect of synchronizing purchase contract terms as well.

As I’ve said, we’re all still figuring this out. This is just my take, right now. Please let me know any questions you might have! Don’t be shy in talking about it! I’m happy to do it more!