By now, you’ve probably heard of the multiple class action lawsuits across the country alleging that realtors and their big bad evil brokerages are conspiring to inflate commissions and hurt home sellers.
We’re not attorneys so we’re not here to opine about the merits of the case. We also have no idea how things will eventually shake out.
We do know that things aren’t going to change immediately as these court cases will be appealed for several years and that this enormous industry will take a long time to make any drastic changes. In other words, business as usual for now. But a storm may be brewing…
Black People Will Be Severely Hurt
We can’t help but think this is yet another case of wealthy people seeking to further consolidate their power and make it harder for others to attain wealth as well.
The implications of this ruling will have disastrous consequences for home buyers, and the black community in particular, if these proposed changes were to take effect at some point in the future.
More often than not, we don’t own a house and our people are trying to buy a home, not sell one.
Black people will be disproportionately affected by these lawsuits if the greedy lawyers representing the plaintiffs have their way.
Summary of the Issue
We’re going to explain things as simply as we can so that most people can understand how commissions currently work. This is neither technical nor legally perfect and varies across different states so please don’t come for us.
The home seller hires an agent to sell their home. The seller and the agent negotiate a fee/commission in order to do so and it usually ends up somewhere between 4-7% of the home price. Let’s say they agree to list the home for $500,000.
Now, both the seller and the agent want to find the right buyer for the property and they know that agents obviously don’t work for free, so the seller’s agent decides to split whatever fee they negotiated with the home seller, for example 5%, with the agent representing the buyer.
- Sometimes it’s 50/50 – seller’s agent gets 2.5% commission ($12,500) and buyer’s agent gets 2.5% commission as well ($12,500)
- Sometimes it’s 70/30 – seller’s agent get 3.5% commission and buyer’s agent gets 1.5%.
- Sometimes it’s 40/60, 60/40, 35/65…you get the point. Everything is negotiable.
The lawsuit basically alleges that the seller shouldn’t have to pay, for example, 5% commission because they may end up paying 2.5% of it to the buyer’s agent.
We could write an entire article around the flaws in this argument and the misguided rationale at play here but, for now, let’s think about the ramifications of what this could do to both home sellers and home buyers.
They will both lose.
One simple word: Affordability. The racial wealth gap is real. This will only widen it.
Lack of affordability is why the real estate market, as of the fall of 2023, has been at a standstill for over a year as transaction volumes have fallen off a cliff.
Interest rates are at 8% for well qualified buyers and many people simply can’t afford a mortgage at 8%+, a down payment, and closing costs – home inspection, home appraisal, title fees, lender underwriting fees.
Now, you want to make buyers pay for the cost of the agent as well, for example $12,500, for that $500,000 home? 9 out of 10 people cannot afford that and the housing market will break.
So now a home seller has priced out 90% of the market, which means less demand, which means their home will likely sit on the market for longer, sell for a lower price, or not at all.
Congratulations, you played yourself.
Possible Solution – Buyer’s Agent Compensation
The stakes are high in real estate because there’s so much money on the line. Naturally, people seek professional assistance when large sums of money are involved.
Some people had a bad experience with a lazy, inexperienced and subpar agent and so they now have a visceral reaction and healthy disrespect for all realtors.
Why anyone would buy a sh!tty product on Amazon, hire an inexperienced lawyer, CPA, engineer, salesperson, mechanic, writer etc…when information is freely available to prevent such mistakes is beyond us. But for some reason, people still do.
Stop doing that sh*t. Seriously. Everyone loses.
Anyway, if buyers clearly can’t afford to pay the commission for their agent, there has to be another way, right?
What if agents charged the same way that lawyers did? Or what if you paid them by the hour? Seems fair, right?
Ok, now think about how often you would contact your realtor if you knew you were paying them by the hour? How many houses would you tour? 3 houses or 20 houses?
How many times would you contact your agent whenever a question pops in your head about the local market, the school district, the offer price etc…The end result is that most people would be less informed and look at fewer homes because they can’t afford it otherwise.
There are services where a home seller can simply pay a flat fee to list their home on the MLS or on Zillow for example. This fact alone kills the plaintiffs’ argument but I digress.
What if there were something similar for home buyers? A flat fee for every service:
- Want to see a certain number of homes? Flat fee.
- Want a comp of the home and what we think it’s truly worth? Flat fee.
- Write and structure the offer? Flat fee.
- Connect you with my network of contractors, lenders, inspectors, appraisers, attorneys, title companies, movers, other agents etc…? Flat fee.
How many people would truly pay and take advantage of everything that their agent has to offer? They won’t. They won’t be able to afford it.
Possible Solution #2 – No Agent
You barely have enough money to cover the down payment and closing costs. You managed to get approved for a home loan. Home prices just keep going up so you compromised on either the location or size of the home.
You simply can’t afford to pay an agent on top of all of this so you go unrepresented.
Now, the seller, who of course is represented by their experienced agent, has even more power. Most people transact in a home sale 3-5 times in their entire lives. Good agents transact 3-5 times per month.
They have more reps than you and are more experienced. It’s not a dig, it’s a fact. And heaven forbid you’re a first time home buyer, as many of us will be.
You’re at a real disadvantage. There’s an increased chance that you may end up buying a house that’s not really a good fit for you.
- Maybe you were convinced that the location is better than it really is.
- Maybe you didn’t know how to structure the offer and insert the right contingencies.
- Maybe the issue(s) that came up during the home inspection was a bigger deal than you thought and you didn’t know how to negotiate a seller’s concession.
- Maybe you simply got beat up in negotiations and nobody had your back.
There’s a reason that dual agency – having one agent represent both the buyer and seller of a home – is frowned upon and even illegal in many states.
Possible Solution #3 – Lender Help
Ok, if you can’t afford to pay for something upfront, then what do you do? You finance it. Layaway. Credit. It’s the American way.
Mortgage lenders may step in and help cover the cost of the agent compensation. Of course it won’t be free.
Now on top of paying a higher interest rate, borrowing more money because home prices keep going up, you have to take on even more debt to finance the cost of paying an agent? It just keeps getting worse for home buyers.
Oh, and we can’t tell you how many times people contacted us after being connected with a sh*tty agent by their mortgage lender. This might begin happening more often unfortunately.
Nobody wins except the greedy lawyers who will reap the most from these lawsuits in the form of legal fees (what’s 30% of $1.8 billion and counting?)
Home sellers: In a perfect scenario, you pay less commission, find a home buyer who can actually afford the increased cost of home ownership and you sell your home.
Many home sellers turn into home buyers as well. Now it’s your turn to either go unrepresented or to pay more than you normally would to buy another home. There goes that money you think you just saved.
First time Home Buyers: This is potentially devastating. They’re going to lose alot more than others if this comes to pass.
There is a long way to go and this may not even come to fruition and get struck down during the appellate process or in higher courts. Hopefully, reason will prevail and this country will finally stop protecting the wealthy at the expense of everyone else.
But if not, the clock is ticking and many of us may end up being permanently priced out of buying a home.