A REALTOR wrote a social media post this week lamenting the trend of brokers offering 2.5% compensation to buyer agents instead of the expected 3.0% commission. The agent believes buyer agents work hard for their money and should be compensated at the highest market rate by the one lucky seller who happens to accept her client’s offer. Should market demand push home prices one way or the other, but not move broker commission?
The compensation method standard in real estate MLS associations has proven to be immune to market pressure. Is that immunity due for a change? Modern real estate practice uses a compensation-sharing formula designed for an old model where agents were (supposed to be) working for the seller on both sides of the transaction. Until about 1991, disclosed Buyer Agency was uncommon in our market. Everyone worked for the benefit of the seller (the only person with a contract promising to pay in exchange for service). The buyer agency assumes an agreement between the buyer and a broker to exchange services for compensation. The broker serves, and the buyer compensates. Does the buyer pay their agent? It depends on your perspective.
Who’s money is it?
Buyers bring the money to the table. Before the money gets to the seller, expenses get paid. By the terms of the purchase agreement, the seller often agrees to pay the buyer agency fee out of the proceeds received from the buyer. Arguably, the buyer is paying the buyer broker with the money first going to the seller. It’s also arguable that the seller is paying the buyer broker with cash that once but no longer belongs to the buyer.
However you sort the money, the fact is that the amount of commission paid to each broker affects the price of the property and the seller’s profit. And that’s where there’s room for improvement.
Without getting into the difficulty of the work or skill required to facilitate a home sale, can we agree that compensation in a free market should rise and fall with demand and expertise? I don’t know that happens in the cooperative system of a broker-to-broker commission payment. I see a scenario where the listing firm obligates the seller to pay a top-of-the-scale fee to a buyer agent to get their property listed on the MLS.
The free market works when we let it
The free market system is working if there is a trend away from 3.0% compensation offers by sellers to buyer agents. Old beliefs and standard practices that once made sense cost American real estate consumers billions of dollars in lost equity. A fair compensation system would require the buyer to pay the buyer agent and the seller to only be obligated to pay the listing agent. The parties would negotiate any change to this arrangement, and the negotiations would start at zero.
Only in real estate do we expect a consumer (the home seller) to promise to pay a top price before seeing the quality of the product (the offer). All offers are not equal in money or risk. Disconnecting the commission into the two parts allows the seller room to negotiate commission and space for the buyer to negotiate the price. If commissions are negotiable, the home seller should not get locked into a non-negotiable position before seeing what they’re buying.