Why should sellers have to pay their buyer’s agent’s fee?
The buyer’s agent spars with the seller over price, inspection items — their fiduciary duty is owed to their buyer, of course. So why would the seller pay them and not the buyer?
Before the internet, the middleman had a Rolodex of potential buyers and made strategic introductions that led to a sale, and sellers would pay that buyer broker a finder’s fee. This is valuable in a market for hard to find buyers. Its really unfortunate commission compensation found its way to housing, which is commoditized and not at all hard to find. Trillions (Yes, Trillions) of dollars have been paid out to Realtors for standing in between an abundance of supply and an abundance of demand. The fees are in gross excess of the value. What’s profoundly terrifying about the hundred billion a year homeowners pay out each year today in the 21st century is that the internet makes information available to anyone. You can see the address of everything for sale, the interior pictures, the names of the homeowners, the sales history, etc. You used to have to walk into a Main Street brokerage, sit down and flip through a listings binder to know what’s available. You became leverage for that broker. Today you have permissionless access to every single listing online for free. Despite the internet, networks, software, email and electronic signatures, fees haven’t come down like they have in every other space involving an information broker. The reason is simple: seller’s have to pay the buyer’s agent.
Buyer’s agents can hold their buyer hostage for the fee they want, not a fee that is dictated by a free market, governed by the same supply-demand market pressures exist in every other industry. Of course, sellers don’t want to offer less commission, for fear the buyer agent wont show the home. The buyer has no idea any of this is going on. This has led to conflicts of interest like steering: https://economics.yale.edu/sites/default/files/barwick_conflicts_of_interest_and_the_realtor_commission_puzzle.pdf
Antitrust issues
In Pennsylvania, the buyer signs off on the agreement of sale, but they don’t sign off on the form that stipulates their agents commission. They can have no idea that their agents commission is what is holding up the deal. Although commissions are 100% negotiable in every state, it does no good. My sellers offered 2% instead of 2.5%. Although the buyer agent showed the property, she snuck her 2.5% fee in there. If the deal fell apart, her buyers would have no idea that the selling price wasn’t the issue.
Notice how the buyer’s signature isn’t required. They are kept in the dark by design:
The National Association of Realtors is an enormous trade group. They spent nearly $65 million dollars lobbying in 2016, slating them as the second largest lobbying spenders in the world. It is in their best interest to design these forms in such a way that keeps commissions high, so as to keep more Realtors in business, paying their membership dues and fees.
NAR and company; REMAX, Keller Williams, etc., are the recipient of a class action lawsuit alleging conspiracy:
Should a judge rule in favor of the plantiffs in this lawsuit, it would have devastating implications on the industry. Buyer agent commission is half the revenues for brokerages. If buyer’s paid their own agents, there’s no chance they’re going to pay the 2.5% out of pocket. 70% of Zillow’s revenues are informed by their ‘Premier Agent” program, where agents pay big bucks for buyer leads, because they can anticipate receiving a large commission from the seller. Everyone should be paying close attention to this because Cohen Milstein is the Mike Tyson of class action law firms. They knocked out Volkswagen over their emissions scandal, big tobacco and big oil, to name a few. They are seeking a permanent injunction that would ban sellers from paying the buyer’s agent. This is going to a jury trial, and then it will likely find its way to the supreme court:
“Why should the seller have to pay the buyer’s agent?”
Realtors don’t like that phrasing because the seller’s agent charges the five or six percent fee and advertises half of it to the agent with the buyer, technically making the seller-agent’s brokerage the one paying the buyer-agent from their total five or six percent fee. It’s a technical point, but it doesn’t address the reality that the arrangement innately, inadvertandly, keeps fees price-fixed which is unfair to consumers and antithetical to free market principals. I put it this way — why should the buyer’s agent commission come from the seller’s pocket?
Why 6%? Why not 8%? Why isn’t it 4%, or 2%?
The fee is arbitrary. There is no sophisticated, consciencious or otherwise ecnomically sound and justifiable basis for the current fee. Its an accident of history. It simply fell out of the mouths of a few people in a room in the 1920s, and it stuck. But its the expectation that the buyer’s agent’s portion comes from the seller’s equity that completely undermines the ability for supply-demand forces to make the necessary correction. In every other industry an increase in productivity and efficiency reduces costs to the end user. Realtors are cashing in on an 80 year old tradition.
There is no correlation between commission and effort. It is not twice as hard to sell a $500k home than a $250k home. There isn’t twice the paperwork, the doors aren’t twice as hard to open. Economists refer to percentage fees causing payment payouts in gross excess of value provided as “social waste”:
Example: A buyer agent received $15,000 for 15 hours worth of work and was happy. That same buyer agent was offered $15,000 again for the same 15 hours worth of work, but was very unhappy, “offended” even. In the first instance, the $15,000 commission was 2.5%, their half of a 5% commission to bring the buyer for a $600,000 house. So in their mind there was no injustice. But in the second instance, someone selling a $1,000,000 home, who has upgraded and updated it to the point where it was garnering a ton of action and selling itself, is offering only 1.5% to buyers agents. In response to this sort of thing, agents throw a fit, they tell their buyers the home is not available, they leave angry voicemails and throw bricks through car windows.
