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REALTOR® Representation… How Does It All Work?

Dated: May 23 2024

Views: 63

My father (a.k.a. Pops) began selling Real Estate in 1966, a time that he says was much simpler and straightforward for real estate transactions. He would receive a call from someone who wanted to buy a house and do everything humanly possible to find the right home for his ‘client’. His offer (on a contract of only 2-3 pages - Wow!) would be sent to the listing agent and his compensation would be paid by the listing agent who had negotiated the Realtor compensation with the home seller.  This compensation would be split with Pops if he represented the buyer. There was no buyer’s representation agreement at the time, just an understanding between him and the buyer as to how things would work.

There is a Latin term, Caveat Emptor, meaning ‘let the buyer beware’, which in real estate means the buyer gets what they get, even if the house has major flaws. The buyer’s representation agreement was created in 1991 to place legal structure around the relationship between the home buyer and the Realtor who was leading them through the transaction, and to ensure that home buyers had professional representation and would not need to ‘beware’ of anything.

Even with the creation of the buyer’s representation agreement in 1991, nothing changed in terms of how both agents were compensated. Continuing even today, the listing agent negotiates their compensation with the home seller and then shares a portion of their compensation with the agent on the other side (typically the amount is split evenly).

Why Do Home Seller’s Pay Compensation?

A colleague recently told me that she met with a client selling his house and he was adamant that no compensation would be paid to the buyer’s agent.  Based on this client’s understanding of what was reported in the news regarding Realtors and their compensation model, he believes the buyer should pay for their own Realtor services, not him.

Is this a reasonable request from the home seller? After all if the buyers are receiving services from a certain Realtor, they should be the ones paying for those services.  Like so many things in life, there are some layers to peel back from this onion to understand why the current system is in place and how it has evolved over time.

Seller’s want to advertise their home and have it marketed broadly to the entire market, locally, out of town, and potentially even internationally. They need it sold quickly and efficiently for the highest price possible. In short, Sellers need a crowd of buyers brought to them in order to accomplish their goal of selling their home. A high-quality agent can make these things happen, so for a home seller, compensating that agent is the best way to get it done.

For the agent responsible for selling the house efficiently and at the highest price, making an offer to thousands of Realtors that you will share the listing compensation if they can bring a buyer to the table also makes sense. Transparency makes the system work as everyone understands how the compensation will work.

According to a NASDAQ report about 10% of home sellers go the route of For Sale By Owner (FSBO) to avoid paying agent compensation. They take on the marketing, showings, negotiations, paperwork, and all other tasks that an agent normally completes. The report goes on to say that FSBOs often sell to someone they know, for less money (about $120,000 on average) than if they had placed it on the market through a Realtor. Many FSBOs eventually turn things over to a Realtor after they understand the extent of the work.

It is also important to note that home buyers often struggle with buying real estate due to the amount of money they need for the deposit and the other costs associated with the transaction. Forcing buyers to also pay a Realtor commission has great potential to reduce the number of buyers in the market who are able to buy a house, especially first time home buyers, veterans, and others.  Obviously limiting access to the market would not be good for home sellers/buyers, the real estate market, or the economy in general.  

What Is Changing?

Under the current system, the listing agent must disclose in the multiple listing service (MLS) that Realtors use to buy and sell homes, how much of their compensation they are willing to share with a buyer’s agent. This compensation can be any amount, as it is negotiable, however it is a percentage of the purchase price with the listing agent often receiving the same amount. 

In August (the target date), there will be changes to the compensation system and one of them is that transparency of compensation will go away and listing agents will not be allowed to show the buyer’s agent compensation in the MLS.  As it stands today, no one knows how the new system will work, however things are being worked out and in August it will come to pass and home buyers, sellers, Realtors, and other stakeholders will all work together to find the best way forward… 

Value Remains in the Eyes of the Client

Realtors provide a large array of services to home sellers and buyers. How Realtors are compensated to perform these services, no matter which side they are on, needs to be done in a way that helps and protects clients as they transact in the market, creates a smooth and efficient market, and allows professional Realtors to operate at a level that allows them to bring value to clients. According to the National Association of Homebuilders, residential real estate accounts for 15-18% of the country’s Gross Domestic Product. That’s a large chunk of the economy that requires a great deal of activity and cooperation among all industry stakeholders.

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Patrick Pruett

I have a pretty unique background compared to most agents, which is one of the main reasons I’ve been able to help so many clients. One thing a lot of people don’t know is that I once had ....

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