Another consumer trade group is coming for our industry again. As if a $1 billion settlement, national practice changes and laws (in some states) regarding buyer representation agreements, along with a tidal wave of changes to existing contract forms, weren’t enough, the Consumer Policy Center (CPC) thinks buyer’s agents are charging too much money.
The outcome of Sitzer | Burnett resulted in mandatory practice changes nationwide:
- NAR agreed not to create rules that allow listing agents to set compensation for buyer brokers.
- Offers of compensation are no longer displayed in the multiple listing services.
- MLS participants are required to work with buyers to enter into written buyer representation agreements before touring homes.
While the attorneys made bank, we don’t know how much sellers who opted into the class are receiving — varying reports have it from $20 to a couple of hundred dollars, but it is safe to say, based on information that’s out there, it’s not life-changing money.
The CPC’s findings
With no amount of buyer agent compensation guaranteed under our new rules — despite the work being put in on behalf of a buyer and no enforcement mechanism to collect the agreed upon fee in the agreement should seller and/or buyer not agree to pay all or part of it — the CPC’s report found that 95 percent of the agents in the study quoted a commission rate that was between 2.5 percent and 3 percent of the sales price, with the vast majority quoting a 3 percent rate.
“Several agents said they were charging the ‘standard’ or ‘usual’ rate in their area, evidence of price-fixing,” Stephen Brobeck and Wendy Gilch noted.
While there is no “standard” or “usual” rate, agents can negotiate their fees based on a variety of factors — the nature of the buyer’s search, projected time involved, skill and expertise. There are a ton of unknowns going into determining a buyer agent’s fees — the search could take three months or three years, there could be multiple offers written that don’t come together or several transactions for any number of reasons beyond the buyer agent’s control.
Agents have a delicate line to walk — predict the future of the job they were hired to do with sufficient compensation. It’s virtually impossible to do.
Did the CPC consider that agents are requesting 2.5 percent to 3 percent based on what they are seeing sellers being willing to pay, depending on the price range and what is reasonable for a buyer to pay in the respective markets they work? Some agents may request more or less depending on the situation, price range, repeat client, etc.
I don’t think 281 buyer agents canvassed for this study is an accurate depiction of what agents are charging. This was honestly entrapment as agents were mystery shopped by phone, trying to get them to quote a percentage. While some took the bait, some did not, and any savvy agent is going to figure out the line of questioning was likely for an ulterior motive, rather than working with a real buyer.
While an initial phone conversation can be helpful, nothing can compare to a face-to-face meeting, whether that’s done virtually or in person for an in-depth buyer consultation to earn the buyer’s trust and confidence while sharing key information to empower, educate and inform, nor is it an accurate picture of our industry.
The CPC’s recommendations
As a result of the CPC’s findings, they recommend:
- Compensation is separated; buyers pay their agents, and sellers pay listing agents.
- Buyers should be allowed to finance the cost of agent compensation into a mortgage loan.
These suggestions are nothing new and were the subject of much debate when the Sitzer | Burnett practice changes were being implemented. They are simplistic and unrealistic at best.
Lenders are not willing to tack on buy-side compensation to loan amounts for the sake thereof. Buyers would end up paying more as the sales price would need to be increased, which could result in the loan amount being increased as well. Good luck going to the wrestling mat with the mortgage industry on that one. There’s been no movement by lenders to offer this up as an option.
With regard to the total separation of agent compensation and buyers having to pay their own agent, many buyers would be knocked out of the market completely or forced to forgo representation.
A listing agent is not going to take on the liability of representing a buyer and seller in a transaction and not factor in compensation for handling both sides. The expectation that agents will agree to reduced fees when taking on a job with too many unknowns is unfair and unrealistic.
Real estate transactions rarely move in a straight line or go according to plan. There are simply too many unknowns that are out of an agent’s control.
With respect to sellers, the researchers said that “many buyer agents will lower their compensation if there is pushback.”
“In interviewing prospective listing agents, sellers would benefit from asking whether the agents are prepared to communicate to buyer agents a willingness to negotiate their compensation, not ever disclosing a specific amount,” they wrote.
It is worth making the point here that the CPC and CFA are consumer advocacy groups, but overall, they’re advocating for agents to make less, which indicates a misunderstanding of what agents do.
It is easy to sit in an ivory tower and criticize, but spend a day, a month or a year in our shoes. What agents actually make in commission is often far less than the billable hours would be in another profession.
The hypothetical buyer that the CPC mystery shopped agents for — cash, moving in two months, etc. — is a rarity and not a common occurrence, and as any savvy agent knows, what a prospect says and what actually happens are two different things.
Many people say they are cash or moving in X timeframe, but end up getting a loan and a longer timeline for a variety of reasons — we are talking about humans and real-life circumstances, which often change and can be delayed.
I worked with a buyer earlier this year who said they would pay cash, but the reality was they intended to obtain financing for the tax benefits, even though they would not make an offer contingent upon financing or an appraisal. Still, there was a loan process to manage to ensure we closed on time.
With this particular buyer, I wrote five offers, and we were in escrow four times before we closed on a property that worked out. The amount of time spent with these buyers over a six-month period was significant and intense.
The notion that agents should agree to take less up front cannot be justified because of scenarios like this that play out every day.
Agents deserve every penny they can negotiate for
Let’s reiterate a few things for the CPC:
- We are NOT paid a salary. Whatever compensation we are paid from a transaction is our paycheck for that transaction only. Let me remind the CPC that out of the gross buy-side compensation paid, the agent splits the compensation with their broker according to their split, a franchise/marketing fee is taken out, potentially a transaction or escrow facilitation fee, referral fee (if applicable which can go up to as much as 50 percent plus of the total commission) and then has to set aside money to pay taxes, contribute to their social security and retirement, take care of bills and set what’s left aside to reinvest in their business if there’s any left at all.
- Agents spend an undetermined amount of time, energy and their own money on any given deal, and there is no reimbursement. Drive 100 miles and gas costs? That’s on you. A stone hits your windshield while on the freeway, and it cracks while driving from property A to B? Too bad, so sad.
- Agents are complying with the settlement and following the rules. There is nothing in the settlement that limits what they can charge. There simply is no conspiracy as to the compensation a buyer’s agent is requesting in their buyer agreements, and a variety of factors are at play in determining that fee. Agents have often been underpaid when you factor in the time and effort spent relative to what they received.
Every profession demands a fair wage for a fair living, and real estate is no different. The difference is that agents get paid after the fact, not upfront or during the transaction. While they could set up this kind of compensation arrangement, our industry is not easily set up to do so.
Would you pick an attorney, doctor, surgeon, dentist or accountant by price alone? You don’t know what you don’t know, and those could be expensive mistakes to make that could cost you more in the end — your health, your life and financial stability.
I don’t hear consumers screaming about agent compensation. Based on my experiences, the buyers I have worked with post-settlement have a deep appreciation and respect for all that is involved.
They want an advisor who has the knowledge, skills, resources, contacts and most of all great gut instinct to guide them through an extremely stressful process. That you cannot put a price on, nor should anyone attempt to dictate what that should be, other than the agent themselves, who will determine their worth.
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