Six Fables and Facts Concerning Austin Real Estate Commissions in 2024.
It has been five months since a Kansas City, Missouri jury awarded $1.78B in a class action lawsuit on behalf of 260,000 home sellers in Missouri, Kansas, and Illinois between 2015 and 2022 who objected to the commissions they were “obligated” to pay buyers’ brokers. It has only been three weeks since the $418M settlement with the National Association of Realtors (NAR) which primarily addressed compensation to buyer representatives and will take effect in mid-July.
The results? A major shift in how Austinites will buy and sell residential real estate. How seismic? It depends on the outcome of the appeal process working its way through the judicial system. And it will be reshaped by new developments created by some of the settlement’s unintended consequences.
Meanwhile, allow me to identify six facts and fables now circulating in the public arena.
Fable #1: “Realtors agree to reduce their 6% commission.”
Fact: Commissions have always been negotiated between the seller and their agent and have been commensurate to the services provided. In my 17-year career, this has always been my practice. Furthermore, the seller’s agent has almost always split the commission with the buyer’s representative.
Fact: The split of commission compensation was introduced in the 1990s in response to consumer protection advocates concerned by the lack of representation for homebuyers.
Fable #2: “The settlement will, for the first time, allow Austin/Georgetown sellers to opt out of paying buyer commissions.”
Fact: There has never been an obligation for a seller to pay a buyer’s commission. Since the 1990s, there has been a practice for sellers to offer remuneration to the agent who brings the buyer. This symbiotic relationship has worked exceedingly well in the residential marketplace for two and a half decades.
Fable #3: “Sellers will be prohibited from offering any monetary compensation to buyer’s agents.”
Fact: This is not true. It is totally up to the seller what commission amounts will be and to whom they will be directed. To be sure, any incentives provided by the seller will go far in obtaining the desired outcome.
Fact: The NAR ruling stated that any home listed on a local Multiple Listing Service (MLS) must not publish any information regarding agent commissions.
Fable #4: “The settlement will reduce the costs of transaction services since the sellers will no longer pay buyer agent commissions.”
Fact: Not always. Suppose the sellers choose not to provide any buyer agent consideration. Imagine that during negotiations, the buyer’s agent includes compensation and concessions in the offer sheet for the same dollar amount that would have been offered had the seller chosen to do so. As a result, the final amount received by the seller at closing may not change much at all.
Fact: Those who argue, “Buyers should pay their agent for services rendered” must not have in mind the first-time home buyer, the buyer moving from a less expensive market to the Austin/Georgetown area, or a military veteran.
Fable #5: “The court ruling will serve to lower real estate prices and make home ownership more economical.”
Fact: General values in real estate are founded on the same principles as other goods: supply and demand. For instance, during the Pandemic when automakers cut back production, used car values accelerated. Why? No supply. The same is true for real estate. True, the fees paid to Realtors represent part of the expense of the transaction, but it is one of many, including such items as downpayment, loan origination, title insurance, escrow services, property taxes, etc.
Fact: Should Realtor fee structures be adjusted, so, by necessity, services rendered must be retrofitted. And should new players emerge it will only be for one reason: to make money. No one works for free.
Fable #6: “Buyers will now be able to negotiate the fee for representation.”
Fact: Perhaps. I have read articles proposing an ala carte menu provided by buyer’s agents. It sounds good in theory. As a practicing agent, I can’t imagine anyone coming away pleased.
Fact: For anyone who has ever purchased a home, I am sure you were quite happy with the arrangement that once was – sellers compensating your agent. It was hard enough to save for a downpayment, secure a loan, and pay for all the ancillary items. Having the seller pay the buyer’s commission and enfolding it into the price of the home allowed the buyer to finance the total purchase price over time rather than come up with an additional amount at closing. The reality is that most mortgages are sold to Fannie Mae or Freddy Mac. They have no provisions for realtor fees to be financed. For a VA Loan, the Veteran’s Administration prohibits the borrower from paying any form of commission. How is this supposed to work for our men and women who have honorably served our nation to purchase a home without representation?