The way real estate agents are paid could be changing

Real estate agent Barb Lebrecht was giving a tour of a bucolic, 10-acre property she recently sold in Garden Valley, a town of a few thousand people about an hour northeast of Sacramento, California.

If you squinted past the seafoamy paint job, the hillside home looked like something out of a Vrbo ad for a rural weekend getaway. Emphasis on rural.

“I actually wore boots the last time I was here because I was worried about rattlesnakes,” Lebrecht said.

Rattlesnakes weren’t the only hazard Lebrecht dealt with. There were squatters who refused to leave, she said. One time a bull got loose from a neighbor’s yard and just stood behind her Lexus.

It took two years to sell the place. It’s finally scheduled to close before year’s end for around $500,000.

Lebrecht will get a 2.5% commission on the final purchase price, roughly $12,000. The buyer’s agent gets the same cut for a total commission of 5%, technically paid by the seller. It’s the standard way real estate agents are compensated.

Despite two years of essentially uncompensated labor, Lebrecht is a big fan of the commission model. She’s made a solid living out of it for 20 years.

“I have a real affinity toward buyers,” she said. “And I think that if buyers were forced to come in and pay their own commission … it’s difficult. A lot of my buyers are barely able to scrape a down payment, much less closing costs, and then in addition to that also pay their agents.”

She was referring to a possible consequence of a recent wave of litigation that threatens how agents traditionally are paid.

In October, a jury in a Missouri civil case found that the National Association of Realtors and several high-profile brokerages colluded to inflate the commission rates home sellers paid to agents. The crux of the class-action case was a requirement that for a home to be placed on the multiple listings service — essentially the master list of homes for sale in an area — sellers would have to offer buyer’s agents a commission. The jury awarded $1.8 billion in damages to recent Missouri home sellers.

There’s a raft of similar lawsuits targeting the commission model. The National Association of Realtors plans to appeal the Missouri verdict, maintaining that sellers have always had the ability to negotiate commission rates.

But real estate finance professor Andra Ghent at the University of Utah doesn’t really buy that.

Sellers occasionally can negotiate, Ghent said. “But the negotiation is between 5 and 6 [%] on the overall transaction. I think it’s extremely unlikely that you could negotiate down. The Realtor education teaches Realtors against going into an agreement with less than 5%.”

Ghent said the commission model doesn’t work well for buyers either. Even though home sellers are technically paying the commission, in reality, Ghent said, the market incorporates those commissions into the transaction price of the home. And the more a home costs, the more the buyer’s agent gets paid.

“Realtors have a really big incentive to push homebuyers into the most home they can qualify for a mortgage on,” she said. “And for a lot of homebuyers, this is just not the right decision.”

Nate Johnson, vice president of advocacy at the National Association of Realtors, argues that misalignment of incentives between buyers’ agents and buyers is overblown. He said good agents are more concerned with getting repeat clients than marginally bumping up commissions.

“When we look at the sort of pennies and tens of dollars that may result in me encouraging you to pay for more of a property as opposed to less, it’s just not worth it,” Johnson said.

An advantage of the current model is that buyers are effectively paying their agent through their mortgage. Johnson said if they have to pay out of pocket, many buyers might risk making the biggest purchase of their lives without expert help.

Which is actually how homebuying works in plenty of other countries.

“It’s hard to make a comparison to the United States,” Johnson said. “I don’t know exactly what real estate looks like in terms of if there is fair, you know, fair and equal treatment in terms of buyers in the market. There may not be.”

Commissions in most other countries are significantly lower than in the U.S. In the United Kingdom, total commissions are on average about 1.5% of the home price.

“So buyers will just call the listing agent and say, ‘I’d like to view that property, please,’” said Charlie Lamdin, who has worked in the U.K. real estate business for two decades. “And if they like it, the buyer will make an offer to that agent. The buyers generally don’t have representation.”

But Lamdin said there’s a downside — the closing process in the U.K. can be a nightmare.

“Over here, it’s currently an average of five months. That’s how bad it is.”

Lamdin said American real estate agents have it much better than their British counterparts.

At least, for now.

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