No, reps insist, agent commission-sharing practice doesn't boost home prices
As expected, members of the mortgage industry balked at a potential dismantling of the long-held commission-sharing system used home sales agents – a custom now under antitrust scrutiny by the US Justice Department also being challenged by a pair of private lawsuits challenging the practice.
As reported by Bloomberg, shuttling the payment structure would not only impact the National Association of Realtors (NAR) – the industry’s lobbying group – but could spark drastic change across the real estate landscape. Under the commission-sharing system, home sellers are required to pay 5% to 6% cut of the sale divided between their agent and the buyer’s agent.
Mortgage Professional America reached out to the NAR for comment, but officials did not immediately respond.
Laura Ray (pictured top), vice president and CFO of Florida-based Liberty Mortgage Lending Group Inc., disagreed with litigants’ claims of collusion and complaints of the commission-sharing system inflating home prices further. Still others point to NAR’s control over many of the country’s multiple listing services, suggesting that hold essentially safeguards the practice – a premise with which Ray also disagrees.
Home prices aren’t bolstered by commissions, she said
“Realtors with the MLS [Multiple Listing Service] agree to make offers for compensation and are not bound to a specific percentage in neither the total percentage nor the percentage of split,” Ray countered. “I don’t feel the scrutiny is warranted for the reasons that are given.”
She cited home value as an example: “It is incredibly unlikely that a seller will reduce the sale price simply because the selling agent lowers the commission,” she told MPA. “A seller will always likely look for a sale at the appraised or comped value, i.e. highest and best. The commission negotiation is more likely to occur when a seller receives an attractive offer that is below sale value. Does the seller know that they can negotiate the commission when reviewing offers? Not likely, but they should be made aware of that.”
MPA also reached out to Tyler Flora, CEO of California-based SunnyHill Financial, who in turn referred inquiries to Dave Cunningham (pictured below), managing director of SunnyHill Realty. Like Ray, Cunningham opposed the scrutiny.
“The government has its role, and the free market has its role,” he told MPA. “Sellers are currently not required to pay 5% to 6% in order to sell their homes. There are times that sellers are paying more or less than those amounts as commission is fully negotiable.”
He views the commission system through a different lens: “I think of it as marketing,” he began. “A realtor lists the home on the MLS and in order to attract buyers with representation; the seller is paying the buyer’s agent to show their clients the home and increase foot traffic and visibility.”
He said the commission-sharing system doesn’t bolster home prices too
The practice of paying on both sides of the agents’ spectrum does not add to a property’s sales price: “If the buyer’s agent is not being compensated for their time to show a house they may skip sending that property over to their client or tell their client they would need to pay the commission,” he said. “The tradition of seller paying both sides is built into home prices, the home buying and selling process, and there are no obligations to opt into this tradition.”
Assessing the likely aftermath of dismantling the system
He envisioned the impact of eliminating the commission-sharing practice: “If this tradition was to be removed, it would remove the individual agent showing home or cause buyers to simply negotiate an offer where the buyer’s agent commission to be paid by the seller.
“You would also see an uptick in buyer agent contracts required by agents to show homes which may cause apprehension for buyers to make offers. None of this helps a buyer purchase a home.”
Ray also highlighted a potential aftermath should the investigation and/or lawsuits win their arguments: “Buyer agents will stray from selling homes with lower commissions or lower splits,” she said. “Whether it is an intentional bias or a subconscious bias, it is a reality for some buyer agents. It is not in the buyer’s best interest. In this way, the commission split scenario could be a violation of anti-trust.”
She further outlined what might occur should a percentage limit be placed on commission-sharing: “If the commission is relegated to a maximum 4%, for example, the industry will lose realtors and we might see commission plus broker fee plus advertising costs in the agreements. However, the Realtors that remain will make it work.”
Yet the thorny issue of remuneration remains: “There is a question of fair compensation.,” Ray said. “Who decides? In the mortgage industry, we have a maximum that we can make, whether we like it or not. We also have costs associated with each transaction. Why is real estate any different? Many RE shops have a set fee that sales associates pay giving the majority of the commission to the agents. You will likely see more real estate agents going in that direction.”
The commission-sharing system benefits sellers and buyers understand the cost, Cunningham suggested: “Sellers continue to opt into the commission-sharing system as they feel it is the best way to accomplish their goals, sell their homes quickly, and have confidence that the transaction will be handled by professionals,” he said.
“The idea that this system is causing the increase in home prices is not necessarily true as the price is determined by buyers’ willingness to pay what the market demands, and buyers have continued to see the value of home ownership and have paid market price.”
Let the market decide, he reiterated: “Prices will not drop until buyers no longer see the value in buying homes at a given price,” he said. “This is starting to happen with mortgage interest rates in the 7s already. The market will sort itself out. That is how a free market works – supply and demand.”
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