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NAR will inevitably change the way commissions are structured because of the Sitzer | Burnett ruling. The implications are far reaching, and the conversations need to start immediately.
I am a veteran real estate broker in Southern California and represent both sellers and buyers. In charting the course forward, NAR should consider what this means for the industry at large, for brokers and their agents, and most importantly, the implications on buyers.
10 weeks to contract
According to NAR data, a Realtor typically works with a qualified buyer for 10 weeks on average to identify and get into a contract on a home. During that period, the buyer’s agent operates as an unpaid fiduciary and sales agent. The Realtor identifies homes of interest, accompanies the buyer at showing appointments, offers advice and, ultimately, assists the buyer with making an offer on the home of choice.
After the offer is presented, the Realtor negotiates with the seller’s agent to reach an agreement on the sales price and terms of sale. All the terms are negotiable. Both parties work together to reach a favorable agreement for their clients.
In California, for example, there are 33 items in a purchase contract, and agents must protect their client’s interests and navigate it. In most cases, there are 20 to 38 items in a purchase contract, and agents must protect their client’s interest and navigate it.
Feelings and facts
In the trial, plaintiff Burnett stated, “I paid the buyer’s broker to negotiate against me and my husband, which resulted in a lower sales price,” Burnett said. “She did a good job for him [the buyer], but I had to pay her commission.”
I’m afraid I have to disagree with that simply because this seller had already agreed to a gross commission payment of 6 percent of the sales price to her Realtor.
Burnett admitted she was very happy with her broker and had no problem paying the commission. So, where is the disconnect? I have followed the trial closely, and no one mentioned that the buyer’s loan consummates the sale. It is the buyer’s loan that pays for the entire transaction.
Buyers are not knowledgeable of what the listing contract terms are. They simply want to purchase a home. They don’t argue that the seller’s listing commission percentage inflates the cost of their purchase. So, where is the disconnect?
Breaking down the cost to buyers
Common home buying practice tells us that a buyer saves for their down payment for two-plus years on average. These amounts average anywhere from 3.5 percent to 20 percent of the home’s purchase price. In the scenario of a $400,000 sales price, that amount looks like $14,000 to $80,000.
It increases when you add on closing costs ranging from 2 percent to 3 percent of the purchase price, $8,000 to $12,000. Closing costs include interest, lender fees, prepaid costs such as property taxes and insurance, points and escrow/title fees. Once the sale is successful, the buyer’s loan benefits all parties. The buyer owns their home.
The seller’s mortgage is paid off (if any), both Realtors are paid, title and escrow are paid, etc. The sale of the home is completed. These amounts are set as expectations with their Realtor before marketing the home for sale.
All these transactions are successful because the prudent buyer paid for them. In the path forward, NAR should also carefully consider what commission restructuring will look like. The narrative that buyers should pay their own agents makes no sense. They already do.
Demographics of agents vs. homeownership
Further, NAR often publishes data on homeownership rates, the demographics of their membership of 1.5 million agents, and the statistics on how homeownership rates among BIPOC communities are not improving. The gap is widening among these communities.
In a study released by NAR in 2015, the demographic makeup of their estimated 1.5 million members comprised
- White 70.3 percent
- Latino 17.3 percent
- Black 5.2 percent
- Asian 5.8 percent
- American Indian .4 percent
- Other 4.3 percent
Conversely, the demographics of current homeownership confirm the issue:
- White 72.7 percent
- Black 44 percent
- Asian Americans 62.8 percent
- Latino 50.6 percent
The homeownership study did not include an “other” category.
More barriers
If these considerations are not factored in, I am concerned that more people of color will experience added barriers to homeownership due to rising costs placed on them.
Another consideration is that Realtors of color will earn less per transaction (as many of them work with their communities), and many will have to leave the industry altogether. I believe placing more costs on buyers will further marginalize these groups. There is a direct correlation between homeownership rates and the Realtors who represent them.
A solution will not be easy to reach. NAR must work with brokerages, local MLS agencies and agents to find a solution sooner rather than later, and we must advocate for it.
With 19+ years of experience in the real estate industry, Trina Gonzales-Van is a broker associate and Realtor at Keller Williams Realty. You can connect with her on Instagram and Linkedin.
