Letters to the Editor 03.27


    OPINION: Real Estate Representation in Providence (And Elsewhere)

    By Nelson Taylor

    I wanted to say a few things in regards to the National Association of Realtors’ (NAR) pending settlement regarding how consumers compensate the real estate agents they hire.  I am a local real estate broker and have been for 23 years.  This is my personal interpretation of and position on the pending changes, not the point of view of the brokerage for which I work or the sales team I manage.  As a tenured real estate broker, I feel the sensationalist, attention-grabbing headlines of late are a far cry from the truth.  For those of you interested in learning more, and being part of the conversation, I am going to try to clearly and exhaustively break it down for you. 

    Besides a whopping $418m monetary settlement, the NAR has agreed to enforce three things upon the Realtors they represent.  This means that if all passes, all agents who call themselves Realtors must abide by these new rules starting July 2024. 

    #1—Commissions for buyers and sellers are 100% negotiable;

    #2—Sellers will not be forced to offer any buyers’ agency side compensation; and if they choose to not offer compensation to the buyers’ agency side, then buyers who want representation will have to pay out of pocket or navigate the process without representation;

    #3—All buyers’ agents will need to have signed contracts with their clients.

    First, from 3000 feet up, there seems to be some confusion about how agents are paid, so why don’t I begin here.  Real estate agents are independent contractors, which means we don’t make a salary or an hourly wage, but rather we are paid a commission at the closing of a for sale or for lease property.  Typically this is a percentage of the sales price.  Because we are not employees, we don’t have the opportunity to take part in company matching programs, health insurance bundles or performance bonuses and we pay for all of our business and client expenses out of pocket, and we are subject to self-employment taxes.

    In regards to #1, sales commissions, it’s important to know that most real estate agents work with both sellers and buyers.  When we work with sellers, we as the listing agents negotiate with sellers the commission to be paid at closing. Agents with the most experience offering the highest levels of marketing, advertising, sales savvy and customer service offer 6% fees to their clients.  This would mean that 6% is paid out of the proceeds of the sale.  Some agents choose to offer budget levels of service with limited marketing, advertising, sales savvy and customer service.  These commissions range from 5% down to 4%.  It is any agent’s right as a business person to offer whatever service at whatever price they choose and a seller’s right to choose whatever level of service makes most sense to them.  Despite how the media has summarized this information, there will be no difference here with the NAR settlement. 

    The sellers’ agency side puts the new listing into the Multiple Listing Service (MLS), which we as Realtors value as a fair and even marketplace requiring all the details of any property being sold and what commission we will be paying out to buyers’ agents.  The MLS also allows for the widest reach, meaning that sellers get the most eyes on their property—whether that be un-agented buyers or buyers’ agents with clients.  The more eyes on a property, the better chance the property will sell for the highest and best price.  And the MLS is valuable because it offers an easy, one-stop marketplace for all.  All the monitored MLS info is harvested by all public real estate websites, so it is available to anyone searching for a home.  The MLS also has strict criteria about what information and relationships must be disclosed, making every transaction as fully transparent as possible. 

    I make it a personal practice and encourage all of our team agents to press upon our sellers the importance of splitting the negotiated commission equally between the sellers’ agency side and the buyers’ agency side.  So, for example, with a negotiated 5% listing, 2.5% is paid to the sellers’ agency side and 2.5% is paid to the buyers’ agency side.  While this decision lies soley with sellers, we vehemently defend the value of fairly compensating buyers’ agents.  Buyers’ agents should be paid for all they do on their side of the transaction to vet and secure qualified and motivated buyers for my listings.  And as a tried-and-true professional with over two decades of experience in the local marketplace, my clients have come to trust and value my insight.

    Some brokers on the sellers’ agency side are already choosing to unevenly share commissions between each side.  Instead of a 50/50 split, say within the example above, they choose to take 3% for the sellers’ agency side and offer 2% to the buyers’ agency side.  Some brokers offer even less.  This is a greedy practice by the listing agency side, which promotes a one-sided race to the bottom rather than a fair and even marketplace for all.  #2 above states that the sellers’ agency side no longer needs to offer compensation at all, but rather if the buyers’ agency side wants to be compensated, then their clients, their buyers, will need to pay them out of pocket.  While on the surface this sounds reasonable—sellers pay their agents and buyers pay their agents—let’s do a deep dive as to why the alternative was been the status quo for over a hundred years.

    Currently, real estate commissions to both sides are paid out at closing, generally half to the sellers side and half to the buyers side.  Just to be clear, agents don’t get all of their half of the commission.  They pay their brokerage a percentage, pay out any teammates or employees and then any number of expenses from education to licensing to insurance to dues to hardware, software, marketing, advertising and automobile related items, just to name a few.  So, from the surface it seems like sellers are footing the bill for both sides, right?   Wrong.  The commission for both sides is baked into the sales price and has been baked into the final sales price/value of real estate transactions for a hundred years.  And are not buyers the ones paying the total cost of the home no matter what percentage is paid out to agents?  So, if you look at it from that standpoint, it makes a lot more sense.  This is the way the commission structure was originally intended.  In other words, both buyers and sellers are, and have always been, sharing in the cost of commissions—payment for valuable services in the transaction of the what’s generally the largest asset anyone will ever be a part of.

    The current NAR settlement, as #2 above states, is putting the value—the entire existence, really—of buyers’ agency at risk.  But before I go any further, let’s talk about the value of buyers’ brokers.  What do we do when representing buyers?  Zooming out…we educate buyers on the process and protect them through the entire transaction.  Zooming in…we make sure they understand the nuances of values, neighborhoods, laws, contracts and finances.  Bad or no presentation can be fine until bad things happen.  And they do.  Often.  Homes are generally the biggest asset one will ever own, so protection is a major goal, which means introductions to tried-and-true lenders, lawyers, inspectors, insurance agents and skilled tradesmen.  Think of a good buyers’ agent as a quarterback, managing the process, the plays and the players.   Good representation can mean not just the difference between the best value possible, but also a smooth and safe process.  Limiting buyers’ agency will create more problems than solutions for all parties. 

    Like I noted earlier, the buyers’ agency side commission has always been baked into the sales price, meaning that buyers are essentially paying up front the extra cost of their representation.  Moving forward, not only will buyers have to come up with a down payment for a property, now they could have to come up with the funds to personally pay for representation.  As #3 states, like with sellers, contracts will soon be required between buyers and their agents, breaking down the terms of any agreement.  Will the price of homes be reduced by their agency costs to help buyers at least make sense of this new statute?  Not necessarily.  Unfortunately, sales prices will not suddenly adjust.  Thus, it can be said that buyers will now be getting hit twice and sellers will be double-dipping.  Does this sound like a fair and even marketplace?

    Here’s what’s worse.  If sellers do not offer a buyers’ agency side commission, some buyers may choose to forego representation in lieu saving money.  For those willing to do the proper due diligence to represent themselves, more power to them.  As a real estate agent, I have always respected and even espoused people’s rights to represent themselves.  But for the average person, the lack of representation could prove disastrous.  This will mean more buyers who are less educated and less qualified, more sellers who are frustrated by generally shakier deals, and transactions with higher chances of costly mistakes and exposure to litigation. 

    And then there are the buyers who simply don’t have a choice and will not be able to financially afford the extra cost of representation.  This is about those at the lowest levels of our socio-economics, the less educated, the poor and disenfranchised, a higher percentage of which are minorities.  This ruling is an offense against the lower class.  And I say shame on The National Associations of Realtors and the Department of Justice for putting those most in need at such risk.

    This settlement feels hasty, not well thought-out and a dumbing down of the fair and even marketplace that equally considered and benefited buyers, sellers and agents from both sides.  I believe the media turbulence and consumer distrust will be short-lived.  Sellers will continue to choose which agents they work with (some not at all), what fees they are willing to pay, and to whom.  And buyers will continue to choose which agents they work with (if they work with one at all), what fees they are willing pay and how they pay for service. 

    On the listing side, I am going to encourage my sellers to allow me to continue to offer a fair compensation to buyers’ brokers—but it will be their choice.  When speaking to potential buyer clients, and in the absence of a commission negotiated on the sellers’ side, I am going to stress the value of paying for savvy representation, which will be able to be financed like a closing cost credit—much as they essentially have always done.  Again, this will be their choice.  No matter who is getting paid and how, I will continue to explain all sides of every nuance of real estate to my clients so that they can make the most informed, no-strings-attached decisions possible.  Consulting with experienced and industry-vetted agents will be even more important moving forward.

    Over time, sales prices will adjust—at least in theory—to only include one side, the seller’s side, of the commission.  To me, this settlement seems like a lot of upheaval and potential fallout on all sides to get to about the same way consumers pay for services and real estate agents have and always will be compensated.  As usual, it looks like the lawyers were the only big winners here. 

    Nelson Taylor is the Managing Partner of The Blackstone Team at COMPASS Real Estate in Providence, Rhode Island.

    To the editor,

    I very much appreciated the article by Sarah Gleason about saving historic buildings and repurposing them for low-income residents. She cites several successful projects that have made a difference in the lives of Providence residents. Cooperation with HUD’s new Neighborhood Strategy Area program is a fine example of what can be done. Kudos!

    Karen Wallin Usas

    To the editor,
    Sarah Gleason’s article “Historic Preservation and Affordable Housing: Possible to Have Both?” highlighted some of the non-profit organizations that have balanced two important characteristics of quality places. It would be interesting to know more about the local for-profit developers who have done the same. Cornish Associates and the Armory Revival Company are two that come to mind, but there are probably others.

    Brent Runyon