The New Commission Equation

Who’s really footing the bill in the new real estate reality?

Insider

Contributing Writer

The NAR settlement has cast a pall over the industry as we start dealing with another great unknown. I have been in this industry for over 40 years (of course, I started when I was ten). Every time there is a major change, we tend to adjust. There have been so many that I have lost count: licensing, the pandemic, loan officer commission rules, the subprime boom, the subprime bust, TRID and more. Each of these came with predictions of Armageddon (with apologies to Bruce Willis — a great movie, by the way).

But we adjusted each time. Though I cannot predict the future, I would guess that we will adjust this time as well. This does not mean we may not have to adjust our business. As a matter of fact, each agency has already had to adjust or reiterate their “buyer-paid commission” rules. This was one of the more obvious needs. In this article I will not try to predict the future. But I will point out a few important factors that we should consider.

• First, let’s talk about the concept of buyer-paid real estate commissions. Ever since I wrote the Book of Home Finance 40 years ago, I have been teaching in this industry. When it came to real estate commissions, I have always stated that the seller does not pay the real estate commission. And everyone looked at me like I had two heads. This is false, by the way, as I barely have one. But let me explain this statement. The buyer of the property is the only one buying something in the transaction. Therefore, they are the only entity that can pay. It is simple economics. Let’s take a simple fictitious example — closing costs. The seller does not pay them — ever.

$400,000 Sales Price, $10,000 in closing costs.
The buyer submits an offer for the seller to “pay” the $10,000 in closing costs.
The contract is accepted.
One month later the buyer decides that paying the closing costs would be more beneficial to their financial situation.
The buyer asks the seller to lower the price to $390,000 with the buyer paying the closing costs.
The agent explains to the seller that their net will be exactly the same, so they accept.
Thus, you can see that the buyer is clearly paying for the closing costs through the price of the house. This does not mean that an agent commission does not benefit the seller — because it has been shown that homes comparable which are listed in the MLS sell for a higher price than FSBO’s. Agent commissions are generally worth the value they deliver. It is just that the buyer pays them — albeit indirectly.

The buyer of the property is the only one buying something in the transaction. Therefore, they are the only entity that can pay. It is simple economics.

• Second, let’s talk about the latest craze. Real estate agents, desperate for more income, will now become loan officers as well. This is already a common practice in a few states. However, major companies have always discouraged this practice because FHA did not allow it. Thus, the practice was more common among non-FHA approved brokers. However, FHA recently revised their conflict-of -interest rules to open the door for this practice. I am not an attorney, but I am not aware of state licensing rules being changed in any way, nor RESPA. Thus, I believe agents would have to be licensed to be paid and they must provide a service worthy of that payment. Regardless of my amateur assumptions, I have heard stories of companies jumping the gun and claiming that they can pay agents under certain guidelines. Keep in mind that the agents who are inclined to take those companies up on this offer are the ones having trouble making a living, which is not exactly the best target for loan officers. Top agents don’t have time to conquer the expertise needed for two jobs. They are too busy selling homes. Plus, if an agent is serious about becoming a loan officer also — do you think other agents will refer them business? These agents are competitors and can sell a next home to those referrals — perhaps not now, but sometime in the future. One exception might be a larger team of agents appointing one of their lower producers as a loan officer — but again, the head of that team likely could not take a cut without licensing and providing a service. I will let the attorneys ferret that one out.

Top agents don’t have time to conquer the expertise needed for two jobs. They are too busy selling homes.

• Finally, will the role of the loan officer change? You bet it will! The loan officer will become more important. Why is that? Every time there is a complicated change in the industry, it opens the door for education. The agents need to learn about what is allowable and what is not. All the questions have not been answered and this is likely to be an evolving situation. Thus, it is incumbent upon the loan officer to keep up with what is taking place. Even more importantly, the loan officer will need to read the contracts much more carefully to determine if the contract meets current requirements for contributions and more. These contracts are likely to become more complex and we will see a slew of variations. Going back to the previous point — the real estate/mortgage interaction world is going to become more complex. How many agents are qualified to traverse this path, let alone become competent loan officers?

This is another major change for the industry. Again, I predict that we will adjust. Those that don’t adjust are the ones that are in jeopardy, not the industry in general. Every challenge begets opportunities and this one will be no exception.