There has been a lot of chatter about realtor fee structures due to some very public lawsuits. But what does it all mean?
You may have heard: The price of all homes is going to drop by 6%! Holy moly! Buyers and sellers will save money! You don’t have to use (or pay) a realtor!
Hang on – that’s not quite right.
Like anything in today’s modern society, there was never a requirement to use a realtor. Did you know that you could always buy and sell without representation? And fees are and always have been negotiable. One of my clients is in the title industry and he always uses a realtor – he already has a full-time job and wants to lean on someone who is the best at what they do, even though he sees and works with transactions all day long. He also knows how deals can go sideways and wants someone who knows how to get to the closing table!
Then what’s going on? What’s new here?
What is changing is that there will be no way to enter any compensation for a buyer agent into the MLS. There will be no field available for a co-broker agreement for those funds.
I think that sellers will still be paying a buyer’s agent fee. Let’s dig into why I think that.
Sellers care about their “net,” which is how much money they will walk away with when it is all said and done.
Buyers, on the other hand, come to the table with downpayment money, and they are more sensitive to cash up front, while the seller is more sensitive to the cash they walk away with. For buyers struggling to raise 5% downpayment an additional 2.5% to 4% to pay for representation could be the difference between purchasing and not purchasing a home. For these same buyers, having a professional who can negotiate better terms and repairs is crucial as they don’t necessarily have the extra funds for large repairs in the first few years.
If buyers are now in the position of paying for their agents and the seller isn’t offering any closing costs to assist with this compensation, many buyers will pass on seeing a home that doesn’t offer closing costs to assist with this fee.
Does it make sense for sellers to limit the number of buyers able to purchase their home?
If a seller is trying to get the highest price possible, how can they do that?
Marketing, preparing the property well, and ensuring the largest number of buyers can see the home are important. When the largest number of buyers can see the home, it is also important to make sure that every single buyer is able to make an offer. If there are buyers with only 5% for a downpayment who have asked their agent to skip any homes, they may choose not to make an offer on a home that is not offering this compensation to their agent.
Let’s talk about this market we are in now in Austin, Texas.
In our current market environment, considered a balanced market, buyers and sellers are evenly matched. It doesn’t feel like that, though!!
Sellers have only a 5% chance of selling their home every week. Only 5% of the inventory goes under contract weekly!
In this environment with only a 5% chance of selling, what happens to the other 95% of properties every week?
They remain on the market at the same price, or they decrease their price.
If you are a seller and you want to capture the highest net from your sale, why would you exclude buyers who don’t have adequate cash for closing costs? Isn’t it in your best interest to invest 3% to try to avoid spending holding costs?
Ok, fine this market stinks, what about a hot market?
For real. Our current market is brutal for sellers. What about the markets we experienced in 2020 and 2021? Does a seller care about saving this money in those markets?
The math is always the same: Buyers are always more cash-sensitive than sellers, as sellers have the equity from the sale. Buyers tend to be less price-sensitive because the increased amount of the sale only increases their total mortgage and doesn’t impact their payment by a large percentage. Sellers want to see a higher price because that is money in their pocket in 30 days.
So, with this in mind, why would a seller want to limit the number of buyers that can make an offer on their property, even in a hot market? They might not incur the cost of property taxes, mortgages, or price decreases in a hot market, but they are still limiting buyers. In 2021 people were paying 5-10% over asking on a regular basis. In that environment why wouldn’t you want the additional pressure of even one more buyer to maximize your profits?
The savvy seller will invest 1-2% of the asset in staging because they understand that while this is a lot of money in their everyday lives, it is a small percentage of the asset, and having one more buyer come and look at the home can pay them a 200% return on that investment.
Likewise, the seller who understands the market mechanics will also offer to compensate a buyer closing costs to help assist with all their closing fees, including the cost of having professional representation.
There have always been low-cost and no-cost models with different levels of service.
This makes sense; some people shop for clothes at Walmart, others at Target, and still others at Nordstrom. There are different service models for Tax assistance as well. Some people opt for Turbo Tax, and still others prefer to have a CPA for a higher level of service and planning.
But the sophisticated seller who understands the relative costs of selling a home is likely to choose to assist a buyer with their expenses to get one more buyer in the door and increase their probability of getting a return on their expense of professional advice. They want to be sure they are part of that 5% that gets an offer this week.