Hiring a housing Gandalf

I’ll get to why Gandalf is relevant later so keep reading, you fool of a Took!

Y’all keep asking me about the recent real estate lawsuit, so I figured I’d just write up my reflections and share them here. If you haven’t been following the news, here are a few good places to start:

1. The facts: Powerful Realtor Group Agrees to Slash Commissions to Settle Lawsuits

2. A helpful interpretation of the facts: Vox: Could a major lawsuit against realtors mean lower home prices?

Why does this lawsuit matter? Will it really affect home prices? How will it change the process of looking for and purchasing a home? Let’s dig in!

Seller assist, anyone?

Until now, it’s generally been the case that sellers would pay commissions: a percentage of the home purchase price to be split between both sides of the transaction — a portion going to the seller agent and a portion going to the buyer agent. That will no longer be the case. From now on, buyers will be responsible for paying their agents in the transaction, and also for negotiating with those agents how much to pay them. That’s the first basic fact from which everything else will grow.

Let’s look at two scenarios:

Imagine a buyer has hired a real estate agent to guide them through the purchase process, and they negotiate to pay their agent a 2.5% commission upon closing.

1. Scenario one: the buyer agrees to buy a home for $300,000 and pay their realtor the 2.5% ($7,500) commission in cash. The seller therefore receives $300,000 for their home from which they then pay their seller agent whatever they’d negotiated.

2. Scenario two: the buyer agrees to buy that same home for $300,000 but can’t afford to pay 2.5% of the purchase price (still $7,500) to their realtor in cash. They’re trying to protect their savings and are holding onto their extra cash for the sake of handling moving costs, repair expenses, or whatever else they want. Instead, they write an Agreement of Sale for a $307,500 purchase price with a seller’s assist of 2.5% ($7,500) to be paid to the buyer agent as the buyer agency commission. The buyer is basically asking to add on the compensation for their agent into their home loan so they can pay it off in chunks, just like they’re paying for their actual house. Therefore, seller receives $307,500 from the lender, pays the buyer agent $7,500, and walks off with their $300,000 to do with it whatever they need to, including paying their own seller agent.

In scenario one, the home price is $300,000. In scenario two, the home price is $307,500 with a $7,500 seller assist. The home price of the second scenario may look like $307,500, but ultimately they’re essentially the same thing: when looking at the net amount the seller walks away from the transaction with, it’ll be the same whether the buyer chooses to lump their buyer agent’s payment into their mortgage loan or not.

Scenario two is essentially how American real estate is organized currently, and scenario one is likely to become more common moving forward.

What’s the upshot of this lawsuit then? Why did they go to all this trouble of litigating something so simple?

Buyer at first sight

The problem with scenario two is that there’s pretty much no connection between how much value the buyer agent has brought to the transaction with how much they’re being compensated. That gap is what this lawsuit is changing.

For example, if you and I were to meet for the first time at an open house and you asked me to write up an offer to buy that house, I would receive the exact same commission as if I had spent months looking at dozens of houses for you before finally finding the perfect fit and then writing up that same offer. And in both scenarios, it’s not even the buyer who pays the commission — it’s the seller. As a buyer, you really wouldn’t care about that gap between how much I as an agent have worked with how much I’m getting paid, as you’re not the one who’s paying that commission — it’s the seller!

The original lawsuit that started this whole thing was based on exactly this problem: Christopher Moerhl, a home seller in Minnesota, didn’t want to pay the buyer’s agent at all, and couldn’t find a broker who would let him list his home with no buyer agency compensation. He ended up giving in and paying the full 5 or 6%, with half going to each side of the transaction as per usual, but was still miffed about the injustice of what felt like collusion and price-fixing between brokerages, as well as a misalignment between what value buyer agents bring to the table and what sellers agree to pay them. So in 2019, he sued, and here we are. The courts have since agreed that this system of deciding compensation for buyer agents isn’t just and needs to change.¹

So to revisit that open house purchase example: let’s jump forward in time a few months and imagine the seller is not paying the buyer agency commission anymore. If you were to walk up to me at an open house and ask me to write up an offer to buy that house, I certainly could demand that you should pay me 2.5% of the purchase price of the home for that labor of me representing you in the transaction. You would also be perfectly justified in responding “GTFO” and offering a lesser sum for the amount of work that I’ve actually done to help you purchase that home. That negotiation process between me (the agent) and you (the buyer) is exactly what this lawsuit and settlement is trying to produce.

So let’s take that example one step further: let’s say that during the process of drawing up the offer for this home at which I had just hosted an open house, as we’re looking at comps around the neighborhood of similar homes that sold recently, we notice that they all include the buyer agency compensation as part of the purchase price. In other words, they all paid both the buyer and seller agents’ commissions. When we decide what a fair market value is for the house, we might deduct the average of those buyer-side commissions (2.75%, say) from the purchase price we otherwise arrived at and submit the offer at that lower price.

Can we really say purchase prices have gone down in this situation? Kinda, but not really! The seller is walking away with a comparable or even identical net amount as if they’d had to pay the buyer agent as well as their own seller agent, right? Therefore the difference is ultimately on the buyer agency side: rather than a buyer agent swooping in and snagging a full 2.5-3% commission on a buy side transaction for which they did the bare minimum of work, they’ve likely negotiated with the buyer what their labor is worth in this scenario and taken a lower amount of compensation. Make no mistake, it’s still plenty of work to represent a buyer through a transaction like this even at this “late” stage of the process, but it’s a lot less than also having done the labor of helping them sift through potential properties and deciding to purchase this one. That portion of the process was already completed by the time the buyer walked into the open house, so accordingly the agent could (probably rightfully) be paid less.

Ideally, the buyer is the one who’s saved some money here. Rather than paying for their agent to walk them through the whole home search process, they’ve jumped straight to the end of it — submitting an offer on a home — and hired someone to guide them from that point on. If you are a buyer looking to save some money on the home purchase process, then this is probably good advice for you! Use the internet, do your search on your own, and don’t pay someone else to help you through that process! Just go to open houses and pay a lower fee to a buyer agent as a result!

Do you want a housing Gandalf or a DMV clerk?

Herein lies the rub, for buyers at least. Some folks want to browse the internet on their own, at their own pace, and only use an agent for the final stage of submitting an offer and making it across the settlement finish line. You can negotiate with agents to get exactly this level of buyer representation!²

But other folks will want more of what I am trying to offer as an agent, by which I mean: buying a home is a transformative decision, one that affects your whole life in almost every facet, and demands careful attention. Having a guide through that process can be invaluable: someone who can help you navigate not just the technical or external factors, but also the personal and emotional elements as well. A home purchase is a platform-level decision on which all other parts of your life are constructed, and thus it is worth it to hire someone who can share their wisdom in helping you make the right decision, not just the easiest or cheapest one. In my experience, a good realtor is like your own personal “housing Gandalf:” a wizard who guides you through a complex process. By contrast, in the eyes of many, a realtor seems to be no different than the person at the DMV who helps you renew your driver’s license: a necessary interlocutor in a complex transaction you wish was far more transparent and simple.

Because the world of real estate is complex. And unfortunately even the proliferation of information available on the internet and sites like Zillow hasn’t made it any less complex. And the process of finding the right house to fit your life is difficult. And beyond understanding the house half of the transaction, understanding yourself is hard enough that plenty of us hire therapists for help (and the rest of us probably should).

But ultimately, if you feel differently and want to pay for the DMV-clerk level of real estate assistance, now you can! And frankly, if that’s the kind of offer you make to me when you try to hire me to be your realtor, I’ll probably say no! Because the work I’m looking to do is far more similar to the guide-wizard-Gandalf model. From the first moment you start considering beginning the process to the final day when you’ve moved in and unpacked your boxes in your new home, I want to help guide you through that transformative process.

I’m trying to continue to write here and post on social media as expressions of my vision of what a better real estate process can look like. Working with me is simultaneously a choice to participate in the best expression of that process that I’ve yet discovered, as well as a commitment to join me in figuring out what we can do better. The changes that are currently hitting the real estate industry are proof that the whole process — for everyone in this country — is evolving, not just my own. And in the end, the goal of this work remains the same: helping people find homes that are worthy of the lives they want to lead. All that’s changing right now is how we pay the guides who help us navigate that process.

1. If I’m botching any of this, then please do let me know! I am no legal expert, but seeing as this post is meant to be an explainer on what has thus far seemed a pretty confusing legal case, it would be good for me to explain it accurately…

2. And to be frank, plenty of brokerages and agents have offered this model for a long time! This lawsuit simply draws attention to these distinctions and forces all of us to negotiate price and value accordingly.