Sellers may not realize it, but the commissions they pay their real estate agents are split with the agents who bring the eventual buyer through the door. Even when that agent works solely on behalf of the buyer, they take a part of the selling agent’s fee. It’s an odd dynamic called “coupling.”
But depending on the outcome of three major lawsuits challenging commission structures in the real estate field, that could change – for the better, according to one seasoned observer.
As Stephen Brobeck sees it, if the courts rule to require sellers to pay their agents and buyers to pay theirs – in other words, uncoupling the commission structure – the fees agents charge will eventually decline. Not right away, perhaps, and maybe not by all that much. But Brobeck believes it will be enough to force “marginal” agents out of the business. Those agents’ clients would then gravitate to their more dominant colleagues, resulting in an increase in business that would more than make up for the somewhat lower commissions.
In the end, says Brobeck, consumers will be better off.
An Experienced Observer
Brobeck has been on the real estate beat for a long time. In 1990, he was executive director of the Consumer Federation of America, a national organization of more than 250 state and local nonprofit consumer groups. In that role, he challenged the use of subagency: a practice in which all other agents are “subagents” of the listing agent.
Back then, the agent who drove prospects around from house to house was legally bound to pass along information that was disclosed to him or her, sometimes without telling the buyers. As a result of Brobeck’s work, at least in part, subagency was eventually abandoned – replaced, unfortunately in some cases, by disclosures so nebulous as to be meaningless to most folks.
Last year and now a senior fellow at CFA, Brobeck wrote a report calling into question the use of ratings – not just the ones found on agents’ websites, but also on listings aggregators like Yelp, Facebook or even Realtor.com, the official public listings site for the National Association of Realtors. Some ratings were paid for, he said, and some others were out-and-out fakes.
Now at age 76, Brobeck is at it again, this time with a critical look at how uncoupling would work. He admits that this change would require favorable rulings in cases brought in Illinois, Missouri and Massachusetts by some of the country’s largest and most successful class-action litigators. But these law firms “would not have brought these cases if they thought they stood little chance” of succeeding, he argues. And he notes that a federal judge in Illinois has already denied an NAR petition to dismiss a suit challenging structural “price-fixing,” making it “far more likely” that decoupling will eventually come to pass.
How Things May Change
Brobeck believes lenders and investors in mortgages will work with agents to facilitate the transition. They will quickly accept the idea that each side of the sales transaction has its own representation and pays its own commission, he said. Better yet, with affordability always a question mark, they will allow the buyer’s fee to be included in the loan amount, so there will be no extra out-of-pocket cost.
It could be “well over a year” for commission levels to start falling, Brobeck said, and they may only fall to 2.5 percent or so. While there is no standard fee, the typical charge by listings agents these days is 6 percent, of which the agent landing the buyer takes half. So, with decoupling, the buyer’s side would be just 0.5 percent lower.
Well-established agents will be “confident enough in their long-term success” to handle the revenue shortfall, he added. But for marginal agents – “perhaps as many as half of all licensees,” Brobeck ventures – the pinch will be so great they will cease active practice.
Buyers and sellers who would have otherwise signed up with those now-inactive agents will gravitate toward more established professionals.
“Overall,” Brobeck said, “clients will receive better customer service.”
Discount brokerages that offer only rudimentary services are likely to see increased business, though not by much. Most consumers want “effective personal service from a single agent,” so Brobeck thinks they will align themselves with “a professional who can guide and reassure them.”
“To a greater extent,” Brobeck said, “the industry will look like a profession, with well-established agents dealing with clients and their issues while delegating routine tasks to salaried administrative staff.”
Lew Sichelman has been covering real estate for more than 50 years. He is a regular contributor to numerous shelter magazines and housing and housing-finance industry publications. Readers can contact him at email@example.com.