The recent lawsuit involving the National Association of Realtors (NAR) and subsequent news coverage have sparked significant discussion within the Realtor community. I’d like to take this opportunity to share my perspective on the home buying and selling process, how Realtors are compensated, and the concept of ‘Uncompensated Effort.’
Realtors earn what is known as a ‘Success Fee.’ Essentially, we provide all our services for free until the transaction is closed and funded, at which point we receive a commission. Efforts that do not result in a closing are what I call ‘Uncompensated Effort.’ Every Realtor incurs this overhead, and it’s an integral part of a system that benefits consumers.
Both buyers and sellers appreciate this system because it allows them to access services at no cost, even if they never purchase a home or their property doesn’t sell.
For example, a buyer might contact an Austin Realtor based on a recommendation from a friend or family member. After an initial conversation, they might agree to work with that Realtor and plan a trip to Austin, staying in a hotel for a few nights. I’ve had many clients do this over the years.
During their stay, the Realtor would drive them around Austin to explore neighborhoods and houses, provide information about the real estate market, various communities, current affairs, pros and cons of different areas, commute times, schools, and local amenities and lifestyle activities.
They can ask unlimited questions and receive honest, informed answers and opinions about anything they want to know (assuming they’ve selected a competent agent). Having lived in Austin since 1985, I have a wealth of knowledge to share.
Let’s say the buyer views 8 to 12 houses on Friday and another 6 to 8 on Saturday, only to decide that Austin isn’t the right fit. Maybe the July heat was a dealbreaker, or they realized their budget and desire for better schools meant a longer commute than they wanted, despite being warned upfront.
They part ways with the Realtor and owe nothing. The service received, the uncompensated effort provided, and the knowledge gained were invaluable as they contemplated their options.
Similarly, when a seller hires a listing agent, we guide them through everything needed to properly prepare and price a home, including backend tasks most consumers never see and marketing efforts. If the home ultimately fails to sell and they decide to take it off the market, they owe nothing. All services were provided for free.
We operate this way for two reasons:
It Benefits Consumers: The system facilitates the buy/sell process in ways that may not be fully appreciated by the average person. Most people move every eight years, so it’s not something constantly on their minds. But when life changes occur, such as receiving a relocation offer, or having a grandchild, they can start working with a Realtor in that city without any upfront costs.
It Benefits Realtors: Realtors, especially those who understand sales, like this system too. The successful transactions more than compensate for the efforts that didn’t result in a sale.
This means successful transactions subsidize unsuccessful efforts. It might not seem fair, but it is. Any single deal might look like the agent didn’t do much, but the commissions from those closed deals enable all the aforementioned efforts to happen at no cost.
Thus, the system is built around ‘success fees’ supporting the ‘free’ efforts that attract the necessary number of buyers to get homes sold. The agents who bring those buyers, benefiting the sellers, are generally paid a commission that appears on the seller’s side of the settlement statement.
It’s this commission on the seller’s side of the settlement statement that lies at the heart of the lawsuit.
Going forward, instead of the seller unilaterally offering a Buyer Agent Commission via MLS, buyers will need to negotiate that upfront. This will start taking effect August 2024. More on that and how it will affect the industry in a later post.