Why Hire a Realtor? And what the NAR lawsuit means for You

Is Silence a Form of Deceit?

If you're planning to buy a home this year, expect to see big changes in the way you engage with realtors. The anti-trust lawsuit against the NAR (National Association of Realtors) settled out of court recently, and part of the settlement agreement requires realtors to have buyers sign what's called a "Buyer Broker" agreement before showing them houses.

In the past decade of working as a realtor, I only used a Buyer Broker agreement once, mainly because my first experience with that piece of paper left a horrible taste in my mouth. I first encountered that form in Reno, where I was trying to buy a house for myself. I was studying to become a realtor at that time, but I was inexperienced.

Nonetheless, I decided to write my own offer, and I submitted it to the seller's listing agent, who refused to present it because he said it was not prepared using the correct forms. So I asked him to write an offer for me, and he declined, telling me that he could not act as a "dual" agent.

Nevada is more transparent than California when it comes to dual agency (a scenario in which the seller's agent also represents a buyer). The first form in the packet of listing paperwork a Nevada seller must sign asks the seller to "choose" whether or not their realtor will also be allowed to represent a buyer. In most cases, that form prompts a discussion about the pros and cons of dual agency. (Here's a clear explanation of that topic from Nolo Press)

I was very interested in the home, so I called a realtor recommended by a friend, and he met me at the house with stack of paperwork for me to sign. Sitting in the front seat of his car, we set price and terms. And it took a long time because I actually read what I was signing.

One piece of paper puzzled me. It said that if the commission being offered to the agent in the driver's seat next to me was not 3 percent, I'd be obligated to pay the realtor the difference between what the seller was offering a buyer's agent and 3 percent. (Not that I'd be unwilling to do that, but I felt this was something the realtor should have negotiated with me; not just tucked it in a pack of pre-printed forms.)

But what it said next was even more disturbing. The way it was filled out, I would end up owing this realtor a commission not just on this house, but on any house I might buy over the next 6 months (whether he helped me buy it or not.) I explained that I had just met the guy, and I was not willing to commit to something like this. Moreover, this should have been discussed. "I'm not willing to sign this," I told him.

So he took the offensive forms out of the stack, and tossed them in the back seat, saying, "Ok we won't worry about that for now."

The experience reminded me of my first realtor who, in 1990, didn't tell us we'd be paying him a 3 percent commission until we were closing on the house. (But that was back when buyer's agents didn't really have a "fiduciary"duty to a buyer; we just thought they did.)

The idea of paying someone for their work was not really the issue (no one expects professionals to work for free); it was the lack of transparency that left me with a bad taste for the Buyer Brokerage form.

So when I began working as a realtor myself, I decided not to use the form. Instead, I decided I would meet buyers, spend a day with them & ask them at the end how they felt about about the experience of working with me ... if they felt I added value, I would ask for their loyalty.

Now, however, I am forced to use the buyer broker form. So I thought it would be helpful to write this post explaining to you the "choices" you have when you're confronted with this form.

1. Real Estate Commissions are Negotiable

This has always been the case. When I meet with sellers, I explain our fee structure and tell them our fee for Top Shelf marketing & service is 3 percent, and they're free to offer whatever they like to a brokerage that might bring in a buyer.  That usually prompts a discussion about what a competitive amount would be to incentivize a buyer's broker.

When my broker listed my own property for sale in Reno last year, I not only offered competitive compensation to an agent who might bring in a buyer, I offered a signing "bonus" to the agent who could close the deal before Dec. 31 (I had two offers in 2 weeks)

2. Experienced Realtors Add Value

They know their market, and perhaps more importantly, they know the other realtors in their market.  In a competitive offer situation, a realtor with strong relationships and a good reputation can give you the edge you need to negotiate a winning offer.  I had one client a few years ago who fell in love with a Marlette cabin overlooking a meadow. (And so did 16 other buyers).  We structured a winning offer, and she lives happily in the home full-time now.

In a soft market, the experienced realtor will save you money.  And an honest realtor can save you from mistakes that could cost you tons of money in the long haul.

I could write a whole book about the ins and outs of buying a home in the mountains here in Tahoe. And I've been known (often) to talk a buyer out of writing on a home that could turn into a money pit.  Lured by the unique charm of older homes, some buyers choose to move forward on homes in need of repairs and renovation nonetheless. But I try to ensure my clients do so with their eyes wide open. (You don't want to discover, with the onset of winter, that your new home is a hair above indoor camping.) Having built and remodeled homes here over the years, and served on various municipal & HOA boards, I'm fluent with local codes and I understand - intimately - our history and our neighborhoods.

More importantly, I have a reputation for  honesty & fairness. And in a market where 10 percent of the realtors are doing 90 percent of the business, that speaks volumes. 

3. Don't Work With Desperate Realtors

The lynchpin of real estate is negotiation. And it often starts well before you put pen to paper for an offer on a home.

An experienced realtor will know the agent on the other side; if not personally, they will at least have done business with them in the past. She will pick up the phone and call the other agent to gain insights that will help you craft the best offer.

A realtor who is willing to discount their commission before negotiations have even begun is desperate. And someone who is desperate for the next paycheck will be just as willing to throw you under the bus when negotiations begin with the other party. Believe me, it happens in subtle (and not-so-subtle) ways.  And it can cost you thousands in lost revenue.

The first best test of a realtor is her ability to sit down and articulate her own value. She needs to prove she can negotiate for her own compensation before you should entrust her with negotiating yours.

No Sale? No Paycheck

Commission-based jobs are tough. In real estate, you might work with someone for years without earning a dime. You don't earn a commission until you close a sale. But your business expenses -- advertising expenses, brokerage fees, MLS dues and fees to regional real estate and licensing boards -- remain the same.  And when you do close a sale, the commission is paid to your brokerage, which, in turns, pays you a percentage of the total (based, most often, on what you were able to negotiate on the basis of your annual sales volume).

That fuels a sense of desperation to just get a deal closed at any cost -- a mentality that can lead to a lack of transparency.

I'm guessing a lack of transparency also fed the mistrust that led to the class action lawsuits against the NAR.

The new rules will remove offers of buyer broker compensation from the MLS. That doesn't mean buyer brokerage compensation is going away; it just means it will be harder to discern a seller's willingness to agree to it.

Ironically, the current model arose during the 1990s amid consumer complaints that buyers were not fairly represented in real estate transactions. The agent representing the buyer was in many cases a "sub-agent" of the seller. That gave rise to the current model of offering "cooperative compensation" to a buyer's broker.

Under the new model, realtors will have to sit down with their buyers and discuss their value, negotiate their own compensation, if you will.  It's not a bad thing, but, as with any change, it might be uncomfortable until it becomes the norm.

Some say this will be the death knell to buyer's agents.  Others say it will give rise to "discount brokerages," who are willing to offer real estate services for a discounted flat fee.

I don't think so.

Discount brokerages have always been around. And there have always been those who focus on picking up a dime, only to lose a dollar in the process. Some people are willing to pay for quality and informed resources.

If I were to buy a home on the San Diego coast, a market about which I know nothing, I would interview three realtors and hire someone who had a solid track record and a reputation for honesty and fair dealing. I know in the long run that would save me money, and possibly save me from myself. (A good realtor will give you the facts to make an informed decision; the rest are just salesmen. And you can tell when someone is just all salesmanship)

Winners & Losers

When the news of the lawsuit first broke, I was baffled.  The news headlines championed "The End of the 6 percent commission." But commissions in our markets had always been negotiable, and the California contract says as much (although it also says a LOT more, making these attorney-drafted forms a tough read for consumers). The forms used in Northern Nevada (Reno etc) are easier to understand. Incline Village, which recently adopted the Las Vegas contracts, is a little murkier, but not quite as convoluted as California.

Some say more buyers will choose to represent themselves. Based on what I have learned over the past decade, that's a path fraught with risk. And in a competitive offer situation, I'd be surprised if a self-represented buyer could out-compete a seasoned realtor representing their own client.

There are also myriad point-of-sale mandates and considerations to be taken into account in the Tahoe-Truckee market, and they vary from one community to another. BMPs, upper lateral testing, HOA compliance requirements, private transfer fees .... just to name a few. In some markets, non-EPA compliant wood stoves must be removed or permanently disabled when a home or condo changes hands. In others, littoral rights or encroachments could become an issue down the road if not addressed properly prior to closing.

Inman News, which covers the real estate market, had an interesting take on the fallout from the lawsuits:

"The changes, though seemingly straightforward, have profound implications that will fundamentally alter the landscape of buying and selling homes in America," they wrote.  "The heart of the matter is regarding the removal of commission rates from the MLS, a change that might initially appear as a stride toward transparency and fairness.

"However, a closer examination reveals a potentially murky future, where the dynamics of real estate transactions become less transparent to the very individuals they are meant to serve: buyers and sellers."