“You’re a Realtor? Then all you do is drive around in a big car and put signs in front yards, right?”
I’ve heard variations of this notion more than a few times over the past couple of years. After all, everyone knew the real estate market was hotter than it had been in recent memory, and it wasn’t out of the question for a newly listed property to have multiple offers above the asking price mere hours after hitting the local broker marketplace.
This was the norm, and these favorable market conditions led some people to enter the real estate profession thinking real estate was an easy gig – a great way to make a quick buck.
And then what happened? To fight inflation, the Federal Reserve Board raised interest rates to their highest point in 20 years. Rates rose to more than 7%, and suddenly, real estate wasn’t so “easy.”
Having been a Realtor since 2007, I’ve experienced fast and not-so-fast markets, which is what most of the country is experiencing now. Sure, folks are still purchasing homes and securing business space, but recent months have been a “back to basics” period for those who practice residential and commercial real estate.
For Realtors, “back to basics” means fully educating our clients and the public on what’s involved in a successful real estate transaction. The National Association of Realtors (NAR) recently compiled a list of the many services Realtors provide. The catalog of 179 items spans every aspect of the transaction, from preparing the preliminary Comparable Market Analysis and establishing fair market value to entering property data in the Multiple Listing Service and negotiating from offer to closing.
So, there’s much more involved than just putting a sign in the front yard. And, like any working person, we don’t work for free.
You might have seen a recent court ruling involving the NAR in which the plaintiffs claimed real estate commission rates were too high, buyer brokers were paid too much, and the NAR’s rules and industry practices led to set pricing. Those of us in the real estate industry disagree strongly with this ruling, and the NAR has begun the appeal process.
In reality, the NAR’s rules prioritize consumers, support market-driven pricing and promote business competition. The NAR’s guidance for local broker marketplaces ensures consumers get comprehensive, equitable, transparent and reliable home information, and that brokerages of any size, service, or pricing model get a fair opportunity to compete.
So, how does real estate compensation work exactly? Simply put, the seller and that person’s listing broker agree on the amount the listing broker will receive for the services they provide to the seller. The listing broker and seller also discuss and agree upon an amount the listing broker will pay a broker who successfully closes the transaction with a ready, willing and able buyer.
Still, the details in these matters can be confusing, so let’s look at some key facts.
Commissions are negotiable
Commissions can be negotiated at any point throughout the transaction, including at the outset, after the results of a home inspection, and after an offer has been made. Sellers negotiate the fee they’re willing to pay for their broker’s services, as well as the fee they’re willing to pay a buyer broker for finding someone who wants to purchase their home.
Different commission models
Buyers have many different options when it comes to selecting a broker, including everything from the commission model to the agent’s areas of expertise and approach to customer service.
In the full-service approach, commissions are negotiable at any point during the homebuying process. The reduced service, or discounted, fee model allows for flexible offerings and pricing. The flat fee approach allows buyers to negotiate a set price per service.
Markets sets commission rates
The free market organically establishes commission costs within local real estate markets based on service, consumer preference and what the market can bear, among other things. The NAR’s guidelines ensure the listing broker tells every participant in their local broker marketplace what the amount of compensation to the buyer’s broker will be for closing the sale.
That amount is determined by the seller and the seller’s broker. Commissions fluctuate over time, including decreasing steadily in recent years and falling to a new low of 4.94% in 2020.
Not a part of mortgage
Unlike mortgage broker fees, closing costs and appraisals, real estate sales commissions are not linked to the mortgage loan production and therefore cannot be financed.
By definition, a mortgage is a lien against a property, which means the property itself serves as the asset the lender can take back to recoup value if the borrower defaults. Commissions, on the other hand, are based on a service provided, and there’s no way for the lender to recover the value of the service in the event of a default on the mortgage.
Further, lenders rely on investors to purchase mortgages to help fund these loans. If mortgages started to cover costs not secured by the property, lenders and investors might be less willing to lend and invest, and mortgages could become more costly.
Strict code of ethics
The NAR’s Code of Ethics binds Realtors to always further their clients’ best interests, including showing homes that meet the buyers’ needs, regardless of the compensation offered.
Additionally, in November 2020, the NAR introduced its Fair House Action Plan (ACT), which emphasizes (A)ccountability, (C)ulture Change and (T)raining to ensure America’s 1.5 million Realtors are doing everything possible to protect housing rights in America.
Because of broker cooperation, buyer and seller brokers are incentivized to share their information through their local independent broker data hub. Without access to complete, transparent and accessible data, smaller brokerages and new entrants would have only piecemeal information at hand, and would be unable to offer as many options to buyers and sellers. Larger brokerages would therefore dominate local markets, creating emerging behemoths that would drive up costs.
Contributions to local marketplaces
The U.S. model has long been – and is still – viewed as the best option for consumers around the world. Buyers abroad are forced to wade through complex and fragmented markets and work with multiple brokerages. Since there’s no exclusivity, sales can fall through.
Generally, the homebuying process abroad is similar to buying a car in the United States; you have to go dealer to dealer, which is time consuming and impersonal.
It’s also common for brokers in other countries to charge taxes and fees that add up to costs that are the equivalent to or greater than those associated with buying and selling a property in the U.S., yet provide only a fraction of the services consumers receive here.
Still have questions? Visit the website Competition.Realtor to get a more complete view of how the NAR and Realtors help consumers with their most valuable investment.
Realtors are everyday working Americans who are experts at helping consumers navigate the complexities of home purchases and advocates for fair housing and wealth-building for all.
Real estate transactions are no walk in the park, but as Realtors, we’re compensated to provide the best service to our clients and their homebuying and selling needs, and we’ll continue to serve our clients and communities to the best of our abilities. That’s Who We R.
Founded in 1912, Greater Chattanooga Realtors is the voice for real estate in Greater Chattanooga. A regional organization with more than 2,700 members, Greater Chattanooga Realtors serves Hamilton and Sequatchie counties in southeast Tennessee and Catoosa, Dade, and Walker counties in northwest Georgia. The Association is one of approximately 1,100 local associations/board of Realtors nationwide that comprise the National Association of Realtors. Greater Chattanooga Realtors owns and operates a Multiple Listing Service (MLS), which is one of approximately 600 MLSs in the country and services more than 3,000 MLS users. Local Association membership consists of Realtors servicing the Greater Chattanooga area and specializing in a variety of disciplines – appraisal, commercial, industrial, land, multifamily, property management and residential. Working alongside Realtors are our Affiliate members, who represent related industries in sympathy with the objectives of the Association. Our Affiliate members include mortgage lenders, home inspectors, title and closing services, pest inspection and control and insurance.