2 Months In - It's not what you were told.
On August 17th, the much-talked-about changes from the Sitzer-Burnett class action settlement were implemented, and if you believed the headlines, you’d think the real estate world had been turned upside down:
“The Biggest Change to Real Estate in 100 Years!”
“The Way You Buy and Sell Real Estate Has Changed Forever!”
Today, two months in, things look much less dramatic than the media predicted. As usual, in their rush to grab attention and boost ratings, the press got it wrong. All this misinformation has led to a lot of confusion among consumers—and too many professionals—about what these changes really mean.
The truth? The industry has seen some practice shifts, but they’re far from revolutionary. There are a few new dynamics at play, some positive and some negative, but the core process of buying and selling homes, and working with professional Realtors, remains mostly unchanged.
In this article, I’ll address the 7 most common myths about the settlement and the real impact on home buyers and sellers.
The 7 Settlement Myths
It forces real estate brokers to reduce their fees.
It will prohibit sellers from paying a fee to a buyer’s agent.
It reduces the total cost of transaction services as sellers will no longer pay buyer agent compensation.
It is a fantastic win for buyers who will now be able to negotiate the fee for representation.
Buyers will need to pay their own fees out of pocket.
It will bring home prices down.
This is the biggest change in real estate in the last 100 years.
Myth #1: The settlement forces real estate brokers to reduce their fees.
False
Fees for real estate services have always been negotiable, and this settlement does nothing to change that. There has never been a law or practice setting fixed fees; brokerages are still free to determine their pricing policies based on their business models and competitive strategies.
The real estate field is fiercely competitive, with agents offering a range of service levels and fees. Consumers have always had the flexibility to choose the level and quality of service they desire at a variety of price points. This remains unchanged.
Consider this retail analogy: there is Nordstrom and Walmart. Both are successful but cater to different consumer needs. Walmart offers inexpensive, lower-quality products with minimal service, while Nordstrom provides high-quality products with high-touch, personalized service.
Real estate is similar. In the Peninsula and Silicon Valley, more sophisticated consumers tend to prefer high-touch, professional service due to the complexity and risks associated with real estate transactions.
This preference is reflected in the market data. For example, Redfin, a leading discount broker, has barely a 1% market share in our area despite years of presence and substantial marketing. Many other discount brokerages have also struggled or failed to gain traction.
Myth #2: The settlement will prohibit sellers from paying a commission to a buyer’s agent.
False
The settlement does not prohibit sellers from offering compensation to a buyer’s agent.
The important consideration, in fact, is whether the seller is truly paying the compensation at all, or just creating an efficient payment mechanism. To say this is an additional cost to the seller implies irrationally inefficient economic behavior by the buyer.
Economically speaking, the cost of the buyer’s agent’s fee has always been borne by the buyer, even if it was paid indirectly through the seller. The major advantage to this system is that it allows buyers to roll the fee into their mortgage. Given that the most common barrier to home ownership is the downpayment, this is an important mechanism.
The key change today is that sellers can no longer make blanket offers of compensation to a buyer’s agent through the MLS. However, sellers can and do still offer and pay this compensation directly.
In practice, around 95% of sales in our market continue to pay compensation to buyer brokers. This is consistent with the historical norm. Structurally, the only real change is that it is now a term in the purchase contract.
Myth #3: The settlement reduces the total cost of transaction services as sellers will no longer pay buyer agent compensation.
False
The settlement does not reduce the total cost of transaction services. While sellers may choose to only compensate their own agent, the buyer’s agent’s services are not free. This means buyers will have to compensate their agent directly, which will be reflected in the terms of the purchase agreement.
In practice, buyers may include a term in their offer requesting the seller to cover the buyer’s agent’s fee, provide other concessions, or adjust the purchase price accordingly.
Sellers should also consider the impact that not offering compensation to buyer’s agents will have on the pool of potential buyers. Many buyers struggle with the down payment, and excluding professional representation costs from the transaction might make it harder for some buyers to afford the home. This could lead some buyers to pass on properties where they cannot finance their closing costs.
Myth #4: The settlement is a win for buyers who will now be able to negotiate the fee for representation.
Partially True
Buyers have always had the ability to negotiate the fee for representation. In that respect, nothing has changed. What’s different for buyers now is that they’ll first negotiate the fee directly with their agent and then have to negotiate again with the seller regarding how that fee is paid.
The most positive outcome of this settlement is the increased transparency around buyer’s agent fees. For far too long, many buyer agents implied—or outright told—clients that their services were free, claiming the seller was footing the bill. Many consumers were happy to believe this, going through the entire buying process without understanding how, or how much, they were paying for their agent’s services.
Under the new paradigm, buyers will know the fee from day one and, while they may not pay it out of pocket, they’ll understand that they are ultimately responsible for it.
Side note: This has been a problem for years in the mortgage industry, with lenders offering so-called “no-cost refis.” There’s no such thing. The costs are often financed so you don’t pay out of pocket, but trust me, you’re paying those costs. Nobody works for free.
Myth #5: Buyers will have to pay their fees out of pocket.
Possibly
New rules now require buyers to have a written representation agreement with their broker, which outlines, among other things, the broker’s fee. While buyers are responsible for paying this fee, that doesn’t necessarily mean they will be paying out of pocket.
Sellers can and do still offer compensation to the buyer’s agent, but they can no longer make a blanket offer via the MLS. Typically, a purchase offer will include a term asking the seller to cover the buyer’s broker fee or provide a concession to help offset the cost. (The distinction between these two options is real but subtle, and not particularly important for our purposes today.)
In the end, the seller’s main focus is always the net proceeds from the sale, so negotiations may lead to the seller paying all, some, or none of the buyer’s broker fee. If the seller chooses not to cover any fees, then yes, the buyer would need to pay their broker directly or move on to another property.
Sellers continue to offer compensation in roughly 95% of transactions in our markets, on par with historical norms. This often benefits the seller by attracting a broader pool of potential buyers, and may even result in a higher sales price.
It’s also worth noting that in the Silicon Valley/Peninsula market, about 20% of transactions are all-cash. For cash buyers, there’s no real benefit to having the broker’s fee paid via the purchase agreement.
Myth #6: The settlement will bring home prices down.
False
Home prices, like most products, are driven primarily by supply and demand. Professional fees are proportionately small and have a negligible impact on prices.
The reality is that the U.S. faces a massive housing shortfall that could take decades to overcome at current building rates. In the Bay Area, low housing inventory has been the norm for nearly a century due to a combination of geographic, economic, and political factors—none of which are likely to change anytime soon.
While interest rates are higher than the artificially low levels we saw during the pandemic, they’re still historically moderate. Our local economy remains strong, with low unemployment, high incomes, and a stock market that continues to perform well.
As interest rates begin to come down, all these factors will continue driving home prices, regardless of any changes in real estate practices.
Myth #7: This is the biggest change in real estate in the last 100 years.
False
Not even close! While the real estate industry has been evolving for decades, this is a relative non-event. One of the biggest structural changes came with the internet and the public availability of listing inventory in the 1990s.
Before that, for-sale inventory was distributed to brokerages in large, bound books that remained within the brokerage offices. Agents would advertise homes in newspapers, but listings were proprietary information, closely guarded by brokers and agents. If you wanted to buy a house, you had to rely almost entirely on an agent to know what was available. You can imagine the uproar when MLSs began syndicating listings to public websites. (Believe it or not, there are still agents who are bitter about this!)
That was a true sea change for the industry. It forced brokers and agents to shift from being gatekeepers of information to delivering real, value-added professional services to consumers. This focus on service has continued to evolve over the past 30 years.
The practice changes that took effect on August 17th are simply a minor evolution in the ongoing push for greater transparency, higher value, and increased professionalism in the industry.
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