by colleague Steve Crossland
The recent Realtor industry lawsuit and news reports have spurred a lot of discussion on the Realtor forums I frequent. I'd like to take a moment to share my perspective on the home buying and selling process, how Realtors are compensated, and how 'Uncompensated Effort' fits into the broader conversation.
Realtors earn a 'Success Fee.' This means we do everything for free up until the point of closing and funding. Then, we're paid a commission. Efforts that don't result in a closing are what I call 'Uncompensated Effort.' Every Realtor absorbs this overhead. It's part of how the system works, to the benefit of consumers. Both buyers and sellers appreciate this system because it allows consumers to avail themselves of services at no cost, even if they never purchase a house or their home never sells.
For instance, a buyer might contact an Austin Realtor recommended by a friend or family member, have an initial conversation, and agree to work with that Realtor. They might fly into Austin and spend three nights in a hotel on a scouting trip. I've had many buyer clients do this over the years. During that stay, you'd be chauffeured around Austin to see neighborhoods and houses, and receive information about the real estate market, the various communities, current affairs, pros and cons of different areas, commute times, schools, and area amenities and lifestyle activities. You can ask unlimited questions and receive honest, qualified answers and opinions about anything you want to know (assuming you've selected a competent agent, as many unfortunately are not).
Having lived in Austin since 1985, I have a wealth of knowledge to share. Let's say you view 8 or 12 houses on Friday, then 6 or 8 more on Saturday, and decide that Austin isn't the right fit for you after all. Maybe the July heat was a dealbreaker, or you realized that your budget and the desire for better schools meant a longer commute than you wanted, despite being warned upfront. You part ways and owe nothing. But the service you received, the uncompensated effort given to you by the Realtor, and the knowledge you gained were invaluable to you and your family as you contemplate your options.
Similarly, when a seller hires a listing agent, we guide you through everything that needs to be done to properly prepare and price a home, including all of the backend tasks most consumers never see, and the marketing efforts. If, ultimately, that home fails to sell and you decide to take it off the market, you owe nothing. Everything you received was provided for free. We operate this way for two reasons: Consumers prefer it. The system facilitates the buy/sell process in ways that may not be fully appreciated by the average person. Most people move every 8 years, so it's not something you think about constantly. But when life changes—like receiving a relocation offer or having a grandchild—you can start working with a Realtor in that city with no upfront costs. Realtors, especially those of us who understand sales, like it too. The deals that close more than make up 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.
Yes, any single deal might look like the agent didn't do much, but the commissions from those closed deals allow all of the aforementioned efforts to happen at no cost. Thus, the system is built around 'success fees' supporting the 'free' efforts that draw the necessary number of buyers into the process to get homes sold. And 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. And it's this commission appearing on the seller's side of the settlement statement that's at the heart of this big lawsuit.
Lastly, nothing I've said touches on how commissions are calculated. I won't argue with someone who thinks X% of the sales price might be 'too high.' There are valid arguments and examples of this that Realtors should not shy away from. But I'd prefer to have that discussion with individuals who understand everything I've just covered about how the Success Fee system functions within an industry that everyone wants to keep working well overall.
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