The Department of Justice is suing the National Association of Realtors for price fixing and restraint of trade. Several major real estate franchises have settled out of court, but I think the DOJ may end up losing this case. Here’s the situation.
As the law stands today, when a Realtor lists a property for sale, the seller agrees to pay a brokerage fee. Generally, this is done as a percentage of the sale price. Once a buyer is identified, this brokerage fee is typically split between the agents for the buyer and the seller.
The DOJ claims that when the entire brokerage fee is paid by the seller, it robs the buyer of the ability to negotiate the fee, resulting in artificially elevated housing prices. The DOJ’s argument goes that if a seller wants to net $100,000 on a sale and they agree to pay a 6 percent brokerage fee, they can set the price at $106,000 and the buyer does not have the opportunity to negotiate the fee down.
In the real world, the buyer has all the power in the world to negotiate. A buyer can simply say, “I cannot afford $106,000, but I can do $105,000.” Either Realtor can then choose whether to work for smaller fee.
It’s a strange issue for the DOJ to go after, because requiring both the buyer and the seller to pay a brokerage fee can prevent buyers with limited cash from taking advantage of the many ways a transaction can be structured.
Let’s say there’s a buyer—maybe a veteran or a first-time homebuyer—interested in taking advantage of a no-down-payment loan. Under the DOJ’s scenario, this buyer would have to pay a brokerage fee, possibly making it impossible for him or her to buy the property.
As often happens with government regulations, unintended and unhelpful consequences stem from a desire to help. If the DOJ requires buyers and sellers to each pay a brokerage fee, it may have the opposite effect to the one the DOJ is hoping for. Rather than putting downward pressure on housing prices, it may just put houses out of reach for cash-strapped buyers, exacerbating problems at a time when we are all worried about housing affordability.
Right now, there is flexibility in the system. If the DOJ wins, this will begin to change. As the law currently stands, it is against the law for anyone to tell me, an independent broker, how much or by what method to charge clients. I make this decision for myself and those who work for me. If we want to help a buyer by structuring a transaction such that the buyer does not have to come up with cash to close escrow, we can. I hope this remains the case.
If you have questions about property management or real estate, please contact me at rselzer@selzerrealty.com or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery.