Buyer agency: a crucial historical shift in real estate

Those too young to remember the wild west of real estate believe that real estate commissions have always been evenly split between seller’s and buyer’s agents, with each receiving a portion of the sale price. This misconception obscures the reality that, historically, buyers lacked formal representation. Initially, the entire commission percentage was pocketed by the listing agent, who solely represented the seller’s interests.

Before the 1990s, the concept of “buyer beware” prevailed, leaving buyers without representation and vulnerable to exploitation or disadvantage. Many buyers struggled with the financial burden of covering closing costs, making it difficult or impossible to also cover the compensation for agent representation.

Buyer representation becomes mainstream

The dramatic volume of lawsuits filed by aggrieved buyers highlighted the urgent need for change—a need our government in all of its infinite wisdom (sarcasm intended) failed to address at the time. Stepping up to this challenge, real estate professionals pioneered a solution to safeguard these unrepresented buyers. This innovation, known as commission sharing or “cooperative compensation,” fundamentally altered the real estate landscape and better protected buyers.

In this new arrangement, listing agents agreed to divide their commissions, offering a portion to another agent who would pledge loyalty and fiduciary duty to the buyer. This system was not introduced by increasing the seller’s commission percentage burden but rather by redistributing the existing commission they already received to accommodate the emergence of buyer agency dedicated to advocating for the buyer’s interests.

This paradigm shift significantly benefited all parties involved. Listing agents were motivated to share their commissions because it reduced their workload, and even their costs as many had previously compensated sub-agents for assisting with buyer-related tasks without officially representing the buyer. Now, real estate professionals champion the cause of buyers, managing over 100 tasks in each transaction to ensure their clients’ best interests are served.

However, this new evolution in buyer agency, championed by an ill-informed or perhaps ill-intended Department of Justice and greedy lawyers, may add some serious challenges for future homebuyers. Let’s delve into the potential negative consequences of diminishing or eliminating buyer representation, underscoring why this development matters more than ever in today’s real estate market.

The unintended consequences of eliminating buyer agency

1. The peril of no representation: The unseen cost

The prospect of buyers directly compensating their agents, rather than relying on sellers to do so, might appear equitable at first glance. However, this shift risks significant repercussions, particularly for buyers with limited capital. Many buyers, especially first-timers, might find themselves unable to afford representation, potentially foregoing it altogether.

With the advancements in technology, finding homes online has become easy and straightforward. Yet, the complexity of real estate transactions lies beyond the initial online search. Buyer’s agents facilitates so much more than just being a glorified door-opener, like many outsiders would have people believe.

Even on that topic, without this dedicated representation, a buyer would face the logistical nightmare of coordinating viewings with multiple listing agents, a task hindered by inefficiencies and delays. The low supply of available inventory and the fast pace of the real estate market means desirable properties might be off the market before a buyer can view the homes on their list. It will likely take several days, multiple trips, and hours between showings to see homes.

Moreover, the absence of a buyer’s agent leaves the buyer to navigate the intricate process of drafting offers, negotiating repairs and other terms, as well as understanding legal intricacies such as mineral or water rights, easements, and even the transfer of livestock on agricultural properties to name just a few. These are areas where professional expertise is not just beneficial but essential.

A fundamental shift away from buyer agency not only burdens the buyer but also the listing agent, who would need to assume a greater workload, potentially reverting to higher commission rates reminiscent of the pre-buyer agency era. With the necessity to manage showings across multiple listings, the listing agent might resort to employing sub-agents, further inflating operational costs and, by extension, seller commissions.

The reintroduction of higher seller commissions to compensate for increased responsibilities on the listing side suggests a full-circle return to less efficient, more costly practices, and a dangerous lack of buyer representation, undermining the progress achieved through the advent of dedicated buyer agency.

2. The ripple effect: Fewer buyers, declining equity

As indicated earlier, introducing a system where buyers are solely responsible for their agent’s fees might sound more equitable; however, this change harbors the potential for significant unintended economic consequences. One of the most concerning is the possibility of a diminished pool of buyers. Faced with the additional financial burden of compensating an agent along with the confusion and complexity of the process, some prospective buyers may find the prospect of purchasing a home too intimidating or financially unfeasible, opting instead to delay or abandon their homebuying plans.

This reduction in buyer participation could lead to a decrease in demand for homes, exerting downward pressure on property prices. While lower home prices might appear advantageous to buyers who navigate the market without professional guidance, they pose a considerable risk to current homeowners. A drop in demand not only slows the market but can erode home equity, leaving homeowners with diminished assets.

Ironically, the attempt to save money by refusing to assist with buyer agent fees could result in homeowners needing to reduce their selling price by more than the perceived savings from not covering the buyer’s agent’s commission. For instance, homeowners trying to circumvent a buyer’s agent commission might find themselves reducing their home price by an even greater percentage to attract buyers in a less competitive market.

This scenario underscores a critical paradox: efforts to reduce costs and streamline the buying process by shifting financial responsibilities could inadvertently destabilize the market, affecting both buyers and sellers negatively. Such a shift risks undermining the delicate balance that professional representation helps to maintain in the real estate ecosystem.

3. Low-income homebuyers at risk

The Department of Justice’s (DOJ) drive to prohibit sellers from compensating buyer’s agents poses a particularly severe challenge for low-income homebuyers. While affluent purchasers of million-dollar properties may navigate the market with ease, regardless of representation costs, they represent a mere 7% of the real estate market. Conversely, properties priced below $400,000—encompassing around half of all U.S. home sales—often attract buyers who are stretching their financial limits to achieve homeownership.

For these buyers, every dollar matters. Many are already shouldering the burdens of high debt-to-income ratios, mortgage insurance premiums, and elevated interest rates to secure a foothold in homeownership. Introducing additional costs for buyer representation could be the straw that breaks the camel’s back, forcing them out of the market altogether. This demographic is less likely to absorb new fees without significant hardship and may forego representation, increasing their vulnerability to adverse outcomes in real estate transactions.

This policy change threatens not just the affordability of homeownership for the financially constrained but also the very fabric of market accessibility. By making professional guidance a luxury rather than a standard provision, the push by the DOJ risks exacerbating inequalities within the housing market. It is the most economically vulnerable and underserved populations who stand to lose the most, facing heightened barriers to securing safe, affordable housing.

The consequences of such a shift extend beyond individual transactions, potentially undermining broader efforts to ensure equitable access to homeownership. As more low-income buyers either exit the market or proceed without adequate representation, the likelihood of negative outcomes—from unfavorable terms to outright exploitation—increases. This not only affects the immediate parties involved but also has ripple effects throughout the community, as fewer individuals can transition from renters to homeowners, hindering the wealth-building potential that property ownership can provide.

A path forward in protecting buyers

As we navigate the complexities and proposed changes in the real estate market, it’s crucial to remember the strides we’ve made in ensuring buyer protection. The evolution of buyer agency has been a significant milestone in creating a more balanced and fair market. However, as we’ve seen, challenges remain, particularly for those most vulnerable.

It is in our hands—real estate professionals, policymakers, and the public—to advocate for practices that protect all participants in the market, especially the buyers who are most at risk. This means actively engaging in dialogues, supporting policies that maintain the integrity of buyer representation, and seeking innovative solutions that ensure affordability and access for all.

Let this moment be a call to action, not a cause for despair. History shows that when faced with adversity, the real estate community can adapt and emerge stronger. By standing steadfast in our commitment to buyer protection, we can ensure that the dream of homeownership remains within reach for everyone, regardless of their financial standing. Homeowners need to remember that they too were once home buyers, personally and financially benefiting from buyer agency.

Joshua Harley is the founder of Fathom Holdings, a RealTrends 500 brokerage.