The sudden wave of lawsuits against real estate brokerages and associations has sparked doubt among consumers about the value of real estate agents.

Buyer Agent Compensation

At the center of many of these recent lawsuits against major players in the real estate industry is compensation for buyers' agents. In most cases, home sellers pay their listing agents a commission to help them sell their homes. The commission amount and other terms and conditions of the business relationships are enumerated in the listing agreements, which both home sellers and listing agents sign. And the vast majority of listing agreements include the home seller's consent to allow the listing agent to compensate a cooperating broker for procuring a buyer. In other words, the listing agent is allowed to pay a commission to a buyer's agent, if necessary. This compensation for the buyer's agent comes directly from the listing agent's commission, so it's not an additional cost to the home seller.

Despite agreeing to these terms by signing listing agreements, many home sellers have joined class action lawsuits, claiming that they shouldn't have to compensate buyers' agents, even if that compensation is technically paid by their listing agents. The home sellers and their attorneys have further claimed that real estate brokerages and associations have conspired to inflate and fix commission prices by limiting consumers' choices in an otherwise free market.

Regardless of the eventual outcome of these lawsuits, consumer skepticism about real estate commissions and the industry as a whole has risen sharply in light of these allegations. Home buyers and sellers across the United States are wondering why real estate agents get paid so much and are questioning whether or not they even need help from real estate agents, given the information and marketing tools available at their fingertips.

Quick History Lesson

If home buyers can easily find homes on Zillow and other search sites, then why do buyers' agents even exist? If home buyers didn't hire agents in the first place, that would cut the home sellers' commission costs nearly in half and then sellers could pass that savings on to buyers. Right?

These questions have been circulating since homes have been marketed online. Although it's true that home buyers have much greater access to listings now than they did before the internet, there are many other reasons why home buyers hire real estate agents to help them. In fact, we can easily understand the value of buyers' agents by simply reviewing the recent history of the real estate industry - back to a time when buyer agency didn't exist.

Before homes were marketed online, real estate agents published their listings in a book, which was kept in their office. And they didn't share their listings with other agents, because there was no system set up to offer other agents any compensation for finding a buyer for their listings. Real estate agents relied on home buyers to contact them directly when they saw their sign in the yard or came across one of their ads in the newspaper.

Back then, home buyers were on their own. They had to drive through neighborhoods, browse publications, and visit every real estate office to see what homes were for sale. And when home buyers wanted to schedule a showing, the listing agent (who represented the sellers) would show them the home and try to convince them to write an offer. Although I never experienced this scenario first-hand, I imagine it was much like going to the dealership to buy a car. The salesman at the dealership is trying desperately to sell you a car and only represents the interests of the dealership and his own interests in earning a commission.

To make matters worse, home buyers didn't have any professional guidance regarding what price and terms were reasonable and fair when writing an offer to buy a home. "Buyer beware" was a common axiom at the time, designed to place all liability on the shoulders of home buyers rather than home sellers and their listing agents. After getting a home under contract, home buyers had to navigate the intricate details of the inspection, appraisal, and financing on their own as well. All things considered, home buyers were left in a weak negotiating position and were vulnerable to making costly mistakes.

Purpose of Buyer Agency

If we fast forward to modern-day real estate practices, we see a stark contrast in home buyers' experience when compared to the old-fashioned way of buying a home. Of course, it's pretty easy for home buyers to find their own homes online, so buyers' agents don't offer...

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