May is Commission and Compensation Month here at Inman. We’ll sort through the noise and misinformation and provide you with the most up-to-date facts and strategies about how to prosper in the wake of the commission settlements. And look for straight-to-your inbox updates with Inman’s new weekly digest, Commission Chronicles.
Let’s talk about steering. At its most basic, the definition of steering is, “to take someone or something or make someone or something go in the direction in which you want him, her, or it to go.” While the word has mostly been used in a negative connotation, there are other aspects of steering that need to be understood, especially in light of the current litigation against NAR and the corresponding settlement.
Guiding your clients to their best outcome
In real estate, we routinely steer or guide buyers positively. Because of our fiduciary relationship with our clients, we work with them to keep them focused on properties they can actually afford; we point out property conditions that could spell significant negative long-term financial consequences (such as severely cracked foundations or other building defects); and we ask questions such as, “Are you comfortable living under the final approach flight path of a major airport?”
TAKE THE INMAN INTEL INDEX SURVEY FOR MAY
With the goal of helping our clients find the home of their dreams, we work with them to guide and protect them from making choices they will later regret. We also collaborate with them to locate loan programs that will be a benefit and steer them away from other options that could have dire consequences.
As agents who have signed off on the Realtor’s Code of Ethics, we are reminded that Article 1 begins with, “When representing a buyer, seller, landlord, tenant, or other client as an agent, Realtors pledge themselves to protect and promote the interests of their client.”
In other words, we provide necessary information so that buyers can make informed decisions. Having provided that information, we then honor whatever decisions they choose to make.
How to know if you are going off-course
NAR, in their Fair Housing Corner, provides a definition of steering we are more accustomed to:
“’Steering’ is the practice of influencing a buyer’s choice of communities based upon one of the protected characteristics under the Fair Housing Act, which are race, color, religion, gender, disability, familial status, or national origin. Steering occurs, for example, when real estate agents do not tell buyers about available properties that meet their criteria, or express views about communities, with the purpose of directing buyers away from or towards certain neighborhoods due to their race or other protected characteristic. If a client requests a “nice,” “good,” or “safe” neighborhood, a real estate professional could unintentionally steer a client by excluding certain areas based on his or her own perceptions of what those terms means.”
The article goes on to delineate best practices to ensure an agent does not embark on negative steering, stating that a Realtor should:
- Provide clients with listings based on their objective criteria alone.
- When a client uses vague terms such as “nice,” “good,” or “safe,” ask impartial questions to clarify their criteria, such as property features and price point.
- Only communicate objective information about neighborhoods and direct clients to third-party sources with neighborhood-specific information.
- Learn to pay attention to your unconscious biases. When evaluating what a client objectively wants, ask yourself why you have eliminated certain areas, if you have.
As an example, when asked, “Is this a safe neighborhood?” a Realtor cannot make an assessment based upon personal opinion but can provide their clients with a suggestion that they go online and research relevant statistics on their own.
Pitfalls and harmful practices
In their article entitled “How will the National Association of Realtors settlement affect the cost of selling or buying a home?” Ben Harris and Liam Marshall write:
“If the settlement is approved, the practice of tying and steering will likely come to an end — meaning that homebuyers can better negotiate on the level of commission and more easily seek alternative compensation models, such as paying by the hour, flat-fee compensation, or purchasing sharply reduced levels of service. Home sellers, too, will likely be less pressured to list through the MLS and/or with a licensed agent.”
Having been in the business almost 24 years, I have observed a lot of buyer agents and can say, without reservation, that in my experience, the majority have put their clients in front of their personal needs. Put another way, they have honored the Code of Ethics and worked with buyers to sell them homes regardless of the commission offered.
Laurie Goodman, Ted Tozer and Alexei Alexandrov, in their article titled, “More Competition in Real Estate Broker Commission Negotiations Will Lower Costs for All,” argue, “Under the current compensation structure, real estate agents have incentives to prioritize more expensive properties and less labor-intensive buyers. We believe this issue is lessened under our proposal.” Again, I would have to respectfully disagree.
In the future, it will be the buyers who do the steering.
Buyers leading the way: Pros and Cons
In the new model, a buyer’s agent will be required to have their clients sign a buyer-broker agreement before showing them properties. Since compensation will no longer be displayed on the MLS, the buyer’s agent will need to contact the listing agent in some way to determine whether or not the seller is offering a commission.
They will then pass this information along to their buyers. If there is little or no compensation, and the buyer’s agent has a minimum fee that is not met by the compensation offer by the seller, the buyers will then need to figure out how they will make up the difference if they wish to buy the property.
An additional fact here is that, depending on how the buyer-broker agreement is filled out, the buyers could be prohibited from going directly to the listing agent to try to cut a deal. If it is determined that the seller is willing to entertain an offer with compensation to the buyer’s agent built-in, then a purchase offer could be submitted.
If not, however, for those buyers who have tight margins and cannot afford to pay a separate fee to their agent in addition to their downpayment and closing costs, the choice will be obvious: pass on that property and move on. This will especially affect those with loans that do not permit buyers to compensate their agents, such as VA sales.
The ugly part of this is that the new rules will most significantly affect those whom the nation’s fair housing laws were set up to protect.
David M. Dworkin, wrote for the National Housing Conference on Sunday, March 17, 2024:
“How much the settlement will change the current system, which for home sellers and buyers is arguably one of the most expensive in the world, is anyone’s guess. According to Gary Acosta, co-founder and CEO of the National Association of Hispanic Real Estate Professionals, ‘forcing buyers to pay out-of-pocket for an agent to represent them through the process would only exacerbate affordability challenges and put homeownership out of reach for millions of would-be buyers … a ban on broker cooperation would benefit no one but the wealthiest among us.’ How much the settlement will confuse and discourage first-time homebuyers, especially people of color who are disproportionally first-time homebuyers, is much easier to understand and predict.”
Some argue that these issues will drive home prices down, making it easier for those at the bottom of the market to purchase a home. Those who espouse this opinion do not understand math. The amount of money a buyer could potentially save in commissions — even if a home’s price is cut by 10 percent — is negligible in the grand scheme of things.
The only other solution here is to dramatically lower the compensation paid to buyer agents. With the majority of agents across the country already earning a less-than-stellar wage (the average, as stated by NAR, was $46,014 a year as of Jan. 26, 2024) a movement to decrease the compensation for buyer agents would initiate a final form of ugly steering that would impact the market: buyer agents would steer themselves out of the industry and into more lucrative jobs, such as working for Walmart.
Carl Medford is the CEO of The Medford Team.
