It’s taken me a couple of days to process a lot of the wild commentary, knee-jerk reactions and bad reporting that’s come out since the lawsuit settlement announcement.
**This settlement still needs higher court approval to be final**
This is going to be a long read so if you’ve got some time and want to learn more about what happened in the Real Estate Industry this past Friday that will impact the way residential Real Estate is transacted, then please continue reading.
Let’s start by sharing some backstory – in 2019, lawsuits were filed in Illinois and Missouri alleging that several large brokerages conspired to require that home sellers pay homebuyer’s agent commissions in violation of federal antitrust law. Subsequently, many “copycat” lawsuits were filed in a stereotypical money grab scenario.
Now let’s dive into how most real estate transactions work in terms of commissions being paid. Real Estate is local and there are variances across the country, but most follow the same path we have here in Arizona for a long, long time. Commission is technically paid to the “Broker”, which is actually the Brokerage where the agent is employed. The Brokerage has their share of fees and such that get deducted from individual sale commissions, but that’s another story.
When someone lists their home for sale, a listing contract is executed, and that document outlines the total commission being paid by the seller and also delineates the amount being offered to a buyer’s agent. That total commission amount is part of the seller’s “closing costs” and deducted from the proceeds at closing. This meant buyers were not coming out of pocket separately for their Realtor representation and many think this practice evens out over time since you pay for real estate commissions when you sell, but not when you buy.
The commission amounts have always been negotiable… like with any industry, some people are willing to work for different rates and the quality of service differs too. You get what you pay for. The Seller can choose not to hire a Broker based upon the rate they are looking for just like a Listing Broker can choose not to work with a seller that isn’t willing to compensate how they’d like.
There is no ‘standard’ commission rate… I can say from personal experience that I have handled transactions for flat fee amounts all the way up to 10%. The latter normally being on land. Price point, transaction type and many other variables are part of the equation to determine what reasonable compensation looks like. My/our liability remains the same whether I receive $1 or $1M.
Commercial Real Estate is handled differently since most properties are not listed on one centralized MLS (multiple listing service).
Friday morning, it was announced that the National Association of Realtors (NAR) had agreed to a $418M Settlement, but there would be a number of provisions and changes to how real estate commissions work going forward as part of it.
Some “Hot Take” Headlines have included:
- Real Estate Commissions drop by 30%
- The 6% commission on buying or selling a home is gone
- National Association of Realtors agrees to slash commissions
That’s irresponsible journalism.
The whole premise has been over “de-coupling” commissions. That means whoever is being represented should pay for that representation; sellers pay their listing broker and buyers pay their buying broker. Sounds simple, but in reality, it’s NOT.
The majority of Buyers struggle to come up with the necessary funds for their minimum required down payment, let alone all the closing costs. Adding additional expense to them out of pocket just isn’t feasible for most.
I have seen other Realtors saying things like “buyers who can’t pay their real estate agent out of pocket, can negotiate the agent fee and roll it into their mortgage”. While there will most likely be changes coming to mortgage guidelines and commissions paid, today this is definitely not allowed.
Some others have said the Buyer’s Agent commission can be negotiated and then paid to the buyer as a seller “concession” through escrow, to the Buyer and thus onto their Realtor. Well… there are concession limits on different forms of financing so for the buyers that need to use those concessions for other things like closing cost assistance or in today’s market, a mortgage interest rate buydown, this doesn’t work either.
First-time buyers will suffer the most from this. It creates an even higher barrier of entry to home ownership and thus widens the wealth gap. For all the talk of Fair Housing, these changes will negatively impact minorities.
Consumers who aren’t educated on their options and don’t think they can have quality representation may go unrepresented in their home purchase. This leads to people being taken advantage of and eventual lawsuits.
Here’s what I am sure of:
- Commissions are not going away.
- Commissions have always been negotiable.
- Home Prices are not magically going to drop suddenly.
- The vast majority of Home Buyers will still hire Professionals (like me/us) to represent them when making what is normally the single largest purchase they’ll ever make.
- Buyer’s Agents will not work for free.
- We will figure it out.
Process of Commissions:
Now – Seller pays the Listing Broker and Listing Broker pay’s the Buyer’s Broker.
Future – Seller pays the Buyer and the Buyer pays the Buyer’s Broker.
Is there really a difference in this or just optics?
For the Sellers who think offering no compensation to a Buyer’s Broker is the best thing to do, I wouldn’t be so sure on that.
Option A: Offering reasonable compensation – you will garner the most amount of attention and potential buyers to your home, giving yourself the best chance at selling and for the highest price in the shortest amount of time.
Option B: Offer little or no compensation – possibly exclude a large portion of the buying market due to Realtors’ not being willing to work for free and Buyers being unwilling/unable to come out of pocket, thus decreasing your odds of selling along with a lower final sales price, after significantly longer on the market.
The Choice is Yours!
Theoretical Changes on the Horizon:
- Compensation from a Seller to a Buyer’s Broker will no longer be allowed on the MLS.
- A written agreement between a prospective Buyer and a Buyer’s Broker will be required BEFORE touring homes. (In Arizona, it’s called a Buyer Broker Agreement)
A Buyer Broker Agreement (herein referred to as BBA) is a document (contract) that is binding between the prospective Home Buyer and the Realtor (Broker) that is being hired. This Realtor is being hired to promote the best interests of the client, work diligently to find suitable properties and perform countless duties to properly represent that Buyer throughout the transaction. It also specifies the fee the Buyer’s Broker is charging for these services. If the fee cannot be obtained from the Seller, then the Buyer is responsible for this cost at closing.
These forms are nothing new… they’ve been around for decades. However, most Realtors have not used them, for a myriad of reasons. Personally, I have not used them very often during my 20+ year career. They can be difficult to enforce and it’s not solely up to the Realtor to decide whether to pursue legal action if a buying client doesn’t live up to their part of the agreement. It is the Broker’s client so the brokerage / Designated Broker normally makes the final call. Sometimes attorney fees and legal costs haven’t been worth the hassle.
For those people who see a for sale sign and want to go take a look real quick, you’ll need to handle some paperwork first. That may be daunting to buyers who aren’t serious about buying, but it would weed out some of the ‘looky-loos’.
The MLS (multiple listing service) has acted as an agreement for compensation between Brokers. Therefore, if you were a member of the MLS and Realtor Association, you were protected when it came to being compensated for bringing forward a ready, willing and able buyer. Without any commission offered by a seller being allowed on the MLS, this changes the game. Now, Buyer’s Agents will need to negotiate and get in writing the compensation amount being offered BEFORE showing a property to a potential buyer. This is a much more arduous process.
Sidenote – For Sale By Owner people have tried to remove commissions for longer than I’ve been alive. Ninety plus percent of those sellers end up paying a Buyer’s Broker and statistics have shown that those homes sell for significantly less than when listing on the open market with a Broker.
As a Professional, it’s up to me to show my value and prove my worth. Then it’s the client’s decision on whether they see it. If so, then we will work together to find the best possible outcome for everyone. Nothing has changed in this regard.
There are countless unanswered questions and soooooo many logistics to work through over the next several months… lending regulations & programs, forms revisions, industry education, etc.
Who benefits from all this? The Attorneys involved. They will receive $100M+ and whoever is part of this class action settlement will probably receive twenty dollars.
I wouldn’t be surprised if this litigation has been financed, at least partially, by Wall Street and private equity firms (such as BlackRock) or other Real Estate technology companies. Why? Easy… money from the fallout and positioning for new business models.
As always, please never hesitate with any questions for me. I am here to be a resource before, during and after the transaction.
