The National Association of REALTORS® (NAR) and several top US brokerages settled
a major real estate commission lawsuit back in March. Soon after, the buzz began: one
article reported that real estate agents “lost their 6% commission;” another proclaimed
that “6% commissions are a thing of the past.” Sensational headlines get good
engagement, but they don’t always get it right.
The settlement doesn’t reduce the amount of money agents charge for their services.
Real estate commissions have always been negotiable, and that’s not changing.
Instead, the settlement changes the relationship between buyers and their agents,
requires more disclosures and paperwork, and regulates some aspects of seller-paid
buyer agent compensation. That’s hard to summarize in a catchy snippet, and as a
result a lot of people are confused and misunderstand the implications.
What exactly are the new rules? Most importantly, what do they mean for buyers
and sellers? I’ll break it down, but to do that I need to first explain how cooperative
compensation works.
Cooperative compensation
In 1913, NAR established the Buyer Broker Commission Rule, later dubbed
cooperative compensation. This required member agents to evenly split their fees
with agents who brought them a buyer. At the time, agents only worked for sellers, so
this was a way to incentivize agents to take buyers to their competitors’ listings. This
improved outcomes for both buyers and sellers—more buyer competition benefited
sellers and agent representation benefitted buyers—and it became the norm for the
next hundred years.
Eventually, the requirement to split commissions ended, but the practice continued. In
the 1990s, when Multiple Listing Services (MLSs) moved online, NAR required listings
on participating MLSs to display a buyer-broker commission offer. In a recent statement,
NAR explained that the rule only required agents to “communicate an offer of
compensation… any amount, including zero.”
Though sellers were free to offer little or no compensation to buyer agents, this rarely
happened. Since 1913, sellers have typically paid the fees for both their agent and
the buyer’s agent.
The lawsuit
In March 2019, homeowners sued NAR and the four largest US brokerages, alleging
that cooperative compensation artificially inflated sellers’ commission costs. NAR
strongly contested this, but without admitting fault they agreed to settle the suit in March
of this year. NAR agreed to pay $418 Million to eligible homeowners, and other
defendants agreed to pay several hundred million more.
They also agreed to:
● Remove buyer-agent commission offers from the Multiple Listing Service MLS
(but offers will still be allowed), as of August 17
● Require buyer agents to establish a representation agreement, including a
compensation rate, with their buyers
● Prohibit sellers from paying buyer agents more than what’s listed in their buyer
agreement
Though offers of buyer agent compensation will no longer be allowed to be shown on
the MLS, sellers will still be allowed to pay buyer agents. These offers can be advertised
on agents’ websites and discussed openly. And though buyers will be required to agree
to a compensation rate with their agents, they will be allowed to negotiate to get the
seller to pay it (or, of course, to choose not to buy a home).
Changes for sellers
Headlines are saying “no more 6%” because, going forward, more sellers than before
may choose not to offer compensation to a buyer’s agent. This may be the case, but it is
important to remember that sellers have always had this choice. Agents will continue
to present the seller with all available options and help them make an informed decision.
Sellers may offer:
1. No buyer agent fee, without concessions: the buyer pays their own agent plus
other out-of-pocket expenses, such as closing costs. The seller only pays their
agent.
2. No buyer agent fee, with concessions: the buyer pays their own agent the
agreed-upon rate, but the seller covers other out-of-pocket costs for the buyer.
3. Full buyer agent fee, with or without concessions: the seller pays the buyer
agent’s fee and may or may not offer concessions, such as closing costs. This
was the common pre-settlement practice.
4. Partial buyer agent fee, with or without concessions: the seller pays a portion
of the buyer agent commission and the buyer pays the rest of the agreed-upon
amount. The seller may or may not cover other expenses for the buyer.
These changes only recently took effect, but due to the already high cost of home
buying I expect buyers to want to know what their total cost and out-of-pocket will be
before bidding on a listing. We can also expect some sellers not to offer much in the
way of buyer agent compensation or concessions, especially if the market remains tight.
This will give sellers who do, a competitive advantage in the months ahead.
Changes for buyers
Buyer agents are now required to sign compensation agreements with their clients
before showing them a single home, and these contracts will require buyers to pay
their agent whatever fee they negotiated if they purchase a home. Sellers can pay this
fee for the buyer, but not more than the agreed-upon rate. If a seller offers to pay less
than what the agreement states, the buyer will pay the rest.
Paying a buyer agent fee, out-of-pocket, to buy a home will further stretch buyers who
are already strapped. For this reason, I do expect many sellers to continue to offer
buyer-agent compensation (or to at least structure the deal to help offset it), and for
many buyers to therefore continue hiring agents. Some buyers, however, may:
1. Go it alone. These buyers will truly be on their own, as the seller’s agent will be
working in the seller’s best interest only.
2. Hire a lawyer. Real estate attorneys already exist, but historically they’ve been
hired for special transfers or to assist with certain aspects. It is hard to imagine
an attorney giving up their weekend to show a buyer 17 homes.
3. Hire a discount broker / service. Discount brokers / services have existed for
decades, but they do not offer the same protections and services as full time /
licensed agents.
Bottom line
The changes that the NAR settlement will bring about for the real estate industry are
more nuanced than headlines are making it seem. And in all this noise, remember that
agent compensation has and will remain negotiable.
Different markets will have different reactions to these changes. For this reason, those
who are looking to buy and sell in Ventura should look for an agent with a good track
record and a lot of experience.
If you’re considering a move, give me a call at 805.707.4121. I am eager to answer
your questions and share how I’m helping my own clients succeed in this post-
settlement environment.
