As you might have seen or heard, the hot topic in the real estate world is the commission lawsuit settlement. Today we’re unpacking what this means for you as a consumer buyer or seller. Whether you’re thinking of buying or selling a house, this affects you!
How Did it Start?
There were 2 lawsuits, one in MO and one in IL. One of the lawsuits filed claimed that the NAR along with large major brokerages in that state were colluding to inflate and keep real estate commissions high. The other lawsuit claimed that why should sellers have to pay for a buyer’s agent’s commission? They felt that this was unfair for a seller to pay for the cost of a buyer’s agent who would come in and essentially negotiate against the seller.
Are these claims accurate?
Let’s look at claim #1. Is NAR, brokerages, and real estate agents colluding to keep commissions artificially high? The truth is that as Realtors, and members of the NAR, we are not allowed to even talk about commissions between each other as Realtors. For the very reason of being accused of price fixing. There is no such thing as a standard commission rate. The commission was always negotiable when working with sellers or buyers. The so-called standard 6% commission is just a myth. The fact is that we are in a capitalist market. There are many brokerages and agents out there that charge less than that. There are flat fee or limited service brokerages out there. Their business model is that all they do is enter your listing into the MLS for a couple hundred bucks. But you as a consumer must realize that you pay for what you get. So the quality of service and guidance you get during the sale of your home may not be the best. In addition, as a consumer, it’s only natural to shop around and interview multiple agents before you hire one. If you’re not doing this, then you’re doing a disservice to yourself. Not all agents have the same level of experience, quality of service, expertise, or skill sets for your situation. For example, if you were thinking of selling your home, you probably wouldn’t hire an agent whose majority of their business is selling vacant land.
Moving on to claim #2. Sellers do not want to “pay” a co-broke commission for the cost of a buyer’s agent. The purpose of a co-broke commission has always been that it would be advertised on the MLS for buyer agents to see how much a seller was offering them if their buyer purchased that home. So it is an incentive for buyer agents to bring their buyers into the doors of sellers’ homes. Now agents are supposed to work in the best interest of their buyers. So if a buyer wants to see a house with a low co-broke commission offer or $0 even. Then they are supposed to inform their buyer that this seller is not offering co-broke commission or not enough per our agreed commission between me as your agent and you as my client. That means you, the buyer, will need to fork out the difference out of your pocket should you purchase this home. If the buyer had the funds, they would continue to purchase the home and pay the difference in commission if there was one. Buyer agents are not supposed to “steer” clients to show only homes where a high co-broke commission is being offered. However, if the buyer instructs the agent that I have no funds to pay you out of pocket, let’s only go look at homes where the seller agrees to cover your commission. Now that’s valid because your client has instructed you to do so.
The second piece about this is this lawsuit is over why a seller should even pay for the cost of a buyer’s agent. We can probably argue about this all day in circles. As we know, it takes 2 parties to close a deal. On the closing settlement, typically in most cases the commission payout is taken from the seller’s proceeds and paid to the listing agent’s brokerage. Then as we discussed above, some of this is split as a co-broke commission to the buyer’s agent. Some will say it doesn’t make any sense as to why a seller should have to pay for the cost of a buyer’s agent to come in and argue against them during the transaction. Buyers should pay for their agent out of their pocket. Technically the commission amount that is paid to both agents is funded by the buyer as that is included in the cost of purchasing the home. So one could say that while the seller is the one cutting the commission checks, the person who funded both sides of the commission at the end of the day is still the buyer. So without the buyer, there is no closing. For a seller to think that they would save some cost by not having to pay the buyer’s agent commission is short-sighted as well. As soon as they sell their home, if they now need to buy, they are now on the other side of the table.
What are the new changes?
NAR agreed to pay $418M to settle the lawsuit. This will release NAR and individual Realtors from the lawsuit. However, major brokerages will still have to negotiate for themselves. Some have already settled or will be negotiating their settlement.
The other change is that co-broke commissions will no longer be advertised in the MLS.
How Does This Affect You as a Buyer?
This is meant to allow both buyers and sellers the opportunity to negotiate buyer-agent commissions. As before it was mostly determined at the time of listing between the listing agent and seller. While it was still negotiable after listing, it was a rare occurrence that a buyer agent or buyer would attempt to negotiate with a seller for a higher co-broke commission. Many buyer agents either just accepted what was being offered or they might have their buyer make up the difference. For buyers who have the funds to make up the difference or pay their buyer agent, things will be fine.
On the opposite spectrum, this will hurt buyers who do not have the funds to cover their own buyer agent’s commission should a seller not offer a co-broke. This would be many first-time home buyers who barely have the credit and down payment to buy their very first home. These buyers may have to target only sellers who are willing to cover their buyer agent’s commission. Which in the low inventory market we’re already in, will further reduce the amount of inventory they have access to. This will also cause a dilemma for VA buyers who are not allowed to pay any commissions/fees to a buyer agent brokerage as part of today’s current VA loan guidelines. So there will be some things that need to be worked out for these buyers.
The other major change is that now it is mandatory to have a written buyer agency disclosure agreement with a buyer before you are even allowed to show them a home. This buyer agent document has always been required, at least in WI where I work. It was never mandatory to be presented immediately upon the first meeting between an agent and a buyer. It has always been good practice to present this as soon as possible when working with a buyer so that working expectations are set between client and agent. But in real life, the majority of eager home buyers just want to start seeing homes instead of slowing down to take the time to understand the details of the buying process. When an agent shows this contract to a buyer before even allowing a buyer to see a home or even after they’ve seen a few homes together. Some buyers get nervous because they don’t want to feel like they are “locked in” or “trapped” to an exclusive agent agreement with an agent. Some of these feelings are simply due to buyers/consumers being unfamiliar with how the working relationship with an agent goes during a home purchase. The buyer agency agreement is essentially an agreement to hire an agent and permit them to work on behalf of your best interests. The agent will provide you with services that they could not otherwise give to you unless you agree to hire them as your agent. This includes things like sharing any insight on a property that they might have, helping you strategize to find a home, sharing winning strategies to get your offer selected over your competition’s, providing you with CMA or comps to properly determine a competitive price, and negotiating terms with the seller. This agreement also spells out exactly how the agent gets paid, what that amount will be, the length of the working relationship, and how to terminate the agreement should you feel it is no longer working for you. The agreement also protects the agent from buyers who are disloyal and might hop between agents thinking that they will have an advantage by working with multiple agents. Some agents fear that buyers will say no to signing this agreement immediately or early on in the working relationship. Buyers who don’t understand this agreement or refuse to sign an exclusive agreement will simply go ask other agents even go directly to the listing agents to open doors for them. However once this change becomes the industry mandatory practice, all agents must present this disclosure agreement before the first showing. Then buyers will have no way around it or they simply won’t be able to view homes. In actuality, this mandatory upfront agreement and consultation will help to deliver a better experience for both buyers and agents. It is taking the time to set the stage and explain how the buying process works, what responsibilities are due by each side, the value add that the agent offers to help the buyer accomplish their goal, defines the agreed compensation and how to achieve it, and how to terminate the agreement should either side feel dissatisfied.
How Does This Affect You as a Seller?
For sellers who are in locations where they already had the freedom to negotiate and set both the listing brokerage and co-broker buyer brokerage commission, not much change at all. It will be now for sellers living in areas where the co-broke commission was not spelled out. Also to clarify, just because the co-broke commission is no longer going to be shared in the MLS, does not mean that sellers are not allowed to offer co-broke commissions. It remains a seller’s choice whether or not they want to offer one and how much. It also means that sellers and listing agents will have to go about communicating the co-broke commission differently moving forward. And sellers should expect to start receiving more negotiation requests from buyers on the co-broker percentage as the norm.
Summary
Hopefully, this clears up many of the mainstream media headlines. The NAR commission settlement doesn’t mean that there was the admission of guilt of collusion and price fixing of commissions, that there was ever a standard 6% commission, that commissions will be disappearing or reducing necessarily. And it for sure, doesn’t mean that home prices will be dropping or becoming more affordable just because changes to the way commissions are handled are coming. These changes to commissions are not going to magically increase the supply of homes available or lower mortgage rates. All it does is change the way business will be done. It opens the door for more open communication and dialogue between sellers, buyers, and agents in regards to the commission. There will be more processes and disclosures. It will allow buyers and agents to have a better, more clear working relationship from the start. And ultimately it should improve the buying and selling experience for all buyers, sellers, and even agents. Lastly, the DOJ still needs to finalize NAR’s settlement and some additional changes/tweaks might still come out. So be ready for that!
If you’re thinking about buying or selling a home? Don’t be afraid to ask about commission rates! In the comments below, let me know your thoughts on the NAR settlement. Share your experiences related to commissions on the sell side or buyer side. And if you have any real estate questions, drop them in the comments, msg, email, or text me.