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.
Thanks to the recent commission lawsuit settlements, we are inching toward a new reality in how residential real estate commissions will be handled. In the future, listing agents will no longer offer buyer agent commissions in the MLS, and displays of cooperating buyer agent compensation information will be removed from MLS platforms across the country.
These changes raise significant questions as to how buyer agents will be compensated: will sellers continue to provide off-MLS compensation or concessions to incentivize buyer agents to sell their homes, or will buyer agents be left on their own to secure compensation for their efforts?
While these questions are providing enough confusion in and of themselves, the vast amount of misinformation around this subject is causing significant bewilderment for potential sellers. This was highlighted to me personally as one of my neighbors, aware I was a Realtor, asked, “So what will you do now since you will no longer be able to earn a commission?”
To begin, I recommend reading Budge Huskey’s response to the media allegations as he debunks seven mainstream media falsehoods. He declares, “Since the settlement announcement, there have been numerous articles and stories in the media on what this means for buyers and sellers. Regrettably, most reflect a profound lack of understanding of the real estate business as well as mistaken claims.”
With this in mind, and to provide clarification in the face of inaccurate media articles, here are our 10 questions and answers to sellers who may be confused.
1. What is at the heart of the lawsuit?
In an article by Ben Harris and Liam Marshall of the Brookings Institution, they state, “The key issue in the lawsuits was the practice of ‘tying,’ whereby NAR members require that commissions paid to buyers’ agents be set by the seller’s agent when a home is listed.”
They continue, explaining, “The practice of tying commissions — whereby MLSs mandate that buyers’ agents be offered a pre-determined commission — has been shown to inhibit competition and drive-up fees. Under tying arrangements, the compensation for a buyer’s agent is established before the buyer can be sure of the quantity or quality of the services their agent will provide. Not only does this make it harder for buyers to negotiate fees, tying also means that sellers may have to offer higher commissions to maximize the chance they sell their home.”
NAR denies any wrongdoing and, in a statement released on March 15, 2024, explains, “The settlement, which is subject to court approval, makes clear that NAR continues to deny any wrongdoing in connection with the Multiple Listing Service (MLS) cooperative compensation model rule (MLS Model Rule) that was introduced in the 1990s in response to calls from consumer protection advocates for buyer representation.”
2. Does this mean the standard commission is gone?
To clarify, there is no such thing as a standard commission. As an example, the California listing agreement states on the first page and in bold lettering, “Notice: The amount or rate of real estate commissions is not fixed by law. They are set by each Broker individually and may be negotiable between Seller and Broker (real estate commissions include all compensation and fees to Broker).”
While many homesellers may have assumed that commission rates were fixed — and some have actually believed they were fixed by law — a careful reading of their listing agreement would reveal otherwise. Not only does the standard listing agreement include the amount the seller is paying for representation, but it also includes the amount the seller is willing to compensate a buyer’s agent for selling their home.
While fault may be ascribed to listing agents for not making this point clear, responsibility also resides with sellers for not carefully reading their listing agreement and asking questions, as applicable. Bottom line: both numbers have always been negotiable.
Commission rates can vary across the country from region to region, and they can vary based on the level of service being provided. It is also no secret that there have been many discounted commission models in the marketplace for years.
One of the major changes is that commissions paid to listing agents will no longer be split with buyer’s agents in the MLS starting Aug. 17, 2024, with sellers being given a clear choice as to whether or not they wish to provide an incentive to a buyer’s agent to sell their home.
3. Does this mean I no longer have to pay a commission to a listing agent?
No. You will have a choice as you have always had as to whether or not you wish to hire a real estate agent representative to help you sell your home. If you choose to hire a real estate agent to facilitate the sale of your home, that representation will earn the agent a fee. This fee is negotiable (and always has been) based on the locale, level of service provided and more.
You also have always had the choice to hire a discount brokerage (typically with a different fee structure based on varying levels of service). Additionally, there have also been MLS entry brokers who do nothing more than post your home on the local MLS while you do all the work of selling on your own.
4. Does this mean I no longer have to pay a commission to a buyer agent?
No. You will have a choice as to whether or not you wish to incentivize a buyer’s agent to sell your home. The method by which the compensation will occur, however, will change. An article by Laurie Goodman, Ted Tozer and Alexei Alexandrov for Urban Institute, dated March 28, 2024, provides clarification. In the section entitled “Why the seller-paid model will remain” they write:
“We foresee two potential commission fee models: one in which the seller pays the buyer’s agent and one in which the buyer pays the buyer’s agent. We predict the seller-paid model will be adopted because it is closest to the status quo and there are no regulatory hurdles or required government action. Under a seller-paid model, fees could be paid either through direct payments or by giving the funds to the seller’s agent to pass through to the buyer’s agent. The exact distribution method doesn’t matter, though the former is more straightforward.
“Here is how a seller-paid model would work: The buyer would sign an agreement with their agent at the beginning of their home search, laying out the services the agent would perform and the fee they would be paid. Separately, the seller would enter into an agreement with their agent when the home is listed, laying out the services to be performed and the fee to be paid. When a buyer makes an offer, they would specify both the price being offered and the fee the buyer’s agent expects to be paid. The buyer, seller, and their agents would settle on the final terms of the sale contract.”
The seller-pay model has worked effectively for years and was adopted following demands from consumer advocates that buyers have adequate representation and that their representation have access to a decent commission.
5. What do buyer agents do anyway to justify a commission?
While some assume that all buyer agents do is meet a potential buyer at a house, walk them through and then write an offer, the scope of a buyer’s agent is much more substantive. An experienced buyer agent is, in fact, a real estate professional with extensive knowledge of the market, types of properties available, area information, ability to assess potential issues, a trained negotiator, contract expert and more.
They have access to a network of other proficient real estate professionals including lenders, inspectors, appraisers, contractors and more. Additionally, they have the skills required to direct a transaction through the closing process: we tell our clients that finding a home is often the easy part. Getting it all the way through escrow to the closing table is frequently the hard part.
It is also assumed that a buyer agent’s expenses are a tank of gas and occasional cups of coffee for their clients. This does not account for the countless hours spent behind the scenes looking for prospective properties, contacting homeowners in areas where their buyers are looking to find potential off-market opportunities, analyzing market data and other reports, previewing prospective homes and much more.
Additionally, depending on the market, a buyer’s agent may spend untold hours meeting clients at properties until they find one they like. If buyer agents billed by the hour like other professionals, such as attorneys or accountants, it would quickly become evident how much work a typical buyer’s agent actually does.
6. If I don’t provide a commission to a buyer’s agent, how will they get paid, if at all?
Good question. If sellers choose to no longer compensate the buyer’s agent, things have the potential for getting significantly more complicated. It is important to understand a basic premise: representation earns compensation. In a normal real estate transaction, there are three types of representation that earn a fee: the listing agent representing the seller; the buyer agent representing the buyer; and the title company, closing company or attorney representing the contract.
Prior to the 1990s, buyers were not receiving adequate representation, with the result that their rights were not being protected in real estate transactions. Consumer advocate groups sought to highlight the role of a separate agent for buyer representation along with a method of adequate compensation. The Sitzer | Burnett lawsuit threatens to undo the hard-fought protections for buyer representation by making it more difficult for buyer agents to be compensated for their representation.
If a seller refuses to provide a buyer agent’s compensation, the buyer agent will need to secure compensation from their client. The Urban Institute article mentioned above also explains why this model is not the best option:
“Consider the other possible model, in which buyers would pay their agents directly and not out of the sale proceeds. In this scenario, first-time homebuyers would need to find an additional $6,000, based on the median-price existing home sale, with a reduced fee of 1.5 percent of the house price.
“Many buyers won’t be able to come up with the cash, which would limit the buyer pool, squeezing out first-time homebuyers in particular. For federal programs, which use the lower of the sales price or the appraised value, commissions not included in the sales price could not be financed. Even if this rule was changed, which is unlikely and could take years, buyers would still have higher loan-to-value ratios, which could inject unneeded risk into the system.
“Ultimately, with the buyer-paid model, sellers would have to accept a lower price because the buyer has to pay their own agent directly and because the pool of potential buyers is smaller. The choice is clear—the seller would pay the buyer’s agent, with heavy encouragement by the seller’s agent, instead of having the buyer pay directly. We don’t believe federal intervention is necessary to obtain this result; the market will quickly figure it out.”
There are also concerns that forcing a buyer to pay for representation may make it more difficult for minorities to purchase a home. Nate Johnson, writing for the Chicago Defender, states, “Today, at a time when current high mortgage rates and increasing home prices are keeping aspiring homebuyers on the sidelines, additional out-of-pocket fees would only push homeownership further out of reach for many. If our commission model were to significantly change and buyers were forced to begin paying their agent out-of-pocket, it would create an additional barrier to homeownership for Black, first-time homebuyers who may already struggle to afford a down payment, ultimately worsening the racial homeownership gap across America.”
Lastly, it is no secret that the DOJ (Department of Justice) has been an advocate for decoupling commissions. Ironically, in a classic case of the government’s left hand not understanding what the right hand is doing, by forcing buyers to grapple with the commission issue and given the issues stated above, they are working against HUD’s (Department of Housing and Urban Development) efforts to increase housing opportunities for minorities.
7. Will the settlement affect the price I can obtain for my home?
No. In reality, agent commissions are not a major contributor to home prices, which are primarily driven by market forces, including inventory, buyer demand, current interest rates and the overall health of the economy. Budge Huskey, president and chief executive officer of Premier Sotheby’s International Realty clarifies:
“General values in real estate are determined by the fundamentals of supply and demand, not Realtors. Yes, the commission represents an expense of a transaction, yet these also include title fees, closing fees, mortgage-related expenses, property taxes, association fees, etc.
“Should real estate commissions theoretically be reduced by 1 percent as a result of compression, that $500,000 home will now only cost $495,000 — hardly the difference as to whether someone may afford the home or not.
“The real reason homeownership is increasingly less affordable is that the values of homes in our market have risen dramatically in recent years.”
8. Why don’t you, as the listing agent, just work with all the buyers that visit our home?
There are two issues surrounding this practice:
First, for an agent to represent both the listing and buying side is called dual agency and is actually considered illegal in eight states. Although agents in other states represent both sides, it is almost impossible for the agent in the middle to fairly represent both sides of the equation.
It also opens the door for potential litigation if one of the sides believes they were not fairly represented. For this reason, even in states that allow dual agency, some listing agents choose not to work with buyers on their listings.
Second, if a listing agent chooses to work with a buyer on their listing, a buyer-broker agreement will still be required for that transaction and, depending on whether or not the seller chooses to provide income to the agent representing the buyer, may discourage some buyers from writing an offer on that home.
My guess is that we will see an initial increase in dual agency (where allowed) in the short term, but I predict we will see a return to previous practices once the new rules have been in place for a bit. The highest and best practice is for buyers is to have their own independent representation.
9. What did President Joe Biden mean by his recent comments concerning the NAR settlement?
In a response to the NAR settlement, President Biden said, “In addition, last week the National Association of Realtors agreed for the first time that Americans can negotiate lower commissions when they buy or sell their home. On a typical home purchase, that alone could save folks an average of $10,000 on the sale or purchase. I’m calling on Realtors to follow through on lowering their commissions to protect homebuyers.”
NAR President Kevin Sears issued a statement in response, stating:
“While the National Association of Realtors appreciates President Biden’s continued focus on the affordable housing crisis, the President unfortunately repeated incorrect claims that the recently announced settlement agreement allows Americans to negotiate commissions for the first time. Commissions were already negotiable before this resolution was reached and will continue to be negotiable as they have been.
“Real estate agent commissions are driven by the market and are not the cause of the affordability crisis. Until there is an all of government approach to a historic lack of inventory and supply in communities across the country, the dream of homeownership will remain out of reach for millions of middle-class Americans.
“NAR commends President Biden for recognizing the need to build a stronger housing supply, and we will continue to work with his administration and Congress, as well as in statehouses across the country, to fight for policy proposals intended to make homeownership more affordable and accessible for all Americans.”
10. Will this affect open houses?
In fact, I personally believe they will become far more important. The new rules propose that, beginning Aug. 17, 2024, buyers will need to sign a buyer broker agreement to have an agent show them a home. This will significantly change the viewing practices that have been in place for years and will erect a barrier that some buyers will not be willing to cross.
As for open houses, a buyer-broker agreement will not be required for prospective buyers visiting on their own without their agent. This suggests that there will be fewer scheduled buyer tours and more visitors at open houses. We occasionally have sellers who tell us they do not want any open houses: going forward, this could significantly affect their ability to sell their homes.
Come August, and based upon court approval, the real estate landscape will be changing significantly, and how this will all work out remains to be seen. One thing is certain: sellers still need to sell and buyers still need to buy. These simple facts ensure that real estate sales will continue under the new model: put another way, the destination remains the same, but how we get there is going to be different.
Carl Medford is the CEO of The Medford Team.
