Northwest MLS Unveils Changes to Compensation Guidelines

To improve consumer protections in real estate, owners who plan to sell their homes on the open market will establish compensation guidelines for both real estate brokers working on the transaction and their firms. That’s according to updated policies that take effect Oct. 3 on for-sale properties added to the Northwest Multiple Listing Service.

The broker-owned Northwest MLS, a non-profit which serves 26 counties in Washington, is doing away with the long-established method in which the listing agent and brokerage paid the buyer’s broker and firm. Instead, the revisions place the burden on sellers to make an offer of compensation to a broker who brings a buyer into the transaction – a decision put in writing before the home hits the market.

For more than 30 years, the compensation framework in residential real estate sales was structured for the seller to pay the listing firm and for that brokerage to share a portion – usually half – with their buyer counterpart.

This arrangement was a vestige of “sub-agency,” in which every broker represented the seller and brokers did not work directly for the buyer. Sub-agency was eliminated in the mid-1990s with the adoption of the Agency Reform Act (Washington law RCW 18.86) and the creation of buyer’s agency. Yet, the “commission sharing” structure remained.

The changes in October aim to:

  • enhance transparency regarding broker compensation, 
  • create additional opportunities for consumers and brokers to discuss and negotiate compensation,
  • provide more flexibility for consumers and brokers when listing and purchasing real estate, 
  • and promote innovation and competition among member brokers.

While admirable in their objectives, the changes can potentially expose buyers to paying their real estate representative should sellers set compensation levels lower than industry norms. Buyers will want to discuss potential scenarios with their broker and lender before embarking on home tours and well before making an offer.

While admirable in their objectives, the changes can potentially impact buyers’ purchasing power and what they pay their real estate representative, depending on the seller’s offer of compensation. Buyers will want to discuss potential scenarios with their broker and lender before embarking on home tours and well before making an offer.

A research paper co-authored by a former Freddie Mac senior vice president believes changing the compensation structure could affect a buyer’s ability to afford a home. Ann B. Schnare, now president of her own consulting firm, said that potentially “requiring buyers to pay their agent’s fee directly would result in reduced homeownership opportunities for cash-constrained families and lower net proceeds for many sellers.”

Published in May 2022, the research said, “Minorities, lower-income households and first-time home buyers who rely more heavily on agent services would suffer the most” and that instituting changes “would clearly conflict” with the goal of the Biden administration to find greater equity in the housing market.

This marks the second major change to place more control into consumers’ hands in real estate transactions. The first change took place in 2019 when the MLS began publishing a compensation percentage the seller offers to pay a buyer’s broker. At that same time, the MLS eliminated the requirement that a seller offers compensation to the broker submitting the offer. 

The concept of “commission sharing” by listing firms will be removed from the rules and the listing agreement between the seller and real estate agent. Of course, the seller and listing firm can work together to determine the amount of compensation to offer the buyer brokerage firm – but, as the research noted, buyers may now be expected to cover some or potentially all their broker’s compensation.

The listing agreement will be reformatted to clearly differentiate compensation distributed between the listing firm and buyer brokerage. The agreement will be revised to provide new options for compensation to address transactions when a buyer is represented by the listing broker, known as “dual agency.”

The modified purchase-and-sale agreement will include a section in which the buyer can either accept the offer of compensation outlined in the listing and established by the seller or counter that and ask for another amount as compensation for the buyer broker. In addition, the agreement will be revised to clarify that the seller owes compensation when the sale closes and if the sale fails due to the seller’s breach of the sale agreement.

No longer will the two brokerage firms negotiate the amount of compensation or the split between the two. What won’t change, of course, is the dedication of real estate professionals and their firms to serve all parties fairly and honestly while promoting the interests of their clients first.

The latest revisions continue the evolution of the real estate brokerage industry and will help MLS members better serve their clients while following service bylaws that call for it to “at all times act to improve the standing of real estate brokerage in the community and better serve the public in all real estate transactions.”