The real estate community is abuzz with discussions around broker compensation and transparency. While many of our readers are attorneys and may be more knowledgeable on this topic than I am, here's my perspective, and I welcome yours in the comments.
In a nutshell.
Litigation arose concerning the lack of transparency surrounding commissions, particularly regarding home sellers paying commissions to both the seller's agent (LA) and the buyer's agent as the selling agent (SA), and whether these fees were negotiable.
While some brokerages are still contesting the issue, several others, including the National Association of REALTORS® (NAR), reached settlements. The implications of this settlement depend on one's perspective, and the situation may still be evolving. Just the other day, I received another email indicating the Department of Justice (DOJ) may challenge the NAR Commission Settlement.
For Now, Here is Some Background.
- The Multi Listing Service (MLS) is a platform provided by the NAR exclusively to its members. It serves as a hub for publishing properties available for sale, which then disseminates to other platforms like Zillow and Realtor.com. Only subscribers to the MLS, who are NAR members, can input information about properties on the MLS.
- With over 86% of homes sold being listed on the MLS, agents must join NAR to gain exposure for their listings on their syndicated platform.
- The NAR Residential Listing Agreement between the seller and their Real Estate Agent includes an option, though not mandatory, for the seller to compensate the SA. This offering payment to the SA ensures that the agent will receive compensation if they bring a buyer for the property. With this practice, both agents are compensated by the sellers.
- While commission amounts are not standardized, they have become competitively aligned among brokerages operating in similar locations.
The Problem:
- Some sellers were unaware they had the option to negotiate whom they were contracted to pay.
- And that they had the option to negotiate the amount they paid.
- LAs are working without the benefit of an agreement to protect both themselves and their buyers.
- Concerns arose about potential discrimination against listings based on lower compensation amounts.
What Will Likely Happen in mid-July 2024:
- “Co-broke” Commissions or “Cooperative Compensation” will no longer be advertised on the MLS or included in the agent remarks section. While sellers can still provide compensation to both the LA and SA, the MLS cannot disclose or actively promote the availability of such compensation.
- Co-broke” Commissions or “Cooperative Compensation” will no longer be required. Considering it never was required, this statement is to just remove any existing confusion.
- Sellers can offer “Concessions” towards Buyer’s closing costs. These concessions can be advertised on the MLS; and such concessions can be used to offset SAs These MLS concessions must be offered to any Buyer, even if a real estate agent does not represent them. Concessions not advertised on the MLS are not subject to this requirement.
NOTE: Although the difference in the use of “commission” vs “concession” can affect the seller's net income. A commission is agreed to be paid to the LA and the LA then disburses the agreed-upon portion to the LA at close. If there is no SA (self-represented), then the LA doesn’t have anyone to disburse to and effectively keeps “both sides of the transaction.” No guilt here because the LA completes all forms and meets all deadlines for the unrepresented buyer. With this new requirement of adding the compensation as a concession to the SA, if there is no SA, then that concession does not have to be paid by the seller. Assuming now that the unrepresented buyer will still need the assistance of the LA to get the transaction done the LA will no longer be compensated.
- Broker compensation must not be a factor in finding a property for a buyer.
- Written Buyer-Broker Agreements will be required before touring a property. This agreement must include the amount of compensation, which cannot be open-ended (must contain a number), and how that compensation is to be earned and received.
- Real Estate agents are not free. Unless an agent will truly receive no compensation, they cannot represent that the buyer “pays nothing” because they come out of the Seller’s sales proceeds.
- All compensation must be disclosed to Sellers in writing and Seller must approve an offer of compensation to SA.
- Real Estate Agents must disclose that commissions are fully negotiable.
Okay. So far nothing new here.
Every Real Estate Agent is to assist their clients in understanding their options and the legal documents they will be asked to sign; this is part of their fiduciary duty they attest to. It’s just that sloppiness is no longer being tolerated and relying on the seller to tell the LA they read and comprehended the documents, the LA will have to reiterate verbally.
The biggest challenge for a SA will be to articulate their value, negotiate a fee, and get buyers to sign the Buyer-Broker Agreement. This shouldn’t be a huge hurdle considering this is customary practice with LAs. In a nutshell, no more dating, you gotta put a ring on it.
This process should provide greater reassurance to all parties. A legally binding contract ensures protection and transparency for both sides. Affording both parties greater security by outlining expectations, the agency relationship, how the brokerage is compensated, and how this process serves the buyer's best interests. Clients deserve transparency whether they're buying or selling as do their representatives.
This is still fuzzy:
- Opting not to offer a commission to the buyer's agent might seem like a way to reduce selling costs. Without it listed in the MLS, who would know? But realistically, what's to prevent buyers' agents from asking? Or from listing agents promoting it in marketing materials?
- Regardless of how you look at it, the buyer effectively ultimately covers commissions in the home purchase price. I haven't encountered a seller who agrees to lower their home price because they want to avoid paying commissions. So, could buyers potentially end up paying commissions... twice?
- If comparable properties are priced similarly, do you offer less for a home that doesn’t compensate the selling agent and more for one that does? I doubt that there will be a discussion at the negotiation table.
- Without the commission fee being included in the home price, will buyers be able to roll the fee into their home mortgage? Or will they need to come up with more cash upfront? Wasn't this supposed to make homes more affordable?
Unsung Heros.
Buyer's agents often find themselves in the shadows, their contributions reduced to frequent gas-guzzling trips across town and mere footnotes in the success stories of listing agents.
If you're currently wondering, "Well, what exactly do they do besides 'show homes,' fill out paperwork, and collect a check?" I may not be able to detail every step your agent takes for you, but I can shed light on the various roles they play:
Matchmaker: A proficient buyer's agent is attentive, taking the time to understand you. They listen not just to your words but also to your actions and reactions, discerning your desires, needs, and motivations toward your new home. They possess an intuition for what you're seeking, often understanding your preferences even before you do. It's not merely about finding a house; it's about aligning with your lifestyle, preferences, and aspirations, creating a curated collection of properties tailored to you.
Analyst: A skilled buyer's agent possesses comprehensive knowledge of not only the target location but also surrounding neighborhoods. They excel in setting timelines, evaluating financing options, and devising personalized strategies. While you're focused on aesthetics, they're analyzing appreciation rates, neighborhood dynamics, amenities, schools, and more—all crucial factors in safeguarding your long-term investment. Armed with market insights and a curated selection of properties, they embark on the hunt, from previewing homes to crafting strategic bids, demonstrating unwavering dedication at every turn.
Offer Strategist: A seasoned buyer's agent excels in negotiation, crucial for success in competitive scenarios. Amid multiple offers and heated markets, trust emerges as their greatest asset. They possess adept communication skills, attuned not only to what's said but also to the unsaid nuances in conversations with their peers. Years of cultivating relationships with listing agents pay off as they navigate negotiations with finesse. Armed with a sharp pen, they craft compelling offers and understand how to appeal to sellers, recognizing that it's not solely about price but also about conveying commitment and reliability to get the deal done.
Risk Management: A top-tier buyer's agent exhibits foresight, anticipating issues before they arise and remaining unfazed when challenges inevitably surface. In the face of inspection hiccups or appraisal uncertainties, they display exceptional problem-solving abilities, mitigating risks and identifying factors that could impact the property's resale potential. Leveraging trusted resources and support teams, they confront obstacles head-on, demonstrating proactive thinking from paperwork to pre-closing walk-throughs, leaving no detail overlooked.
Personal Advisor: A proficient buyer's agent is not only available but also attuned to your needs, emotions, concerns, and frustrations throughout the home-buying process. Beyond closing deals, they prioritize building enduring relationships and serving as trusted advisors every step of the way. Patient and understanding, they ensure you feel valued and supported through the highs and lows of the journey.
Transaction Manager: An adept buyer's agent maintains impeccable organization and employs robust systems to oversee all aspects of the transaction seamlessly. They respect and optimize your time, utilizing transaction coordinators and management software for efficient handling. Initiative-taking and meticulous, they ensure smooth and well-managed transactions, leaving no room for oversight.
The real estate landscape is currently navigating significant shifts in broker compensation and transparency, prompting discussions and legal actions within the community. While settlements have been reached in some cases, the implications remain multifaceted and subject to ongoing developments.
The role of the SA, often underappreciated, is indispensable in guiding clients through the complexities of home buying. Throughout the process, they serve many roles requiring elevated levels of expertise and knowledge. As the industry continues to evolve, the commitment and expertise of the real estate agent will remain essential in facilitating successful real estate transactions and fostering lasting client relationships.
So, next time you're admiring your dream home, just remember, behind every open door is a resolute agent ready to guide you through it—figuratively speaking, of course!`
