As your real estate professional, I am committed to keeping you informed about real estate changes. In this blog post, I'll discuss the recent settlement of a national lawsuit by the National Association of Realtors (NAR) related to broker commissions and how it might affect your future real estate transactions.
Real estate commissions in the U.S. have always been negotiable.
Despite what the lawsuit and the buzz around it might suggest, it’s important to know this: the dollar amounts paid to listing agents by home sellers in commissions have always been and will always be negotiable. Since 1992, on average, U.S. home sellers have paid their listing agents a commission at closing, typically between 5 and 6% of the home's selling price.
So why did these home sellers decide to sue?
The lawsuit claimed NAR effectively “set” commissions through the Multiple Listing Service (MLS) Cooperative Compensation rule. This rule dictates that listing agents who use the MLS to market homes must split their listing commission with the buyer’s agent, and this amount must be included in the MLS property listing. The lawsuit claimed that the publication of the split on the MLS caused commissions paid by the seller to be set at higher levels because it incentivized buyer agents to steer buyers toward higher-priced properties to get higher commissions.
The lawsuits that created cooperative compensation.
The lawsuit claimed the cooperative compensation rule disadvantaged sellers, which is interesting since the industry enacted cooperative compensation in the '90s in response to the dramatic volume of lawsuits filed by aggrieved buyers who felt disadvantaged by their lack of professional representation.
Before the 1990s, buyers often lacked dedicated representation since the entire commission was typically pocketed by the listing agent, who exclusively represented the seller's interests. This created a Wild West "buyer beware" environment, leaving buyers unrepresented and vulnerable to exploitation. The introduction of cooperative compensation aimed to rectify this disparity by ensuring buyers would get professional representation by buyer’s agents working solely in their interest.
What's changing as a result of the settlement?
First, while the settlement says the cooperative compensation rule and the commission split offered to buyer’s agents don’t have to stop, they can no longer be published on the MLS. So, it'll still be an option for sellers and their agents who agree it’s good for both parties to have representation, but agents must negotiate it privately—completely off the MLS.
Second, MLS agents representing buyers must now implement a written buyer agency agreement. While this has been the standard in North Carolina for 20 years, the timing is changing: now, it has to be in writing before any house hunting begins.
What's in the NC buyer agency agreement?
This agreement indicates the amount the buyer's agent will get paid from either a cooperative compensation listing firm or the seller, depending on the situation (e.g., a for-sale-by-owner). And if, for any reason, the compensation falls short of the negotiated fee, i.e., the seller doesn’t offer cooperative compensation for the buyer’s agent, the buyer agrees to make up the difference unless the law says otherwise (e.g., Veteran’s Administration (VA) borrowers are not allowed to pay the buyer’s agent’s commission.)
These changes might not seem like much, but they signify a new era in buyer representation that could make things more complicated and costly for homebuyers in the future.
Why commissions have remained unchanged for decades.
The cooperative commission, averaging 5-6% since the '90s, likely endured the test of time because it benefits sellers and buyers. Sellers don't pay anything until they get the price they want and the sale is final. Buyers get professional representation without having to pay their agent. It’s also important to note that in spite of all the work that agents do to successfully transfer property between buyer and seller, if a sale falls through, the agents don't get paid. Unlike other pros involved, like lawyers or lenders, agents gamble their time and money without a guaranteed payout if things don't work out.
Who's paying the commissions?
Contrary to popular misperception, in practical terms, the seller doesn’t pay the fees of both agents alone. While sellers absolutely consider a buyer’s ability to pay when choosing from multiple offers (cash or financing?), they often fail to recognize that the proceeds they use to pay commissions are only in their bank account because of the funds brought to the table by the able and willing buyer procured by the buyer’s agent.
In reality, both parties are required to produce and pay the commission, which is fair as the two agents work to protect the interests of their individual clients exclusively, creating fair and balanced transactions that benefit all parties involved.
The dangers of making buyer representation unaffordable.
After several years of a low-inventory, high-price market that unarguably favors sellers, the potential repercussions of diminishing or eliminating buyer representation are more pronounced than ever. Sellers who view the lawsuit as an opportunity to pay lower commissions risk undermining their listing agent's ability to procure a qualified and committed buyer, possibly even jeopardizing the transaction.
Just as unrepresented buyers suffered and brought lawsuits in the pre-1990s “buyer beware” environment, if buyer representation is no longer a given through cooperative compensation, buyers who can’t afford to pay for representation on top of higher down payments and closing costs will be forced to rely solely on the seller’s agent, making them vulnerable once again.
The good news going forward.
As we navigate the complexities resulting from this recent lawsuit and settlement, it’s important to remember our industry’s history in coming together to ensure buyer protection, particularly for those most vulnerable.
The good news is that despite the two rule changes resulting from the settlement, sellers who see the value in cooperative compensation can continue using it. Experienced agents will continue to educate sellers that it’s in everyone’s best interest to have professional representation for buyers and sellers.
No matter what obstacles lie ahead, the dedicated, hardworking and professional real estate agents who are the backbone of this industry will continue to find new ways to protect the interests of everyone involved and maintain a fair and balanced housing market for all.