Buyer Commissions at a Crossroads

Home buyers and sellers face the prospect of major changes to how much and in what way they pay their real-estate agents, following Tuesday’s historic verdict against the National Association of Realtors and large residential brokerages.

Those changes could range from minor tweaks to the commission system to a more radical restructuring of the residential real-estate industry, such as more people buying homes without using agents or buyers paying their agents by the hour.

By way of a quick summary, a federal jury found NAR and large brokerages conspired to keep costs artificially high and awarded $1.8 billion in damages, which could be tripled to more than $5 billion under antitrust rules.

The Cascade Team provides buyers and sellers with choices, control, and complete transparency.

The up to $5 billion jury verdict in a home seller’s class action lawsuit in Missouri against the National Association of Realtors and large brokerage franchisors has consumers and brokers in Washington state asking questions about residential real estate brokerage. The jury found that the defendants conspired to artificially inflate commissions paid to real estate brokers based on a mandatory National Association of Realtors’ rule that requires the seller, via the listing broker, to offer compensation to the buyer’s broker.

In a report released ahead of the verdict, Ryan Tomasello, a real-estate industry analyst with Keefe, Bruyette & Woods, predicted that the lawsuits could lead to a 30% reduction in the $100 billion that Americans pay in real-estate commissions every year and push well over half of the almost 1.6 million agents out of the industry.

What is a “Fair” amount to pay for real estate compensation?

Since 2019, The Cascade Team Real Estate has spearheaded initiatives that afford buyers and sellers more information about broker compensation in their transaction and clear opportunities to negotiate their broker’s compensation.

As we have since 2006 with lower negotiated listing commissions, we have been at the forefront of explaining to sellers and buyers that all commissions including those offered Buyer representatives are negotiable.

 The most notable changes included:

•          Eliminated the requirement imposed by other MLSs that a seller, via the listing broker, offer compensation to the buyer’s broker.
•          Began publishing the amount of compensation offered to the buyer’s broker.
•          “De-coupling” broker compensation, meaning that any compensation the seller chooses to offer the buyer broker is set and paid by the seller — not the listing broker; and
•          Any compensation the seller chooses to offer to the buyer broker is prominently stated on the first page of the purchase and sale agreement, with an opportunity for the compensation to be accepted by the buyer and the buyer’s broker or separately negotiated by the parties.

Additional efforts to promote choice, negotiation opportunities and transparency are revisions to the Washington state “Agency Law” that will go into effect on January 1, 2024. The new law will require brokers to enter into a written services agreement to represent either a buyer or a seller. All agreements must comprehensively address the broker’s compensation, the scope of representation and all related terms. With the revised Agency Law, buyers will agree on how much to pay their own brokers, and buyers can then negotiate for the seller to help cover that cost as part of the purchase.

Due to the changes that The Cascade Team and its Brokers have made, sellers and buyers are, with ever increasing frequency, availing themselves of the opportunity to negotiate compensation with their brokers. The upcoming revisions to the Agency Law will enhance these efforts by requiring compensation be negotiated by the parties as soon as the broker begins to provide services to a buyer or seller and also serve to further promote innovation and competition.

Here are some scenarios for potential changes ahead:

Sellers’ agents cannot offer commissions upfront.

The Missouri trial centered on how real-estate agents that represent buyers are paid. Under the current system, sellers pay their own agent’s commission—typically 5% to 6% of a home’s selling price—which is in turn shared with the buyer’s agent.

In most markets, sellers are required to include the amount they will pay a buyer’s agent in order to advertise a home on a database known as a multiple-listing service.

NAR says the current system helps buyers because it allows them to direct their funds towards a down payment.

The plaintiffs’ lawyers argued that the current model makes it difficult for buyers and sellers to negotiate and keeps commission costs high, even though technology now enables buyers to find listings and research the market themselves.

One outcome favored by consumer advocates is that buyers would pay their own agents but could negotiate for the seller to help cover that cost as part of the deal.

“It’s not turning the whole system on its head, but it’s injecting market forces into the process to make sure you’ve got a correlation between service provided and the commission that the broker is getting,” said Ted Tozer, a nonresident fellow at the Urban Institute’s Housing Finance Policy Center.

Buyers must pay their own agents.

If sellers are banned from paying buyers’ agents, then buyers could be forced to come up with additional cash—or go without an agent of their own.

This could affect first-time home buyers the most. They are the least likely to have additional savings to pay for an agent on top of their down payments and closing costs. The typical down payment for homes purchased with mortgages in the second quarter was $31,500, according to Attom Data Solutions.

In this scenario, more agents would likely offer hourly rates or a menu of services that buyers could choose from, such as touring properties, reviewing inspection reports or looking over final contracts. Buyers could also choose to have the listing agent facilitate the transaction for both parties at a lower cost.

Sellers can choose whether to offer a commission upfront.

The most modest of the outcomes would make it optional for sellers’ agents to offer upfront to compensate the buyer’s agent. That would barely differ from the current scenario because NAR has already said in recent weeks that sellers’ agents can make an offer of compensation as low as zero.

Northwest MLS, a broker-owned multiple-listing service in Washington state, hasn’t required sellers to make a minimum offer of compensation since 2019.

Thus far that has led to little change, according to court documents in one of the class actions. Some 99.75% of sellers in those markets continue to offer compensation to buyer brokers, and 95% of those offers are at rates exceeding 2%, according to the documents.

Going forward most Buyer’s agents will have what’s called a Buyer’s Agency Agreement with their clients. This agreement will guarantee them a certain commission.

For example, let’s use a Buyer’s Agency Agreement with a 2% commission guarantee:

The Buyer’s agent shows 10 -20 homes, helps the Buyers find what they are looking for, connects them with a lender, Etc.

• They offer full price on a home and the Buyer’s agent ask for a 3% commission as part of the contract.
• The Seller accepts that price but counters back at a 1% SOC
• The Buyers could counter again asking for a 2% SOC for their agent to cover the agent’s fee.
• OR the Buyer’s themselves could make up the 1% difference.
  
  So now it becomes clear that the Buyer’s Agent commission is part of the negotiated purchase price and it’s clear who is paying them, who they represent and what % amount of purchase price that represents.
  
  It’s all about better Transparency in the process. Agents will still be properly compensated, just everyone will be clearer on who represents who and it conforms with the law that states “ALL” Real Estate Commissions are negotiable.

New business models arise.

For years, well-funded startups have tried new business models for paying agents and they have almost universally failed or adopted a more conservative approach. A change to the rules for commissions could open the door to new ventures.

Purplebricks, a British company, entered the U.S. about five years ago charging sellers a flat fee to sell their home much lower than the typical percentage commission. The firm burned through tens of millions of dollars in the U.S. before closing up shop.

REX, co-founded by a longtime Goldman Sachs partner, also charged lower fees and didn’t promise to pay a buyer’s agent commission. It aimed to be more efficient in marketing properties through targeted ads rather than the multiple listing service. It too floundered.

REX co-founder Jack Ryan said he believes the verdict and the changes he hopes follow will help new startups to enter the market. “This will be a catalyst because no one could break the cartel,” he said.

A much larger suit against the Realtors association and brokerages, involving 20 markets from Philadelphia to Miami, could go to trial next year, and a nationwide lawsuit against NAR and other large brokerage companies was filed Tuesday.

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