There has been an uproar in the Real Estate World recently, regarding the commissions paid to the buyers agents.
The Backstory
NAR came under attack recently by the DOJ (Department of Justice), for their requirement that a seller offer a buyers agent commission, in order to put their home for sale in the MLS (Multiple Listing Service).
Commissions are supposed to be negotiable and flexible, however, after an investigation of 70 major cities, it was found that almost all of the commission offerings were the same.
The Consumer Federation of America has stated that they believe that sellers should be legally prohibited from offering Buyers Agents a commission to bring the buyer.
Back in the day, many moons ago, there was no such thing as a Buyers agent. All agents were Sub-Agents, working for the seller. Their job was to find qualified buyers and present the home.
Back in the day, agents were the gate keepers of information, so the only way a seller was able to find qualified buyers, was by employing all of these sub-agents to find them, and bring them their way.
Sherman Anti-Trust Act of 1890
In the late 1800’s, a new federal law was put into place to protect the Publics funds.
Price gouging and collusion was all the rage and it was costing the consumers a TON!
Agencies were getting together and raising those sales commissions, purely out of greed, and through “typical commission rates”, consumers paid through the nose.
So, in comes Sherman.
No longer, are agents allowed to set pricing between brokerages. Agents must remain negotiable in their commissions.
We may still see people discussing “typical commission” rates, or rather, complaining about being offered less than their “normal rate”… but this is ILLEGAL and if caught, punishable with a hefty fine… and likely, you’ll be finding a new brokerage, since no broker wants those agents on their roster.
The Consumer Federation of America has basically said that with the majority of commissions being ‘offered’ in the MLS being suspiciously similar… this feels like price fixing, much like those bad practices from back in the day.
Basically… they’re claiming that the sellers have negotiated their fee for selling the home, but they are essentially forced to pay the “typical fee” to the buyers agent, if they want to sell their home, no negotiating allowed. (not necessarily correct, but who am I)
How has NAR gotten away with requiring this offering?
Exactly the point of the DOJ (and now the CFA)… who went after NAR for this very thing (and more) a few years back.
They claimed that NAR could not REQUIRE an offering of commission, in order for an agent to put the listing in the MLS. They stated that the commissions for each side should remain negotiable, therefore, putting the burden on the Buyers Agent to negotiate their side of the sale separate from the listing offering.
By keeping the buyers side of the commission negotiable, the CFA feels that it would save consumers an estimated amount of 20%-30% in buyers commissions alone, as well as a potentially 20% on the listing side to follow.
This may also open up for more flat fee brokerages and those who work on employment status with their agents, offering only a task related salary.
Most of the credible agents that I run across KNOW how to support the value they bring to the table, but we’ll discuss where that consumer savings might come from later.
Fast forward to today…
We are NOT the gate keepers any longer… In fact, it’s challenging, to say the least, to keep our clients from going rogue and finding homes on sites used to lure buyers in, just to sell their information to other agents.
Today, information is everywhere!
If a buyer wants to find a home for sale, they only need to visit one of the 400 syndication sites, one of the hundred thousand Agents sites, brokerage sites… or simply whisper the words “Homes for sale” in the vicinity of their phone, so that Facebook can target Agent created Ads towards them.
If a buyer wants to know what happens during a transaction, where to find a good inspector, what the going rate of a mortgage is, or any other aspect of a sale… they simply search and Google will provide.
Our value is no longer in providing listings to our buyers. Our value is in the protection of their interest, the protection of their funds, the knowledge of our legally binding contracts, the experiences that help us navigate hurdles without public harm, the care we provide our clients and SOOOO much more….
What Changed?
In 2022, a historic case was settled in the US. A supreme court judge decided that it went against the Sherman Anti-Trust Act of 1890, to require sellers to pay a buyers agent their commission as “typically offered” in the MLS.
This case has opened up a can of worms, as it allows, within the Class Action Lawsuit, for sellers to seek reimbursement for commissions they paid to buyers agents, for the last 8 years. EIGHT YEARS!
I can promise, this would put a number of brokerages out of business, filing bankruptcy and closing their doors forever… leaving thousands of clients with improper representation. But… I digress.
Did the Sellers Really Pay the Commission?
I’d like to just take a minute to discuss this… We all know that the Listing agent brings up the commission to the Seller. There is a contract signed, agreeing to pay the Listing Agents Brokerage X% of the sale of the home.
FROM that amount, it’s actually the Listing Agents Brokerage that offers X% to the Buyers agent in the event that the bring the seller a bonified offer.
If a buyer were to go directly to the Listing agent, the original commission to the Brokerage would not change, simply because the buyer had no representation… the contract/agreement between the Listing agent and the Seller is signed and agreed to. And, at least, in AZ, the Listing agent may only have so much control over this, depending on the Policy of that brokerage.
So, the Buyers Agent is offered a commission, Via the MLS. That offering is now made public, as agreed to by NAR, due to the DOJ fuss we mentioned earlier. Buyers are now well aware of how much commission their agent will be making on that sale. If they have an employment agreement, they can also ensure that terms are agreeable between themselves and their agent.
Does the Buyer actually pay the commission?
So… the Buyer submits an offer for the home, bringing a 30 year mortgage with it.
The price of the home is agreed to, and both commissions paid.
But the commissions are paid from proceeds on the Sellers side of the transaction… From proceeds that the seller never had until the transaction was negotiated by these agents, per buyers instructions.
However, the commissions are now typically wrapped into the final price of the home, and included into the buyers 30 year mortgage.
So, who’s really paying for this commission… The seller, who only received an offer at that price because of the expectations of the commissions being paid out of the proceeds and not their pocket. Or… the Buyer, who is now paying for the cost of the home, including commissions, for the next 30 years.
This is all just my 2 cent
Just to clarify… this perspective is nothing more than a conversation starter… another perspective of what’s happening.
Which came first? The chicken or the egg?
Who pays the commission? The seller, or the buyer?
At the end of the day, commissions are negotiable. The Listing agent negotiates their fee based on the value they bring to the table and the value of bringing a buyers agent into the deal as well.
Sometimes, those commissions values match up… not because the seller is forced to pay a “typical fee”, but because it’s truly in their BEST interest to ensure that a buyer has their own representation and both of these fees will be wrapped into the price, no matter what changes.
Buyers work with a Real Estate Agent for months, even years sometimes, before they find the right home… and agents perform this duty, as well as protecting the clients through their sale, based on the promise that they will earn a fair compensation at the end.
Commissions are paid out of the proceeds, yes. They are paid out of funds that the Seller has not yet held in their hand, and they are paid out of funds that the buyer doesn’t have to come up with up front.
If the structure were to change, and each party were to negotiate their own fee… would it change the structure?
There’s argument that the price of the home would lower, as the buyer wouldn’t pay for commissions on top of the price of the home… netting the seller less, by the amount of a commission, right? But there’s also statements that the buyer would still be able to roll that fee into the mortgage… because it’s no one’s intent to hinder a buyers ability to buy a home because of this extra out of pocket expense.
Sure… that makes sense.
The seller takes a X% hit on the value of the home, just as the buyer still pays that X% over the life of their mortgage.
Bottom line… the fees didn’t change for anyone…. Except for…..
Who’s it hurt? Again… my 2 cents.
After years of battling between lawyers, government agencies and every news source loses their minds in excitement… who really benefits or loses as a result of all this?
As I see it….
There will be 2 survivors in the Real Estate world… The exceptional negotiators, who know the value of a good real estate agent and can easily relay that info. And… the really, really POOR negotiators, who only know how to win clients over by decreasing their fee, making it eventually impossible for them to make a living, while providing exceptional service to their clients.
The first will thrive, just as any good, quality service provider does. Continuing to learn and grow… protecting their clients interest tooth and nail, providing even more and more excellent value in each sale they do as more of the poor agents are driven out of business.
The other will sustain, barely keeping their head above water, likely working part time in a hobby-like position. They won’t have time to work it like a full time job, and run a muck for clients, so they’ll flounder, doing the bare minimum, never attending extra education or networking events, as they don’t see the value in it for the time it’ll take… based on the measly compensation they’ll collect. And their clients will suffer, as negotiations don’t work in their favor, the care for their needs dropping…
Agents work by a Code of Ethics, as well as providing Fiduciary duty to our clients.
Do we really need to simply reallocate commissions, to look different on paper, but essentially acting the same way in reality… just to lower the publics protection?
But… I digress.