If you have been following the real estate or financial news you are aware that the United States Department of Justice, DOJ, has brought an action against the National Association of Realtors®, NAR, regarding commissions. You may have heard that the case has been settled and wonder what, if anything, will be different.
Will this be another example of the more things change the more they stay the same or will it be completely new rules with winners and losers? I’ll explain.
What’s the Settlement About?
The DOJ alleged that the very rules Realtors® were required to follow for decades resulted in collusion, creating artificially high real estate commissions and higher real estate prices. Most of the real estate industry, including myself, adamantly disagrees with these allegations but NAR agreed to settle to put an end to the lawsuits and limit the liability of many of its members.
This settlement includes financial payments by NAR and some of the largest brokerages in the country along with significant changes in residential real estate business practices. Here we will talk about the changes in business practices. We will touch on the thinking behind the DOJ’s new requirements, what changes to expect, and what it will all mean to consumers.
What Will Be Different?
There are two significant changes in real estate agent’s business practices that the DOJ is requiring as part of the settlement. The first change is that agents will be prohibited from offering the buyer’s agent’s compensation in the MLS. The second change is that buyers will have to enter into a written buyer-broker agreement committing to agent compensation before even viewing a property. These changes are supposed to occur in mid-August 2024.
No Commission in the MLS –What’s the Difference?
Up until this settlement, Realtors® have been required to put the buyer’s agent’s compensation in the MLS. This commission comes from the listing agent who negotiated the total commission with the seller before putting the property on the market.
Buyers benefited, knowing they could have the Realtor® of their choice represent them in the sale and the agent would be compensated. Sellers benefited, by having their property on the MLS ensuring all active, informed buyers would know the property was available for sale and all Realtors® would have equal access to represent their buyers. Having an informed accessible market helps all buyers have an opportunity to buy and gives sellers the best chance of achieving an optimal price.
The DOJ argument was that buyer’s agents “steer” buyers towards properties that offer more commission and away from properties that offer less, creating an unfair environment for sellers to negotiate agent compensation. Perhaps steering was a factor in the 1980s and 90s when Realtors® had control over market information. Those days are long gone.
In today’s market, buyers are constantly looking at information online. Actively listed properties are not kept secret from anybody. These days, eager buyers are the ones informing agents about new listings. This is why we are not seeing agent bonuses in the MLS like in the old days. This is also part of why we are seeing buyer’s agent commission rates gradually being reduced.
It is the listing agent’s job to advise sellers on the appropriate commission. Listing agents are not in the business of maximizing the buyer’s agent’s commission. Offering a fair and reasonable commission compensating the buyer’s representation has always been in the best interest of all concerned. This is not a zero-sum game.
There are so many points to be negotiated when buying a home including price, earnest money, contingencies, timelines, possession, service providers, repairs, and whatever else comes up. There is something nice about having agent compensation, pretty much, out of the way when the property goes on the market. The old system worked well for the buyers, sellers, and agents. Buyers got the representation of their choice and did not have to negotiate compensation with their fiduciary during the transaction.
Still, under this system, some brokerages offer commission rebates back to buyers as part of their business model. In complicated or continuous transactions, agents are frequently asked to chip in part of their commission to make things work. Agents will even sometimes voluntarily offer up commissions just to close a deal and move on.
I can’t think of any professional service provider whose fee is negotiated more than real estate agents. People who would never dream of negotiating rates with their accountant, plumber, or hairdresser might try with their Realtor®.
Mandatory Buyer-Broker Agreement – What’s That?
Up until this settlement, buyers could view homes for sale without committing to an agent or negotiating the agent’s compensation. Buyers could look around at different homes without signing anything. Buyer’s agents were paid out of the proceeds of the sale at a rate negotiated ahead of time between the seller and their agent.
Moving forward, buyers will be mandated to sign a written buyer broker agreement naming the amount of compensation the buyer’s agent will receive. The seller may or may not cooperate with the buyer’s agent’s compensation but remember, this information will no longer be allowed in the MLS. This mandatory Buyer Broker Agreement must be signed before the buyer views a property.
The DOJ’s thinking is that buyers will interview agents who will make presentations demonstrating their value and then the buyers can contract with their agent directly regarding compensation. This may sound good in theory but time will tell how it works in the real world.
Some buyer’s agents already use a buyer's brokerage agreement and have done so for years. The Californian Association of Realtors® already has a 3-page agreement that grows to 14 pages if you include the required attachments. This already works under the current pre-settlement system. Of course, a Buyer’s Broker Agreement protects agents more than buyers.
The DOJ intends to allow each party to negotiate their representation, which conceptually could result in the reduction of the buy side commission. However, requiring buyers to agree in writing on what commission to pay their agent before knowing how much the seller will cooperate has plenty of downsides and risks.
My experience is that most home buyers want to shop for homes, not interview agents. Lots of people don’t know if they are ready to buy until they have checked out a few homes doing their fact-finding. Having a buyer brokerage agreement mandatory will cause many buyers to enter into less-than-ideal agreements, especially less sophisticated buyers. Buyers often don’t know what area they will be settling on until they have looked, which could affect which agent they would prefer to use. What if they are already committed to someone else? There are multiple scenarios where you can see problems some of which will end up in court.
Today’s home buyer wants to look at homes and gather information without added commitment or pressure. Today’s successful agents view themselves as educators providing access and information. They find clients by building trust. Not getting compensated by everyone you show homes to works because the compensation has been sufficient when things work out. It will be interesting to see how things change with the new rules.
What Does It All Mean?
The allegations that Realtors® were colluding to artificially keep fees high is disappointing, especially knowing that we were just following the rules and laws made by the government and attorneys forming our legal system.
Having personally sold over a thousand homes in my career, it is my observation that the vast majority of agents work tirelessly for their client’s best interests. My concern is that we are forcing changes in a functioning system that has evolved without understanding the unintended consequences. There is always some kind of trade-off. At a minimum, there will be more things for buyers to sign and a lot more eye-rolling.
I predict the real estate industry will sift through these changes looking at the silver lining. We will attempt to frame it as something positive. It is what we do best. If a house is too small we call it cozy. If a home almost has a view, we say it has a peek-a-boo view. We can’t help it. We are a bunch of resilient optimists.
Realtors® will adjust by working through these government-imposed changes and help our clients make sense of it all. There is still a lot that will be sorted through. Some of it is by the courts and the real estate industry but ultimately the market will have the final say.
You may want to check out some of my other blogs including Why Real Estate Commissions Are So High and Should You Buy Through the Listing Agent?
Hope you found this useful and informative. If you are looking for a real estate broker or property manager in Long Beach, Los Angeles, or Orange County, California or you are just considering it and have a few questions about real estate contact the Mike Dunfee Group today! We are happy to help.
Dunfee Real Estate Services DRE # 02026232
