You may have heard in the news about the lawsuit involving the National Association of REALTORS® (NAR) regarding how buyer’s agent’s commissions are paid. If so, you likely were misinformed about the settlement that was offered.
Some of the headlines read “National Association of Realtors to cut Commissions,” and “The 6% Commission on Buying or Selling a Home is Gone.” While this may be the ultimate result of the lawsuit, neither of these statements are reflective of the terms of the settlement.
The class action lawsuit, Sitzer/Burnett v. NAR, was filed in 2019 and alleged that sellers are damaged when their listing broker offers to compensate the buyer’s representative. They claimed that NAR rules and members’ adherence to those rules led to artificially fixing and inflating commissions being paid to real estate professionals.
To give you a little history on the real estate industry, the current commission structure was established in 1913 which consisted of the listing agent signing an agreement with the seller for a specific commission percentage to sell their home. A portion of that commission, typically half, would be paid to the agent who represents the buyer. The listing brokerage would also be entitled to be paid the full commission if there was no other brokerage involved in the sale of the home.
Since the 1980s, a common total percentage has been 6%, with 3% being paid to the cooperating brokerage. However, that has never been a required percentage and can and has been negotiable between the seller and the listing agent.
From what I understand, the plaintiffs felt like they would be at a disadvantage if they did not agree to this commission structure when they listed their home. Even though they knew that legally they didn’t have to agree to it, they would have a hard time selling their home because agents may not want to show their home if they weren’t paying their commission and that buyers may not want to look at their home knowing they would have to pay their agent themselves.
As much it pains me to say, I must agree that it would have been challenging. It was an assumed thing at the time that the listing brokerage would be paying the buyer’s agent’s commission, and those conversations weren’t even being had. It wasn’t assumed, however, that the commission percentage would be 3% and there was a field in the Multiple Listing Service (MLS) for the Buyer Agent’s Commission (BAC). Agents knew to look there for the percentage the seller was paying, and they could either accept that amount or ask their client to pay some additional commission.
There are a few things that need to be mentioned that I believe contributed the onset of this lawsuit.
Number one: We were in a strong seller’s market at the time the lawsuit was filed. Offers were coming in just hours after a home was listed, and the sellers would often receive multiple offers over the list amount. In some markets, that amount could have been more than $100,000 over list. I’m sure sellers started questioning why they were paying the buyer’s agent when the buyers obviously had the money to pay their agent themselves.
Number two: Home values in most markets had more than doubled in the previous 10 years. While many sellers felt like they could negotiate with the listing agent for their portion of the commission, they didn’t feel like they could do that on the buyer’s side so, since the commission remained the same, buyer’s agents were making twice what they would have made 10 years ago for selling the same home.
Number three: Buyers had a lot more information at the tips of their fingers, literally, than they had just 10-20 years prior. The buyer’s agents were no longer having to go through paper files of listings searching for homes that their client might be interested in. Buyers were doing their own research and finding homes they wanted to see themselves.
So that’s what led us to 2019 when a group of sellers decided it was time for a change in way homes were being sold and commissions were being paid.
Earlier this year, NAR reached a settlement with the plaintiffs. In addition to the plaintiffs receiving a large financial compensation, the primary terms of the settlement are:
The BAC can no longer be in the MLS. This means that an agent has to contact the listing agent prior to showing a home to find out if the seller has agreed to pay commission and if so, how much.
Also, an agent must have a Buyer Representation Agreement signed with a client prior to showing them a home. This forces a conversation between the buyer and the agent about commissions which wasn’t being had previously. They must agree on an amount that the agent will be paid and the agent cannot be paid more than the agreed on amount unless the agreement is amended.
Though these two conditions may not seem like huge terms, for those of us in the industry, it has felt like the way the way we do business was tossed up in the air and we are all just waiting to see how it all lands. Agents have been very vocal about their anger of the settlement, have been in total denial of any wrongdoing, fear that their jobs are going away, threatened to leave the NAR, and reacted in every other way imaginable.
Since everyone else has expressed their view and opinions, I will give you mine. You might want to know who I am first. I am a Broker in Texas that currently sponsors 33 agents. I am also a Broker in Oklahoma and 3 of those agents are also licensed in Oklahoma. I am a member of NAR as well as the state association in both states and a local association in both states.
The first meeting I had with my agents about the lawsuit and settlement, I made the statement that there will be many changes in the industry and that the world we live in is changing at a rapid pace. When there are changes in any industry, those that with the ability to shift and change with it will prosper, but those that can’t, will suffer.
I compared recent shift in the industry to when the internet first became more prevalent and people started streaming movies instead of renting them. Netflix saw an opportunity and capitalized on it. However, Blockbuster was not able to shift and they went out of business. I have told my agents many times, be a Netfllix, not a Blockbuster!
Do I think sellers are going to stop paying the buyer’s agent’s commission? No, I don’t. We are not in a seller’s market right now and sellers don’t want to do anything that might hurt the sale of their home. If the market changes, they might. Also, the buyer already has to come up with a down payment and their closing costs. If they have to pay their agent’s commission on top of that, over half the buyers in the market will be out of the market! That’s the reason, I believe, this structure was established in the first place.
So, what will change? I think the commission being paid to the buyer’s agent will be less than what has previously been paid. Considering what I mentioned earlier about the prices of homes in the last time years, that’s fair. I also think we will be seeing more flat rates for both sides of the transaction rather than a percentage.
The most common response I have received from sellers is that they are willing to pay the “going rate” to the buyer’s agent, but they want the ability to negotiate it based on the price and other terms of the offer. We negotiate who pays for title policy, surveys and other things so why not commission? That’s also fair.
Do I think the buyer’s agent role will eventually go away? I do not and I would certainly hate to see that happen! A home is typically the largest investment that most people will make and it’s something they only do a handful of times in their life. If there’s anything someone needs guidance with, it’s buying a home!
I’ve heard the argument, “People don’t need a representative to buy a car, so they don’t need one to buy a house either.” Buying a car and buying a house is not an apples-to-apples comparison! When you negotiate the purchase of a car, you sign the documents and drive off. After negotiating a contract on a home, you have just started the process! There’s still an inspection to get through and negotiating repairs, dealing with lender hiccups and possibly renegotiating after the appraisal, ordering the survey, combing through the title commitment to make sure there aren’t any issues with title, and so on.
If buyers were to purchase homes unrepresented, we would see a substantially higher number of terminations and contracts that never close leading to frustrations on both sides of the transaction.
For those of us in the industry, the hardest part of all of this has been understand and learning how to use the vast number of new forms and revised forms we must work with! Some of us are struggling.
If you are planning to buy or sell a home, it’s important that your agent understands the processes and knows what your options are. You don’t want to get caught in middle of a transaction working with a Blockbuster agent! Be sure you select a Netflix agent that can adapt to changes as they come and represent you into today’s market, not last year’s market. They are not the same!
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