Real Estate Commissions in the Crossfire! NAR Lawsuit explained.

Today I'm covering a really big topic, one that has been going around in the news and that lots of people have been talking about! Full disclosure, my perspective is rooted in being a lifelong entrepreneur and in recent years, top producing real estate agent in Bellingham, Washington. I aim to give the objective truth around the situation along with my personal views and even some speculation on how this could shape our industry moving forward. As always, I welcome spirited debate and counter arguments to anything discussed in this article. You can always call me directly to discuss anything related to real estate!

On March 15th 2024, the Nation Association of Realtors agreed to pay a settlement of $418 Million in damages for commision lawsuits. Many are claiming that this could result in billions of dollars of commissions for real estate agents, likely forcing many out of the industry in the coming years. I would like to take some time to unpack the implications of this settlement and how it might impact home buyers and sellers moving forward. Keep in mind this agreement must still be approved by the court and the Department of Justice has yet to weigh in. If approved, listings on the MLS cannot advertise compensation for a buyers' agent. 

First, let's discuss how commissions have been paid historically in the United States...

When a home seller signs a listing agreement, the listing agent negotiates a commision to be paid to BOTH the listing agent (for representing the seller, marketing their home, listing on their local MLS) AND a buyers agent for bringing a buyer. This is typically done by agreeing to offer a set compensation percentage to a cooperating buyers' agent. In many states, there is also the ability to set a fee for the listing agent performing what is known as dual agency, where the agent represents both seller & buyer. This is rarely a good idea, but more on that later.

Commissions can also be a flat fee and sellers in many areas (Including our local Northwest Multiple Listing Service) are not required to pay a specific level of compensation. This has always been negotiable for both buyers & sellers commission. One thing I like to remind my clients when discussing compensation is that you want an agent who can advocate for their own compensation. Afterall, this is the first of many negotiations that they will be doing that relate to your sale or purchase. Someone who shows their inability to advocate for themselves is likely unable to do much when it comes to advocating for you. Some may disagree with this and in some rare cases, they may be correct. Regardless, if you are a seller looking for top dollar, a buyer looking to win in a multiple offer scenario or gain leverage with a home that has been on the market for some time, you would be wise to pick a top level negotiator.

Somewhere around 50% of the homes that I sell to buyers are ones that my buyers didn't see online or thought that they wouldn't be interested in. The hyper local & hyper specific knowledge of a qualified buyers agent helps buyers find the right home and negotiate the best terms. Just today I was showing a home on Chuckanut to new clients who were eager about a home they'd been looking at online for months. They were in love with it's potential and wanted to write an offer immediately. I urged them to consider another home (that they'd seen but disregarded) that I felt would better meet their needs, and ultimately it became their top choice. They were grateful that they had an agent who listened to their needs and knew the inventory well.

Pros & Cons of the old model-

Buyer Pros-

- buyers could work with any agent they choose (including top agents) without signing an agreement and once the sale of their new home closes, their agent is paid from the sellers' proceeds. 

- first time home buyers or anyone with limited cash to close didn't have to have extra liquidity to pay their agent.

- unless the specific agent requires a buyers' contract (I never did), you could change agents freely (prior to signing a purchase contract) if you felt your expectations were not being met.

- appraisals were rarely impacted by a buyer offering above the asking price simply so the seller would still pay their buyers' agent.

Seller Pros-

- sellers decide what they want to offer for compensation to a cooperating buyers agent up front and don't have to factor that into every offer.

- sellers can ensure that their listing agents sole fiduciary responsibility is to them and dual agency can be avoided.

- sellers have countless hungry buyers agents who are financially motivated to help sell their home.

I feel it's also important to note that when the seller first purchased their home, they received the same benefit.

Buyer Cons- 

- many buyers don't understand the value of a good buyers' agent or how they are compensated. Our industry has historically done a poor job at this.

Seller Cons-

- a higher commision is committed upfront and paid by the seller.

- from a technical standpoint, sellers are paying the commision of an agent whose job it is to represent an opposing party.

Pros and cons of the possible new model (Some details TBD)

Buyer Pros-

- an upfront conversation on how commissions work and how buyers' agents get paid.

- assuming they sign the newly required buyers agency agreement, their agent will be bound by a fiduciary duty.

- having to sign a contract up front, many will not sign with the first agent they talk to and instead do their due diligence on the best agent to suit their needs. Currently, something like 70% of people work with the first agent they talk to. This is rarely a good idea. You should know WHY you are working with your agent and make an informed decision in the matter. I believe that this will accomplish just that.

Seller Pros-

- a smaller percentage of commissions will be paid overall by the seller in most cases.

- on competitive listings where the seller will have multiple offers, they may pay even less or nothing to a buyers agent.

- sellers may no longer feel the need to pay a commision to an opposing party to negotiate against their best interest.

Buyer Cons-

- buyers unwilling to sign the buyers agency agreement may end up signing a purchase contract with a listing agent and who's sole obligation is to sell that specific house unless the agent operates under dual agency and even then, they are now a mediator and cannot advocate solely to the buyers' benefit.

- buyers may end up paying significantly more to close on the purchase of their home.

- having to pay an agent out of pocket could make the difference between getting the home of their dreams, or not. Quite often the strength of a buyers' down payment or ability to cover the difference in the event of a low appraisal will be diminished by having to pay their buyers' agent.

- sellers may not accept an offer when a buyer with limited funds asks a seller to pay their agents commision.

- many buyers may choose the cheapest option and forgo having high level representation through the course of their home search and subsequent contract negotiations.

Seller Cons-

- less buyers being shown a home due to lack of incentive to buyers agents.

- sellers agents performing dual agency will eliminate their agent from soley representing the sellers best interest.

What will a buyers' options be moving forward?

Sign a buyers agency agreement and either pay whatever commissions were negotiated or ask the seller to cover some or all. If you have plenty of cash, this may not be a problem. Asking the seller to pay may work in some situations where they are motivated. In more competitive multiple offer situations, this may be a deal breaker and you could very likely miss out on your dream home. 

Work directly with the listing agent. This is known as dual agency and changes the type of representation from advocating for you alone, to more of a mediator. I have done these types of deals and they can work in limited cases where the transaction is extremely simple and both parties are on the exact same page. When you have your own agent, their job is to advocate for your best interest alone. This may include negotiating a lower price, repairs or price reductions due to inspection findings and countless other things that can arise.

Represent yourself. For a savvy buyer, this may be possible. Have the listing agents show you the house (whose fiduciary duty it is to the seller and who is financially motivated to sell the home), have a lawyer draft the necessary documents and write a compelling offer. Make sure that you are incredibly well studied and have done lots of real estate deals in the current market in order to avoid major pitfalls!

Hire a consultant. Many would just hire a real estate attorney, who has extensive knowledge of contracts and litigation but typically has little to no understanding of market trends, how to capitalize on leverage and strategies for creating the offer that gets accepted. I foresee a new model and one that I would be more than happy to implement. Instead of me making a larger amount upon closing, we start with a retainer that includes a certain amount of consultation, showings and communication. Perhaps a success fee as well, upon closing. I think most agents would happily make less on each closed transaction IF every buyer interaction guaranteed fair compensation. 

Are real estate agents overpaid? Let's unpack this. Some would consider our job sales but I would call our job performance based service. Literally every moment spent working with clients, studying the market, continued education, finding new business , etc... is speculative. The only time we get paid is by successfully closing on a home. From the outside this may look easy and frankly, in some cases it is. By and large there are challenges that almost all of our clients would say makes us fairly paid. While it's true that some agents make a great living, it's important to keep in mind that in 2023, almost 50% of agents sold 1 or less homes. It’s not uncommon for me to work with a buyer for a year plus, show and research countless homes, only to have their plans change and not get paid at all. Being on call 24/7 is another huge benefit that our clients receive. I could be on vacation, at a wedding, almost anywhere and will either answer the phone or get back immediately. 

When you work with a dedicated agent, you get unlimited access and they sacrifice their peace in order to give you on demand service. Very few other high level professions give you that type of access. Without throwing some of my colleagues under the bus, I would agree that some agents really aren't working hard enough to deserve their compensation. However, a really good real estate agent is priceless. Having sold many of the top sales in Bellingham and receiving huge commissions, I'd be more than happy to connect you with my past clients to see if they think that the service they received was worth my compensation!

In summary-

I’m all about transparency around commissions AND I'm all about negotiations that result in a win for all involved. At the end of the day, we all want to be heard and treated fairly. One of the reasons that I have been successful in this industry and been a party to countless record breaking transactions is that I seek to deeply understand the needs of others and work with that information to help my clients accomplish their goals. 

The main concern I have is for buyers with limited capital to pay their buyer's agent. Many first time home buyers have limited funds to close and will likely be signing buyers agent agreements that commit them to trying to negotiate the seller covering that expense. This will likely make their offers even less competitive in mutual offer situations. Some agents may be willing to reduce their commission on the buy side, however it is less likely with the best agents due to the speculative nature of representing them. I do believe that there should be an upside for the agent to account for the lack of certainty around compensation. Either that or we should be adequately paid for our time regardless of outcome. This other option would be some sort of retainer or per showing charge with a lower success fee. Either way, these models aren’t really used yet and will take time to flush out. The benefit of the old system is that buyers can work with a top agent and not commit to anyone or any agent costs associated with closing on a house and even then, the expense was paid by the seller typically. 

The irony in all of this, the lawyers who are litigating this class action lawsuit on behalf of the plaintiffs are working speculatively instead of hourly. In fact, if they win they could stand to get nearly HALF of the settlement. How's that for a commision structure!

I’d be happy to discuss this topic one on one with anyone interested. Thanks for reading!

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