Are Real Estate Commissions About To Get Smaller?

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The way we buy and sell real estate is headed in a new direction, one that overturns decades of industry practices and may reduce the fees paid by buyers and sellers. 

The change results from a massive legal action that will impact buyers and sellers nationwide. The National Association of Realtors (NAR) has agreed to pay $418 million to resolve claims which, according to the law firm of Cohen Milstein Sellers & Toll, “allege that NAR and several of the nation’s largest residential real estate brokerage companies adopted illegal rules requiring home sellers to pay buyer broker fees – at an inflated rate – in addition to their own brokers’ commissions,” 

What’s going on can be divided into two parts.

First, in November, the real estate industry lost a court case that would have required the payment of $1.78 billion and possibly more than $5 billion to settle price-fixing claims. As an alternative, there is a proposed $418 million settlement that will need court approval before it can become final. 

“The speed of the decision and size of the award reveal that jury members believe the industry has restricted price competition to ensure near-uniform five to six percent commission rates,” said Stephen Brobeck, a senior fellow with the Consumer Federation of America. 

Second, NAR agreed to change the way real estate commissions are divided and marketed and to require the use of written agreements when brokers represent purchasers. 

Real estate commissions are based on a “listing” agreement between a seller and a broker. The agreement shows how much the listing broker will be paid and how the money will be earned.

In addition, there can be a provision to pay the broker who represents or helps the purchaser. The amount set aside for a buyer broker, if any, must be shown if a property is added to a multiple listing system (MLS). 

Under the proposed settlement, listing brokers will no longer be able to publish buyer broker fees in MLS systems. 

NAR says that under the settlement, it “has agreed to put in place a new MLS rule prohibiting offers of broker compensation on the MLS. This would mean that offers of broker compensation could not be communicated via the MLS, but they could continue to be an option consumers can pursue off-MLS through negotiation and consultation with real estate professionals.”

What does all of this mean?

By showing fees under the old MLS standards, buyer brokers might showcase homes paying larger commissions rather than properties that better meet purchaser needs. 

“As long as sellers can make buyer-broker commission offers,” said the Justice Department in a similar case, “they will continue to offer ‘customary’ commissions out of fear that buyer brokers will direct buyers away from listings with lower commissions – a well-documented phenomenon known as steering. When sellers make such offers, buyer brokers need not compete on price to attract buyers.”

With the new arrangement, purchasers will have to negotiate directly with property owners to see who will pay buyer-brokerage costs. Such negotiations open several possibilities.

In a strong seller’s market, an owner might receive multiple bids and will naturally want the offer that produces the highest price and best returns. An offer requiring the seller to pay some or all of a buyer brokerage fee may not be appealing to property owners in such a competitive environment. 

There may be an affordability problem for buyers in a seller’s market under the new system. That’s because they may need to raise money for the down payment and closing costs, plus the buyer broker’s fee. This will be a difficult stretch for many buyers.

However, a seller may be very willing to pay a buyer brokerage fee in a buyer’s market if that means the property can be sold at a better price or sold at all. Paying some or all of the buyer broker’s fee in such situations will become an inducement to buy, like upgraded carpets or a new roof. 

Lastly, there are going to be some very frank discussions with real estate brokers. 

Fees will be more visible under the new system, especially for purchasers. New forms of brokerage competition may become more widespread, such as the increased use of real estate consultants or attorneys rather than brokers to help with contract negotiations.

Broker costs and charges will be discussed with greater frequency, and price competition may be more intense.

If such changes seem unlikely, consider that millions use relatively inexpensive and even free online tax preparation systems instead of CPAs or enrolled agents. In many cases, it’s now possible to refinance with electronic valuations rather than traditional appraisals.

You might see a physician’s assistant (PA) instead of a doctor when you have a medical appointment. Times change, and so do professions.

Peter G. Miller

Peter G. Miller is a nationally-syndicated columnist, the author of seven books published originally by Harper & Row (including one with a co-author), and has contributed to leading online sites and major print publications. He has appeared on numerous media outlets including the Today Show, Oprah!, CNN, and NPR.

Peter has been an accredited correspondent on Capitol Hill and a member of the White House Correspondents Association. He has served with the District of Columbia National Guard and holds both BA and MS degrees from The American University in Washington, DC. View Peter on LinkedIn.