What’s Going On With Real Estate Commissions?

In case you missed it, a jury in Missouri recently determined that the National Association of Realtors (NAR), along with a group of the largest real estate companies in the country colluded with each other to inflate real estate commissions paid by consumers selling real estate. Prior to the verdict, two of the brokerages agreed to settle for a combined $138.5 million. NAR along with the other defendants decided to take their chances at trial and were shell shocked when the jury awarded the plaintiffs $1.8 billion in damages. And within a few weeks of the verdict, another of the large brokerages decided to cut their losses and agreed to settle their portion of the damages for $70 million.

How do real estate sales commissions work?

Typically, when a seller lists a property for sale through a real estate broker, the seller agrees to pay a commission to their agent which averages 5%-6% of the final sale price. From this amount, the listing agent, at their discretion, will offer a commission to the agent who represents the buyer. In reality, it’s the seller who pays the commission to the buyer's agent but under the current system, the seller’s agent determines how much of the total commission gets paid to the buyer’s agent. If the seller doesn't agree to offer the buyer’s agent a pre-defined commission, they can't list their property for sale through the industry owned MLS (Multiple Listing Service). This has been a point of contention with some sellers for quite some time.

What was the lawsuit about?

Attorneys for the plaintiffs (sellers) argued successfully that NAR and their broker members colluded to inflate the commission by mandating that the seller must allow the listing agent to offer part of the total commission to the agent representing the buyer in order to make their property eligible to appear on the MLS. The jury agreed that the sellers should not be forced to pay a commission to the buyer’s agent and are being unfairly denied the right to negotiate the buyer’s agent’s commission as part of their overall agreement with the buyer.

This storm has been brewing for a long time!

For those of us who have been around for a while the-writing has been on the wall for well over a decade. While technology has transformed one industry after another, NAR and too many of their members desperately hung onto an antiquated compensation system. The days of “pay it because we don’t give you a choice” are quickly coming to an end and NAR pretty much acknowledged that with their D.A.N.G.E.R. Report published in 2015.

What happens now?

As a result of this litigation, the way in which sales commissions are negotiated will likely change. Most likely the listing agents will lose the power to unilaterally determine how much of the commission paid by the seller goes to the buyer’s agent, nor have the ability to insist that the seller offer a commission to the buyer’s agent at all.

Both the buyer and the seller will likely play an active role in negotiating real estate commissions as part of the overall negotiation to purchase the house. There may be times that the buyer will be responsible for paying their agent’s commission or at least a portion of it out of their own pocket. So, buyers will need to have a better understanding as to how real estate agents are compensated before they hire an agent to represent them. Is the agent you're speaking with locked into being compensated 2%, 3%, or more of the final sale price or, would a reasonable flat-fee be an option?

For almost 22 years now, ALT has been suggesting that home buyers build their team (real estate agent, lender, title company) before they get serious about making an offer. You’ll be better prepared for a successful transaction if you get all of the business elements of the home buying process in place before the emotional side of finding the perfect home becomes a distraction.

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ALT has performed over 18,000 real estate closings throughout Pennsylvania and we've worked with many real estate agents and mortgage lenders throughout our area. If you’d like contact information for a few local real estate agents and/or lenders who share in ALT’s commitment to complete transparency and making buying real estate less expensive, please contact us for a referral.