May is Inman’s commission and payroll month. We’ll sort through the noise and misinformation and provide you with the latest facts and strategies on how to prosper after a commission settlement. And find updates directly in your inbox with Inman’s new weekly digest, The Committee Chronicle.
Consumers have spoken and the courts have agreed, as a steady stream of data shows litigation and commission settlement: To the average person, trading is vague at best consumeras a result, the industry is undergoing a major transformation.
While the online portal provides an open surface marketwhich are just curated collections from a variety of different lists multiple listing service (“MLS”). The residential real estate transaction itself and many of the protocols and processes behind it remain opaque and outdated. However, a shift in the residential real estate landscape is underway.
On February 16, 2024, the Department of Justice filed a statement of interest in the antitrust litigation Nosalek vs. MLS Property Information Network and more.Al,call Decoupling of Seller and Buyer Real Estate Brokerage Commissions. One month later, on March 15, 2024, National Association of Realtors Announced a settlement with a class of plaintiffs representing home sellers, agreeing to a partial decoupling proposal from the Justice Department.
Under the terms of the settlement, sellers and their agents will no longer be able to unilaterally set buyer’s agent commissions in the MLS, as they have done in the past. While such commissions are theoretically negotiable, negotiations rarely occur and the buyer’s agent commission in the listing agreement is the actual buyer’s agent commission. However, sellers are still free to contribute to the buyer’s agent commission, although such offers may not be advertised in the MLS.
The hope behind the NAR settlement is that the separation of seller and buyer commissions on the MLS will encourage buyers and their agents to negotiate such commissions among themselves or with sellers.
At least in the multiple offer situation, one can see how the buyer could benefit by paying the buyer’s agent commission themselves rather than requiring any contribution from the seller. While the NAR settlement does encourage commission decoupling, it falls far short of what is required.
conflict of interest
Few commentators noted that broker compensation plans have been U.S. Department of Justice It has also led to practices fraught with conflicts of interest that harm consumers (both sellers and buyers).
At one extreme is the practice of double agency, which is still legal in the United States. 42 states, where a single real estate agent represents both the seller and the buyer in the same transaction. The conflicts of interest inherent in this approach are too obvious and egregious to merit discussion.
At the other extreme are unrepresented buyers. In both cases, the listing brokerage firm must retain full broker compensation, even if there is no buyer’s broker. Similar conflicts of interest arise when a real estate group attempts to internalize buyer’s agent fees by favoring buyers represented by its members. Keeping commissions out of the MLS is expected to significantly reduce these conflicts of interest.
Adding to the Mix Growing Practice Private Exclusive Listing. Here, brokerage firms typically maintain their own lists for a specific period. These so-called “pocket listings” have the effect of internalizing buy-side agent compensation into the listing brokerage business.
Unfortunately, not charging MLS commissions may actually increase the use of these off-market listings, which is very detrimental to the average seller as they benefit from more listing exposure. Only widespread transparency in online transactions can help reduce this practice.
While the separation of seller and buyer commissions envisioned in the NAR settlement will make it more difficult for listing agents and listing brokerage firms to obtain buyer commissions, actual decoupling is necessary to remove incentives for self-interested behavior.
Additionally, transaction transparency where buyers explicitly request a buyer’s agent commission will encourage buyers to pay their own agent commission as buyers compete to make their offers more attractive. All other things being equal, an offer without such a request is stronger than an offer with a request.
Finally, there was a perverse incentive implicit in the prior compensation plan for the buyer’s agent not to negotiate a lower price for the buyer. The higher the price, the higher the commission. Since buyers can negotiate fees directly with agents, they may not agree to such a compensation package.
collective action problem
The continued high level of overall real estate brokerage fees is almost directly responsible for Buyer’s agent fees continue to remain high.this High buyer’s agent feesThis, in turn, arises from specific collective action problems (market failures) implicit in traditional commission structures.
Collective action problems occur when individuals or groups face obstacles that hinder common or mutually beneficial goals in pursuing their own interests.
While individual agents and brokerage firms each seek to maximize their own interests, they collectively charge “customary” buyer’s agent commissions for fear of excluding potential buyers represented by the agents who will steer their clients away from the buyer’s agent This situation arises from properties where people have lower commissions.
Although some people think Buyer’s guidance Listings that stay away from low commissions either don’t exist or are limited due to ethical restrictions, but those in the industry know this to be true.
Even the MLS recognizes the potential for such misconduct and blocks property searches based on buyer’s agent commissions. Simply put, if the seller offers the “customary” buyer’s agent commission, it will be easier and more profitable for the listing agent to sell the home. When all listing agents face the same dilemma, it’s business as usual and the “customary” buyer’s agent fees remain.
this NAR Rules of Participation, combined with MLS practices and the continued use of “customary” buyer’s agent commissions, results in an effective lower limit on overall agent compensation. All available empirical evidence supports this assertion that overall broker compensation is consistently higher across the country. The collective action problems described above inhibit price competition for real estate brokerage services, forcing consumers to pay higher prices.
Collective action problems remain
NAR settlements may help resolve this collective action problem by encouraging buyers to negotiate commissions with brokers. Ultimately, however, a true decoupling of seller and buyer commissions is necessary to completely resolve the collective action problem and move away from the absence of buyer commission negotiations and the persistence of high broker compensation.
By shifting the responsibility for buyer’s agent commissions to the buyers themselves, the industry may now see increased price competition, to the benefit of real estate consumers.
Eliminating MLS commissions is expected to not only remove the floor on overall broker compensation, but also reduce many conflicts of interest and encourage innovation. No more mention of buyer’s agent compensation in the MLS. No more steering buyers away from low commission listings.
The role of demand elasticity in determining hazards
Surprisingly, the vast majority of commentators on the subject of Commission litigation ignore the complex role of the Commission. elasticity of demandmeasures the sensitivity of consumer demand to price.
The sensitivity of housing demand to price is affected by factors such as market conditions and location. Some people believe that since home buyers are the only ones making money (i.e. the ultimate purchaser), they are the ones who are harmed.
This is the logic of Batton 1 and Batton 2 and other cases in which the plaintiffs are homebuyers. Others have successfully claimed that sellers were harmed due to lower net profits due to excessive brokerage fees. This is the core claim of Sitzer | The plaintiffs in the Burnett and Mohr cases were home sellers.
So which group of plaintiffs is correct? it depends. If demand for homes is highly price-sensitive (a buyer’s market), sellers will bear the brunt of higher commissions, absorbing commissions and reducing profits. If demand is highly insensitive to price (a seller’s market), then buyers will be harmed because higher commissions will simply be passed on to them. The answer to the question of who is harmed therefore depends on the time frame and geography.
NAR settlements involve only the seller plaintiff class. Buyer-plaintiff class action lawsuits are alive and well, at least in the context of a seller’s market throughout much of the United States over the past decade. It remains to be seen how the courts will handle buyer class actions and how NAR will respond to them.
Eliminating MLS commissions is a critical step away from the lack of buyer commission negotiations and continued high broker compensation.
By shifting the responsibility for buyer’s agent commissions to the buyers themselves, the industry may now see increased price competition, to the benefit of real estate consumers. Eliminating MLS commissions is expected to not only eliminate the bottom line in overall broker compensation, but also reduce many conflicts of interest and encourage innovation.
The transformative journey of residential real estate
By resolving conflicts of interest, increasing transparency and promoting competition, it is possible to create a more competitive, innovative and fair market.
While the industry is still far from truly decoupling commissions from NAR, this is a step in the right direction. Market dynamics may result in this situation without additional regulatory action, as more sellers refuse to pay buyer’s agent commissions and more buyers agree to pay their own agent commissions.
Regardless of how the industry develops – market dynamics or further regulatory action – true commission decoupling should be viewed as an opportunity to transform the residential real estate landscape.
Increased competition may also lead to the growth of new brokerage models. The dominant one-size-fits-all model that caters to real estate agents may be replaced by a more consumer-centric approach. Specifically, the adoption of decoupling can promote the development of open and transparent brokerage models.
The many self-serving norms and practices of the real estate industry go a long way toward explaining why most consumers distrust real estate agents so much and underestimate them so much without knowing exactly why.
In the interest of full disclosure, this is in large part the reason I co-founded my brokerage, one of a new breed of brokerage that emphasizes transparency and consumer control. Using our company’s software, offers can be submitted online, buyer’s agent commissions are openly negotiated, buyers can compete openly and fairly, and sellers can track their home sale from start to finish.
This transparency is equally important to the booming and competitive real estate market as is the decoupling of brokerage commissions.
Only such openness can truly eliminate the conflicts of interest, backroom deals and opacity that still exist today. Most importantly, only such transparency can improve the negative public image of the industry. While home buying is unlikely to be completely digital, there’s no reason why more transactions can’t happen online, and there’s no reason why the process can’t be made more transparent.
The process of earning commissions outside of the MLS is not without its challenges, but the rewards – increased transparency, consumer trust and a more competitive market – are well worth the effort.
Hopefully, the residential real estate industry will embrace the changes of decoupling and adopt a more transparent business model. If so, it has the opportunity to redefine itself, put the interests of consumers first, and usher in a new era of competition, innovation and fairness.
Bob Mathew is the principal broker snapdoor.com in Washington, DC.contact him Facebook or Instagram.
