Last week the National Association of Realtors, along with some large brokerages, was found liable for $1.78 billion in damages to home sellers in Missouri, Kansas, and Illinois. These were the plaintiffs in a class-action lawsuit which found NAR and the brokerages guilty of “colluding to inflate real estate commissions.”
This jury’s decision will be appealed, so it could be several years before the issue is fully resolved. In the meantime, new class action lawsuits are already being filed. Also in the meantime, the judge who presided over the case in Kansas City is busy deciding what industry rules will need to change following the jury’s guilty verdict. Keep in mind that this was a Federal court, so rule changes won’t be limited to a few states.
An argument that’s gone on for at least 4 decades: Who pays the agent working with the buyer?
I recall my broker, back in 1985, saying that it was the buyer who paid both sides of the commission, because it was tacked on to the price of the house. They were the ones doing all the paying.
Others said no. It was the seller who paid because it came from seller’s proceeds at closing. The seller couldn’t add it on because the house was only worth what it was worth.
I thought that was silly, since the appraisers were using comps of sales that also included payment of commissions.
How did NAR and the brokerages collude to inflate real estate commissions?
Apparently the answer lies in the fact that some agents charge a lower commission in order to get the listing, then offer a lower split to the buyer’s agent than others. The result is that their listings are overlooked in favor of listings with full buyer agent commissions.
Thus, while commissions have always, by law, been negotiable, it wasn’t smart for sellers to offer less. If they wanted their listings to sell, agents needed to convince sellers to offer a standard commission. (I know, there isn’t supposed to be a standard commission.)
My thought was that perhaps some agents encouraged sellers to offer less in order to discourage buyer agents. Then they could double-end the transactions. (And yes, I know that’s not allowed everywhere.)
Not all agents charge the same commission rates.
I do know one high-end agent who sometimes charges less, but applies that “less” to her own side. She also charges a little less if she happens to have both sides.
Just as an aside, we also know that some agents tailor their commissions to what the seller is willing to pay by eliminating some services. For instance, the sellers have to provide their own photos for MLS, print their own fliers, schedule showings with buyer agents, monitor their own closings, etc. The agent’s fee is basically for putting the listing in MLS.
Arguments on both sides of this lawsuit…
I’m sure there were plenty of arguments on both sides of this. After all, the jury heard two weeks of testimony from plaintiffs and defendants! While I wouldn’t want to sit through the whole thing, it would be interesting to read an accurately condensed version.
This could signal the end of NAR’s Clear Cooperation Rule.
As such, it could mean that buyer agents will no longer be paid from the seller’s proceeds at closing.
One article I read stated that this decision will give buyers more flexibility, but will it? I suppose it depends upon the buyer and the size of their bank account.
Let’s talk about the “what-ifs” and the maybes.
- Since buyers will know the seller is not paying their agent’s commission – will they assume they should pay less for the house?
Of course. Isn’t that what they assume any time they see a FSBO?
- Will buyers be willing to pay for representation, or will they try the do-it-yourself approach?
Can you envision those buyers calling every listing, connecting with the listing agent to see each house? Without an agent, that’s what they’d have to do.
- What will happen in states where dual agency is not allowed?
I guess buyers will be forced to hire an attorney to help with the purchase agreement. Or maybe the seller’s agent can write up the offer – just without giving any advice along the way.
Sort of like the builder’s representative at a model home.
- Will there be an all-new disclosure form to cover that eventuality? Brokerages wouldn’t want some buyer to claim they didn’t understand that they had no representation.
- If buyers are paying directly for representation, will it still be commission-based, or will there be an hourly or flat fee?
- If buyers are paying directly, will the buyer’s agent be paid whether or not the sale closes?
Maybe an hourly or set fee for showings, and a different fee for writing the offer? Then another fee for tending the offer to see that it closes?
That sounds messy!
- What will happen to first time buyers (and others) who don’t have the funds to pay for a down payment, closing costs, AND the agent’s commission?
It looks to me like they’ll just be out of luck.
Will banks try to do something to ensure that those buyers can still buy?
I’m thinking yes, because lending money is how they make money!
Maybe we’ll go back to the way it sometimes was in the 80‘s. I recall my broker once taking a boat as trade for his share of a commission. And, when property was sold on a seller-carry contract, it wasn’t unusual for us to be paid monthly out of those payments.
Will home sellers embrace change?
The lawsuit alleges that sellers were “forced” to pay buyer agent commissions. However, I read that companies like Purplebricks and REX , who offered lower or flat fees and did not promise to pay buyer agents’ commissions, failed.
Sellers (perhaps realizing that they needed buyer agents to show their homes) didn’t go for it and they finally closed their doors.
And then… there’s the other question I’ve been seeing lately.
Will real estate agents dump NAR?
I’ve read that some brokerages have already opted out. I’ve also read that some agents, in locations where they’re allowed to opt out, are doing so. They pay a fee to MLS, but not to local, state, or national NAR.
What will result from all this?
Government employees and elected officials have a sad track record of not thinking things through to explore what unintended consequences might result from decisions they make.
I suppose their desired consequence is “Making things fair.” (Oh, I really don’t like that word.) I’m not sure they’ll accomplish that, but they will cause a lot of consequences. Whether those will be good or bad remains to be seen.
One thing I know for sure…
I’d love to hear your opinion on this! What will be the consequences – and how will you be able to make it work?
Leave your opinion in the comments, or write me: email@example.com.
You need to think about it, because it will beyond a doubt be up to YOU to make it work.