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Following a landmark $418 million settlement with the National Association of REALTORS (NAR), the real estate industry is undergoing seismic changes, particularly in how agent commissions are handled. Although these changes may seem simple, they have far-reaching consequences and will fundamentally change the way homes are bought and sold in the United States.
At the heart of the issue is the elimination of MLS (Multiple Listing Service) commission rates, a change that may initially appear to be a step toward transparency and fairness. However, closer examination reveals a potentially dark future in which the dynamics of real estate transactions become less transparent to the individuals they are meant to serve—buyers and sellers.
Historically, the MLS has been the cornerstone of real estate commissions, providing a level playing field for all parties involved. It ensures transparency in commission agreements and provides clear compensation expectations to the buyer’s agent before engaging in transaction discussions.
The settlement’s requirement to eliminate such disclosures could tip the balance, ushering in an era where commission negotiations precede and potentially influence discussions of home purchase terms.
Commissions are conducted in secret
Consider a situation where a buyer’s agent asks the listing agent what commission he is willing to offer before arranging a showing. This conversation takes place outside the eyes and ears of the buyer and seller, setting the stage for a transaction in which the agent’s compensation can take precedence over the buyer’s best interests.
In the worst-case scenario, a buyer’s agent may not be completely honest with the client. For example, before starting negotiations to purchase, they might quietly discuss with the seller’s agent how to secure a certain commission rate.
Even more worryingly, they may mislead the buyer about the commission paid by the seller and incorporate this incorrect commission into the negotiation process. Essentially, the problem here is that an agent may end up negotiating a commission without the client’s knowledge or approval, and that shouldn’t be the case. Agent compensation discussions should be transparent to buyers and sellers.
End of Buyer Agent Incentives
One aspect that stands out in the settlement involves limits on the amount of compensation real estate agents can receive, specifically stating that they cannot accept compensation in excess of the amount agreed upon with the buyer.
For example, if the seller offers an extra 1% above what the buyer and buyer’s agent agreed upon, the agent is not allowed to accept it, even though it won’t affect the purchase price – potentially leaving the seller with more money.
Essentially, all buyer agent incentives offered by the seller are now gone. Unfortunately, the way to do this is to increase the commission required by the buyer to ensure that the seller gets as much commission as possible. The most likely scenario seems to be that this rule is often ignored by the industry and buyer’s agents will receive higher commissions due to the lack of checks and balances.
While some sellers may welcome the idea of not offering buyer agent incentives, others may view this as anti-competitive as it prevents them from using incentives to attract buyer agents, which is often used by builders and investors strategy.
Agents may also view this rule as anti-competitive because it limits the amount of commission they can earn on a transaction by automatically undercutting the commission offered to them by the agreement. Buyers may feel similarly that they are fully responsible for the agent’s commission even if the seller is willing to pay it.
This section of the settlement agreement specifically prohibits free market activities and severely limits the ability of sellers, buyers and agents to negotiate terms they believe are in their best interests.
There may be poor communication regarding commissions
Additionally, the settlement removes the guarantee of commission reimbursement through the MLS, opening the door to potential commission misunderstandings or miscommunication.
Such disputes between brokers, previously resolved through binding arbitration through local REALTORS associations, will largely cease to exist. In situations where the buyer pays the agent’s commission directly, we may see legal disputes arise between the buyer and the brokerage firm.
Buyers may even incur two or more commissions on the same transaction because they did not understand the terms and conditions they signed with their previous agent.
This could spell trouble for the industry’s reputation. Imagine a situation where a real estate agent needs to take legal action to secure their income, which could result in a lien on the buyer’s new home or a lawsuit for unpaid commissions. Actions like this could significantly change the public’s perception of real estate agents.
An important and concerning aspect of this new era is that commissions are not recorded, meaning agents and consumers will lack a true understanding of the range of commissions being charged in the market.
according to NAR’s Home Buyer and Seller Profiles, 71% of buyers visited only one agent. While you might hope that trend would change given the terms of the settlement, the same report states that 81% of recent sellers only contacted one agent before listing their home.
The unfortunate truth is that consumers are not interviewing multiple agents to ensure they are getting the best service at the best price. If buyers and sellers appoint the first agent they encounter, they will have no ready information to know whether they are being charged a fair commission.
It is important to acknowledge that most real estate agents operate with integrity and professionalism. However, as with any industry, there are bad actors who may exploit these new rules for personal gain, especially if their revenue streams are significantly reduced as a result of this settlement.
The lack of a transparent committee structure opens the door to unethical behavior, so it is vital that regulators and industry associations remain vigilant and that consumers are well informed.
Despite concerns surrounding the new committee structure, there is a glimmer of hope. If directed in the right direction, this shift could drive a much-needed increase in open communication and ethical practices within the real estate industry.
For agents willing to respond to these changes with integrity, this is a significant opportunity to stand out and thrive. The future of real estate may be different, but it may also become more consumer-friendly and professional.
Sean Frank is the founder and CEO of a large real estate company in Florida.contact him Instagram and LinkedIn.
