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In the wake of the National Association of Realtors’ (NAR) landmark $418 million settlement, a seismic shift is underway in the real estate industry, particularly in how agent commissions are handled. The changes, though seemingly straightforward, have profound implications that will fundamentally alter the landscape of buying and selling homes in America.
The heart of the matter is regarding the removal of commission rates from the MLS (multiple listing service), a change that might initially appear as a stride toward transparency and fairness. However, a closer examination reveals a potentially murky future, where the dynamics of real estate transactions become less transparent to the very individuals they are meant to serve: buyers and sellers.
Historically, the MLS has been the bedrock of real estate commissions, offering a level playing field for all parties involved. It ensured transparency in commission agreements, providing buyer’s agents with clear expectations of compensation prior to engaging in transaction discussions.
The settlement’s requirement to eliminate such disclosures threatens to upend this balance, ushering in an era where commission negotiations precede, and potentially influence, the discussions of a home’s purchase terms.
Commissions move behind closed doors
Consider a scenario where a buyer’s agent, prior to even scheduling a showing, inquires about the commission a listing agent is willing to offer. This conversation — occurring away from the eyes and ears of buyers and sellers — sets the stage for a transaction where the agent’s compensation could take precedence over the buyer’s best interest.
In the worst kind of scenario, there’s a risk that a buyer’s agent might not be completely honest with their customer. For example, before starting negotiations for a purchase, they might quietly sort out what they need to do to secure a certain commission rate with the seller’s agent.
Even more concerning, they might mislead the buyer about the commission being paid by the seller and factor this incorrect commission into the negotiation process. Essentially, the problem here is that agents could end up negotiating their commissions without their customer’s knowledge or approval, which isn’t how it should be. Agents’ compensation discussions should be transparent to buyers and sellers.
The end of buyer agent incentives
One aspect of the settlement that stands out involves limitations on how much a Realtor can be compensated, specifically stating that they cannot accept compensation that exceeds the agreed-upon amount with the buyer.
For instance, if a seller offers an additional 1 percent beyond the buyer and buyer’s agent’s agreement, the agent is barred from accepting it, even if this doesn’t affect the purchase price — potentially leaving more money with the seller.
Essentially, all buyer agent incentives offered by a seller are now gone. The unfortunate recourse for this is to increase the commission required by the buyer to ensure that as much of seller-paid commission is captured as possible. The most likely scenario seems to be that this rule will be often ignored by the industry and that buyer’s agents will be accepting higher commissions due to a lack of checks and balances.
While some sellers might welcome the idea of not offering buyer agent incentives, it could be viewed as anti-competitive by other sellers, as it prevents them from using incentives to attract buyer agents, a tactic often used by builders and investors.
Agents may also feel this rule is anti-competitive because it puts a cap on how much commission they can make in a transaction by automatically undercutting the commission being offered to them by agreeing parties. Buyers may feel similarly, that they are being held fully responsible for their agent’s commissions even when the seller is willing to pay it.
This part of the settlement in particular prohibits free market activities and aggressively restricts the ability for the sellers, buyers and agents to negotiate terms they believe are in their best interest.
A potential for miscommunication on commissions
Moreover, the settlement strips away the guarantees of commission compensation through the MLS, opening the door for potential misunderstandings or miscommunications about commissions.
Such disputes between brokers, previously resolved through binding arbitrations through the local Realtor associations, will essentially cease to exist. In a scenario where it falls on buyers to directly cover their agents’ commissions, we might see a shift toward legal tangles between buyers and brokerages.
Buyers could even be liable for two or more commissions on the same transaction because they didn’t understand the terms and conditions they signed with previous agents.
This could spell trouble for the industry’s reputation. Imagine a situation where real estate agents need to take legal action to secure their earnings, potentially leading to liens on a buyer’s newly purchased home or lawsuits for unpaid commissions. Actions like these could dramatically alter the public’s perception of Realtors.
A significant and concerning aspect of this new era is the absence of recorded commissions, which means that agents and consumers will lack a true understanding of the range of commissions being charged in the market.
According to NAR’s Profile of Home Buyers and Sellers, 71 percent of buyers only interviewed one agent. Although you would hope this trend would change given the terms of the settlement, the same report states that 81 percent of recent sellers contacted only one agent before listing their home.
The unfortunate truth is that consumers are not interviewing multiple agents to ensure they are receiving the best service at the best price. If buyers and sellers are entrusting the first agent they meet, they won’t have access to readily available information to know if they are being charged a fair commission.
It’s important to acknowledge that most real estate agents operate with integrity and professionalism. However, like any industry, there are bad actors who may exploit these new rules for personal gain, especially in a landscape where their source of income has been significantly diminished because of this settlement.
The lack of transparent commission structures opens the door to unethical actions, making it crucial for regulatory bodies and industry associations to remain vigilant and for consumers to be well-informed.
Despite the concerns surrounding the new commission structure, there’s a silver lining. If it goes 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 navigate these changes with integrity, there’s a significant opportunity to stand out and thrive. The future of real estate may look different, but it also holds the possibility of being more consumer-friendly and professional.
Sean Frank is the founder and CEO of Mainframe Real Estate in Florida. Connect with him on Instagram and LinkedIn.