You may have read about this or heard information in some financial news reports recently. Are big changes in real estate commissions coming? How might recent litigation impact sellers, buyers and real estate agents?
As Principal Broker and Founder of Integrity Real estate Group, I am compelled to share with you my professional opinion and take on this lawsuit, and the ones to follow, and to explain why this is happening and how it is likely to impact the way residential real estate will be conducted going forward. I hope it is helpful to clarify the issues and bring the facts to the wealth of “misinformation” that is out there online and otherwise.
I apologize in advance for the length of this complicated, convoluted missive; however, it is necessary to understand the full picture of what has happened and will continue to evolve as a result of recent and ongoing events.
The Lawsuit: A recent verdict in a class-action, anti-trust law suit filed in Missouri ruled against the NAR (National Association of Realtors), and several major national real estate franchise firms portends upcoming change in the way real estate commissions are disclosed and charged.
While it is just a verdict covering one state, and is subject to appeal, the implications for consumers and Realtors could be quite profound going forward.
Although it is “early in the process,” and the headlines were perhaps a bit more salacious than the facts, it is likely that some reforms championed by the DOJ (Department of Justice) and consumer groups are almost certain to be implemented in the coming years. As the damages in this class-action suit were deemed to be $1.8 billion, which is then trebled in anti-trust cases, the stakes are quite high, and are likely to eventually have national implications.
What is the basis for this and several other lawsuits?
The basis of this lawsuit, and several more that have not yet been heard, was that sellers allegedly were harmed by paying for the cost of the buyer’s agent, without having the ability to negotiate that part of the fee.
The plaintiff side inferred that there was “collusion” to keep that part of the fee higher than it would normally be in a “true” market conditions situation.
Some Background: When a seller lists a home, they agree to pay a certain percentage of the sales price as the “commission” to their listing agent. Listing (seller’s) agents negotiate terms and negotiate appropriate forms with sellers based on the State in which they operate, stating their commission fees to the seller. The listing agent further agrees that from their TOTAL commission fee, they will incentivize other agents representing buyers, to show and sell their home by sharing part of that total fee.
Example: You list your home with a firm/listing agent at a 5% commission. The listing agent then “says they will share” a certain percent of this commission with a buyer’s agent, let’s say 2.5% in this case, so that buyer agents who show the home and are successful in bringing a qualified buyer to settlement can be paid.
This has been the way residential Real Estate has functioned for the last 80+ years. In some markets, up to 95% of the listings offered the exact same “buyer agent” fee. This practice caused suspicions that agents/firms were “colluding/conspiring” to keep buyer agent fees “in-line.”
So if you are a “listing agent,” why offer a fee split to the buyer agent? — After all, if you sell the listing yourself you can pocket the whole 5% commission. Sadly there are agents who think that way and perform that way.
Sharing the commission makes the market efficient for both sellers and buyers. Would you rather have one agent, the listing agent trying to sell your house, or potentially ALL 12,000 agents in Northern Virginia?
Smart Sellers and their listing agents offer a “co-op” fee split. It is the best option for their seller because it gets them “maximum exposure” to the largest number of potential buyers, promotes buyer competition, and subsequently creates a sale in the shortest amount of time for the maximum possible market price.
So why WERE buyer-side commissions so consistently alike? It was not about agents gathering at the local bar and saying “hey, let’s agree to pay buyer agents 2.5%” – That WOULD be price-fixing!
The truth is, it was more about attracting the maximum number of agents interested in selling your listing, knowing that many buyers had signed a contract with THEIR buyer agent saying that they would be paid, say, 2.5% for their efforts, by the buyer, unless that was offset by the compensation offered by the seller and stated in their MLS System for the listing.
It all comes to a head: In 2019, in one state (Missouri), an attorney located several SELLERS who said they didn’t understand, after the fact, why they had to pay the buyer agent fees, and why the amount was not negotiable. We are not familiar with the listing forms in that state, but in Virginia it is clearly spelled out what each agent received. A class action suit was filed, and here we are today.
NAR (National Association of Realtors) Control Over How Realtors Do Business: There was another component to the lawsuit that involves NAR control over the way Realtors do business. NAR sits atop the industry, setting rules for how agents, companies and local/regional MLS (multiple list systems) can operate. These rules stifle creativity and virtually require that real estate agents belong to NAR and follow these rules.
The plaintiffs, and perhaps the DOJ, feel that NAR directives are sometimes “anti-consumer,” and keep real estate commissions higher than they might otherwise be, while stifling innovative concepts that might better serve some consumers. The thesis of all this being, “that real estate commissions would be lower if not for these rules.”
You may have even read that some companies, REDFIN for one, said they are leaving NAR now. For better or worse, this is next to impossible under the current rules in most areas of the country. No NAR membership means no local association membership, which means no MLS access, and no access to standard legal forms. It’s pretty hard to function without tools. There will be change of some sort in regard to this, perhaps NAR and the MLS systems will be “de-coupled.”
Will commissions be lower in the future? There could be a great deal of truth in the position that if some of these changes were made, real estate commissions might be lower in the future. The industry should not fear this. Real Estate is a unique industry, where thousands of companies fiercely compete, while still cooperating by sharing their fees and doing what is in their client’s best interest.
More Lawsuits are Coming! In early 2024, another class action suit covering the entire country is scheduled to go to trial. Having won a victory in Missouri, that attorney filed still another suit covering many more states. The premise is the same, “sellers were harmed” by the perceived collusion to keep commissions high and misinformed about why/how much they paid buyer’s agents.
There is a little irony here. Since 2020, sellers have enjoyed an unprecedented period of wealth gains in their homes. The system in place actually created conditions that led to a maximum number of buyers often competing for the same home. Sellers win when buyers compete, and they won big in 2021-2023. During that time, 88% of buyers employed a buyer’s agent to guide them through what was a very complicated and fast-moving market. Sellers limit the pool of buyers drastically when not cooperating with these buyer representatives.
How will this all get fixed? With damages on these suits potentially into the tens of billions of dollars, an amount that would likely bankrupt the entire industry, NAR and the MLS Systems being included in the suit, it seems likely that a settlement must be negotiated at some point.
Two large companies, REMAX and the corporate parent of Coldwell Banker made pre-trial settlements for a total of $138 million, while admitting to no wrongdoing. Others will follow suit.
What do the plaintiffs really want? In the end, the plaintiffs want, yes, money, but they also want to affect change on to NAR and the entire industry. The defendants could also appeal the verdict in the first case, but that would involve possibly posting a bond as high as $5.3 billion! Well, Berkshire Hathaway Real Estate is a defendant, so I guess Warren Buffett could post that much, but I doubt he will. The plaintiffs bankrupting everyone is not a win for them, so settlement is likely.
More on DOJ: Meanwhile, DOJ has also been jousting with NAR over what THEY consider to be anti-competitive rules. They are likely to see what happens in the lawsuit and offer their own solutions. Change is coming to this industry, one way or another.
What could change in the next few years regarding how homes are sold? The trial judge in the Missouri case will also soon rule on injunctive relief. This would involve imposing new rules on how buyer agents are paid and/or stronger disclosures. It is possible that the current system could be blown up – with NO SET offer of compensation allowed to be paid from the total amount that the listing agent side has negotiated. It is also possible that little will change, but the trend seems to be in the other direction right now.
If there is no fee shared with the buyer’s agent, how do they get compensated for their services? Here are some possibilities:
- They could negotiate a fee with THE BUYER and are paid by the buyer, adding additional costs to the buyer side, at a time when homes are less affordable than any point in recent history.
- Another version could be where the BUYER pays their agent’s fees but has the ability to finance the fee as part of their loan amount. We do not feel this is the best solution because it would put more buyers in an equity-poor situation
Another issue for this option would be that currently buyers using VA loans are not allowed by law to directly pay real estate fees to an agent, so those regulations would have to change. We work with a lot of VA buyers in Northern Virginia, and without this change, this option would be detrimental to both buyers and sellers.
The Most Likely Scenario: Buyers negotiate for buyer agent services – Sellers negotiate for listing side services. The buyer negotiates with the seller to credit an amount towards their agent’s fee, but the amount is not “pre-set,” and the seller has the option to negotiate back, probably depending upon the buyers offer. VA buyers can play in this game because the seller would essentially be paying the agent fees.
How will this change how buyer agents work? Now when buyers engage a buyer agent, they sign a contract that says this agent/company has the “exclusive right” to represent them, and that they will be paid when/if the buyer settles on a house. Now, the buyer agent fee is set and guaranteed by the seller/lister. If the most likely scenario happens, what if the buyer agrees to a 2.5% fee to be paid to their buyer agent, but the seller says they will only pay 1.5% given the offer the buyer presented?
Big change if this happens! Buyer agents will need to explain and demonstrate their value to buyers upfront, and maybe again at contract time. It will be messy for a while, but dedicated agents will continue to thrive, and buyers will adjust.
One of the byproducts of the coming changes is that unproductive agents who cannot demonstrate value, purpose and commitment to their clients will fall out of the business. That’s okay — there are too many ill-trained agents now. The cream will always rise to the top.
Buyer agents will need to bring their best game, because the last alternative is that buyers could choose to totally avoid signing a buyer agent contract at all and go directly to the listing agent. In most cases, that will be very short-sighted, but some will choose this course even though they will have no one protecting and representing their interests. This is never a good option for consumers.
WHAT HAPPENS TO CONSUMERS IF THEY GO DIRECTLY TO THE LISTING AGENT TO MAKE AN OFFER?
When one agent tries to “represent” both sides of a real estate transaction, that is legally called “dual agency.” Dual agency is currently regulated at the state level and is legal in the State of Virginia. Maryland, and many other states, do not allow dual agency, and Virginia is among the few states who currently do allow it. We also hear that it is highly frowned upon by the DOJ, and by some of the consumer groups supporting these lawsuits.
At Integrity Real Estate Group we call dual agency an “unavoidable conflict of interest,” and strongly believe that one agent cannot represent the interests of both parties in the same transaction. Buyers and sellers have diametrically opposing goals, and each party deserves their own representation to protect their interests. In fact, “no single-agent dual agency” was a founding principle of our company in 2007, and our ongoing commitment to our clients. It is our hope that dual agency will become unlawful in Virginia.
Can buyers still buy a house through the listing agent as an “unrepresented buyer?” They sure can, but I hope they don’t. Virginia is a “buyer-beware” state. As one of only twelve states that require a buyer representation agreement to work as a buyer agent with a client, Virginia consumers have been better informed than most in the past, however, in the crazy market of the last three years the approach of buying directly from the listing agent has only resulted in much more confusion, frustration and disappointment for buyers.
A study some years ago noted that consumers who go to an Open House and later make an offer to that house through the listing agent did not realize that the agent was not THEIR agent, but owed allegiance only to the seller. They would often refer to the listing agent as “their agent,” when that agent owed them no fiduciary duty and was solely working in the seller’s interest. Many buyers still remain confused, and we can expect to see more disclosures on this issue as changes are enacted – that’s a good thing for consumers!
Why should consumers hire a buyer agent? The cost of hiring an experienced, professional informed buyer agent who represents only your interests can save you a lot of money, frustration, disappointment, and heartache long term, in what is probably the biggest, most important purchase of your lifetime.
What is Integrity Real Estate Group’s position on all of these potential changes?
DON’T FEAR CHANGE: Change is inevitable and good for everyone. Progressive change and evolution is needed in our industry.
On Transparency for Consumers: At Integrity we have always embraced transparency on commission structures and in how we represent our clients. It is important to us that clients are informed up front of their costs, who is covering those costs, and specifically what services we perform for them.
Representation: One of our core founding values is that we do not, and never have, practiced single-agent dual agency. We have been doing it right since our company was founded in 2007, long “before anyone was watching.”
Commissions: At Integrity we customize commissions for each client based on their specific needs. We strive to deliver great value to our clients, which we believe is reflected in the fact that over 90% of our clients, year-after-year, are referred by clients to whom we have previously proven our worth. We stand ready for upcoming needed changes, look forward to innovations, and will align our practices to best serve our clients as change happens.
Cooperating with Other Agents: We have been in this business long enough to appreciate that without the cooperation of other agents, we don’t get paid for our services. If you treat other agents the way you want to be treated, and always put client needs above your own, then there is no ambiguity of values. We will continue to navigate the changing arena with integrity and honesty and embrace the positive necessary changes that we see coming. Real Estate is a noble profession for those who put “clients first.”
Thank you for taking the time to read this lengthy explanation of what is happening in Residential Real Estate in Northern Virginia, and the entire industry. I welcome any further questions or comments you may have. We embrace the changes, challenges, and continued evolution of our industry with optimism. As more clarity develops on these issues, I will keep you informed.
We love what we do! We sincerely value your confidence and trust in us. Our Integrity family will continue to serve you, your family, friends, and colleagues with honesty, integrity and faithfulness.
Should you have any questions or comments do not hesitate to call, text, or e-mail me.
