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Navigating the news about agent compensation: Myths, clarifications and some good conversations

Real Estate Agents Working TogetherThe March 15, 2024, announcement by the National Association of REALTORS® (NAR) about its lawsuit agreement related to broker commissions has set the media abuzz with speculation and misinformation. Here are some of the myths and misstatements out there, along with the facts about the agreement.

 

1— The settlement forces real estate brokers to reduce their compensation or eliminates commissions entirely.

Both are false.

The settlement sets no standard or limitation on what agents can charge, nor the services they elect to deliver. Agent fees have always been fully negotiable and there has never been any collective bargaining or collusion on commissions.

Agents may cooperate on transactions toward a common goal, but they are independent businesspeople and can often be competitive with one another. In every market, you will find real estate representation at almost every compensation level — and just as many levels of service and competency. From our perspective, there is more variation in real estate pricing than any other product or service.

While there have been comparisons made between fees paid in the United States with those paid in other countries, in many of the countries referenced the real estate professional is an employee of a brokerage, with benefits and often salaries with bonuses. The vast majority of real estate professionals in the U.S. are independent contractors who are 100-percent paid through commissions.

 

2— For the first time, the settlement will allow sellers to no longer pay compensation for the agent who represents the buyer.

This is false.

There has never been an obligation for a seller to pay the buyer’s agent’s compensation. While this has been a historical practice — one that has worked very well — since the advent of modern residential real estate, the Multiple Listing Service (MLS) accepts listings at all compensation levels, even those with no offer of compensation for the buyer’s agent.

 

3— The settlement prohibits sellers from paying a commission to the buyer’s agent.

This is false.

The practice of a seller paying the buyer’s agent’s compensation is a seller’s decision. Nothing changes in terms of options. Sellers may still elect to pay the buyer’s agent’s compensation to differentiate their properties, garner more attention and gain an edge over other properties. While the mandate will restrict displaying on the MLS the commission a seller is willing to pay the buyer’s agent, the practice of a seller paying a commission to the buyer’s agent cannot be restricted in any other way. And, agents may freely disclose a seller’s commission offer in conversations, in e-mails, on websites and more.

 

4— The settlement will now relieve sellers of any financial burden of buyer agent fees.

This is false.

Although sellers can elect not to pay any compensation to the buyer’s agent, buyers may write into any offer a contingency requiring that the seller cover the cost of their agent or may request other concessions, such as the seller paying all or part of the closing costs.

 

5— The settlement ultimately reduces the total cost of a transaction, as sellers will no longer pay the buyer’s agent’s compensation.

This is false.

Should sellers now choose to compensate only their agent (the listing agent), it means that buyers, rather than sellers, as was traditional, will now have to pay for their own agent — if they don’t ask the seller to pay as part of an offer contingency. An agent’s professional services are not free, nor should they be. Just because the buyer and seller may now each be paying for their own agent’s services does not mean the total cost of the transaction will be lowered. Sellers may be paying other fees and concessions now that more buyers may be paying agent compensation.

 

6— The settlement will serve to lower home prices, making homeownership more affordable.

This is false.

General values in real estate are determined by the fundamentals of supply and demand — not by real estate agents. The fees related to a real estate transaction represent additional expenses beyond the agreed-upon price of the property and include not only real estate agent compensation but also title fees, closing costs, mortgage-related expenses, property taxes, association fees and perhaps more.

Here are some theoretical examples. If agent compensation is widely reduced from 3 percent to 2 percent, will sellers lower the price of their homes by that 1-percent difference? In other words, on a home well worth $500,000, will a seller now drop the price to $495,000? Not likely. The home will still cost $500,000. If agent compensation is widely reduced from 3 percent to 1 percent, will sellers lower the price of their homes by that 2-percent difference? On that same home worth $500,000, will a seller lower the price to $490,000? Not likely. The home will still cost $500,000 — because that is what it is worth.

The main reason homeownership has been less affordable recently is because home values in our markets have risen dramatically in the last few years. Sellers are going to want to realize the gains afforded by such appreciation and are not going to lower the price of their homes if demand remains higher than supply. Homeowners should not apologize for wanting to maximize their return and agents should not apologize for making a living in an industry where they receive no compensation unless the consumer succeeds.

 

7— The settlement is a fantastic win for buyers, who will now be able to negotiate the fee for representation.

That is open to interpretation.

For buyers who have purchased any number of homes over the years, they were no doubt happy to have the seller compensate their agents so that they didn’t have to. And, for a buyer who had to save up for the down payment and closing expenses, having their agent’s commission paid by the seller and incorporated into the price of the home allowed them to finance the amount over time, rather than having to pay thousands of additional dollars at closing.

 

8— The settlement will result in significant restitution to sellers who, because of paying both agents’ commissions, could’ve made 3 percent more on the sale of their home.

This is false.

The settlement figure of $418 million can be interpreted as large. But, when one divides that amount by the potential number of qualifying customers, it works out to about $10 per customer. Of note: The class-action attorneys in the case have submitted expenses for more than $80 million.

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