There’s a lot of hype going around about the compensation lawsuits brought against the National Association of REALTORS® (NAR), and, likely, the majority of agents aren’t following the legal proceedings closely. That’s understandable, because most agents care about one thing: selling homes. But the effects of the federal case that just concluded in Kansas City shouldn’t be ignored and are already changing real estate.
All agents should understand the possible implications and, more importantly, what agents could be — should be — doing about it. We’ll cover one piece of it here.
First, to broadly summarize the lawsuit, the plaintiffs alleged that MLS’s, NAR and brokerage firms are anti-competitive and that it’s wrong that sellers should be paying the buyer’s agent’s commission. Again, extremely oversimplifying the lawsuit.
On Oct. 31, a jury found the defendants guilty and ordered they pay damages totaling $1.78 billion. We highly expect an appeal, so the final result won’t take effect immediately. That said, the industry has already seen change as a result.
It’s no coincidence that the board of managers at Midwest Real Estate Data LLC (MRED) authorized and subsequently implemented the minimum commission change in the Private Listing Network (PLN) from $1 to $0 on June 1. That is directly connected to the implication that MLS’s are anti-competitive. And, as all agents should know, MRED further implemented this rule to the entire MLS at the end of October.
What does that really mean? It’s just a $1 change, and agents shouldn’t get too worked up over it, but it does open up the conversation about compensation. In 1995, the law changed in Illinois to remove subagency and implement designated agency, meaning the agent actually works for the person they are working with. This was good for consumers.
For at least that long, agents have had the requirement to disclose their agency relationship with their client, including seller agency, buyer agency, dual agency or no agency. Fortunately, ministerial acts went away in 2019.
The question is how many agents were really having a comprehensive conversation with their buyers about agency. How many actually got — or get — a designated agency form signed? The answer should be everyone. But we know it’s not, and that’s the stem of the problem.
Most consumers aren’t aware of agency responsibilities, especially buyers. Every buyer’s agent should ensure their buyer clients know:
1) Who is paying their fee
2) How much their fee is
3) How the commission gets paid
It is a myth that the buyer doesn’t pay the buyer’s agent’s fee. If you disagree, let’s think about who is bringing the funds for the purchase to the closing table. It’s the buyer.
It could be argued that the seller, usually at the listing agent’s recommendation, is setting the compensation for the buyer’s agent. That compensation travels from the seller to the seller’s brokerage firm to the buyer’s brokerage firm to the buyer’s agent. So, is the buyer really paying the buyer’s agent? Is it the seller? Shrug.
Perhaps the best answer is that the commission gets paid through the transaction. But never tell a buyer that your services are free, unless, of course, you truly don’t expect to get paid.
Here’s the point: Now more than ever, agents need — as the law requires — to have conversations with their buyer clients about those three things numbered above. Whether your company requires its agents to use a buyer’s agency agreement is up to them, but it might be a good idea.
If you use it with some clients, you MUST offer it to all clients, though. Do not pick and choose whom to use it with. Regardless, all agents are required to at least use the designated agency form in conjunction with a complete conversation about agency.
Know this: Mortgage rules prohibit a seller concession from being offered to cover the amount of the buyer’s agent fee. So, likely nothing will change with how commissions get paid in the short term. But if NAR loses the current class-action lawsuit, compensation methods likely will change.
And think of this: If a buyer has to come up with their agent’s fee outside of closing, housing affordability will be severely affected. A first-time homebuyer would need to come up with not only their down payment, but also the agent’s fee. A ripple effect could severely damage an already difficult real estate market, pushing housing affordability even further out of reach for millions of Americans.
Jim Haisler worked in the real estate industry for more than 25 years. He is the CEO of the Heartland REALTOR® Organization, serving agents in far Northern Illinois. You can find more of his thoughts on the NAR lawsuits on Heartland’s youtube channel. Haisler is not an attorney, and this column is not legal advice.