There is very big news in real estate. If you are a regular reader of my articles, you know I have been covering some significant developments in our industry over the past few years. Now the changes have been crystallized and we finally know what the rules are going to be and how the commissions paid by sellers (and buyers) are going to change.
If you are a home seller, what does this mean for you? It means that on August 17th new rules will be implemented that prohibit listing brokers from offering a buyer agent commission in the MLS. Traditionally buyer agents have expected to earn half of the typical 5%-6% commission paid by sellers (2.5%-3%). Studies have shown that If listing agents didn’t offer the expected amount in MLS, many buyer agents refused to show those homes to their buyers. This has been characterized as “steering” buyers to homes where agents make the most money. In most cases buyers did not know it was happening. One major goal of this change in the way commissions are paid is to eliminate this unsavory practice.
In recent class action litigation, sellers argued that the existing structure was unfair to them. It effectively forced them to pay their listing agent and a buyer agent who didn’t represent them, doubling their commission when it brought them no benefit.
On October 31st of last year a unanimous jury verdict in a federal class action trial on behalf of homesellers found the existing commission structure was unfair, inhibited competition, and resulted in inflated commissions being paid by sellers. The defendants in the case were America’s largest real estate firms and the National Association of Realtors. They initially expressed disagreement with the verdict and said they would appeal. Ultimately they decided to settle and will begin abiding by a new set of rules that will significantly change how sellers and buyers compensate their real estate agent beginning August 17th.
So what are the changes?
• The roughly 500 MLSs around the country that are affiliated with the National Association of Realtors (including the Phoenix area MLS) will no longer allow listing brokers to offer buyer agent compensation in the MLS.
• Listing brokers will still be able to make private offers of compensation (off MLS) to buyer agents, although the Department of Justice has publicly stated that it believes this should be prohibited as well, and still may do so.
• Agents will not be permitted to work with buyers without a written buyer representation agreement that outlines the agreed upon compensation and services provided.
• While buyers will be obligated to pay their own agent, there is no restriction on buyers asking sellers to pay all or part of their buyer agent fee as part of a purchase offer.
• Fannie Mae, the largest national purchaser of home loans from lenders, recently stated that if sellers agree to pay the buyer’s commission to their agent as part of a purchase contract, this will not count against the maximum seller concession percentage allowed in various types of loans. The Department of Veterans Affairs, which previously prohibited buyers who secured a VA loan from paying a buyer agent out of pocket, has lifted that restriction.
• An industry rule known as procuring cause will be eliminated. It essentially said that if a buyer wanders through an open house or sees a home with one agent, the agent who showed them the home would receive any buyer-side commission that was offered even if the buyer told that agent they wanted to be represented by their own agent.
• The business models of Zillow and similar home search websites will be turned upside down. These home search portals are monetized mostly by connecting buyers who look at homes on their websites to agents who pay referral fees by showing and selling these referred buyers the homes they inquired about. These models were predicated on the “first showing gets the commission” procuring cause rule.
So what is likely to happen? Buyer agents will get paid what they’re worth based on their value proposition rather than some preset amount offered by the listing broker. Sellers should end up paying half the commission they have in the past. Buyers won’t be “sold off” on Zillow and other home search websites. Buyer agents will show their buyers the listings that best fit them rather than the listings that offer the highest commission for the buyer agent.
The main benefit to sellers is that they won’t feel pressured to make offers of compensation, which should essentially cut their commission cost in half while also eliminating the seller’s worry that buyer agents will steer their buyers away from the seller’s home for not offering enough commission.
I predict that these changes will result in fewer agents in the real estate business. In the Phoenix Metro market, there are about 38,000 agents competing for about 5,000 new listings per month. Contrary to the popular belief that real estate agents make a lot of money, the statistics show that the average real estate agent in this area only lists and sells one property every seven months.
While these changes officially take place on August 17th, many brokers are ahead of the loop. I recently hosted a 50 minute consumer webinar explaining the implications of these new rules. I encourage you to check it out at 72NewLaw.com to learn more about the big changes in real estate.
