NOTE: More changes have occurred since this article was written. Check out what buyers and sellers need to know if our more recent article.
Have you heard on the news about lawsuits against the National Association of REALTORS® and some of the larger real estate brokerages regarding commissions? To understand the gist of these lawsuits you need to first understand the concept of a multiple listing service (MLS) and how real estate agents get paid. Currently, the vast number of real estate transactions are conducted via properties purchased and sold through an MLS. An MLS is essentially a database where homes are listed for sale by agents who are members of the MLS (or members of partner MLS’s). And traditionally, only members of the MLS had access to the data and the members had to pay dues for MLS access. Currently. members still have to pay dues for MLS access to list property and see showing instructions, but the majority of the data about the property is fed to 3rd party sites on the internet, like Zillow, Redfin, and many others. Prior to the internet, a buyer would have to go to a REALTOR® who was a member of the local MLS to find out what homes were available. But now, buyers more often than not ask agents to show them property they have seen online.
Have you been wondering how buyers’ agents get paid? Traditionally in the United States, buyers have not paid REALTOR® fees directly out-of-pocket, although they are essentially paying for it in the sales price of the home. The traditional real estate model has been that the listing agent will negotiate with the seller the total amount of the commission that the seller will pay, and how much of that will go to the agent representing the buyer. That commission is paid to both REALTORS® at closing. The primary advantage of having the seller pay both commissions out the sales proceeds is to allow first-time and/or low-income home buyers to have a shot at purchasing a house and getting adequate representation. Many of these types of buyers wouldn’t have the cash to pay their agent a commission on top of paying their closing costs and putting a down payment on the house. And as a result, that would decrease the pool of potential buyers. So, in order to list a house in an MLS, the rules of the MLS require that some minimum amount of commission be offered to the agent representing the buyer. And it’s this requirement that is the crux of many of the recent lawsuits
Additionally, the plaintiff’s in many of these suits are also claiming that REALTORS® are colluding to artificially keep commissions high. I don’t know about all REALTOR® Associations, but I can tell you that this is not happening here locally in the Space Coast Association of REALTORS®. While news reports talk about REALTORS® charging 6%, that is not the typical commission here anymore. Five percent is the most common amount that I see, and as low as 4% is becoming more common. And what’s even more common is for listing agents to offer a lesser commission to the buyer’s agent then they are taking for themselves. The standard Florida REALTOR® listing agreement has a blank where the total commission is listed and then several paragraphs down there are blanks to fill in how much of the total is being offered to the buyers’ agent. I believe that many sellers are only focused on the total commission and don’t give much thought to how their agent is breaking it down.
Recently I represented the buyer on a listing that was offering 2% to the buyer’s agent, which isn’t uncommon here. But I wasn’t too pleased when I found out that the total commission on the sale was 6% and the listing agent was keeping 4% for themselves. (The amount the listing agent is getting isn’t known by the buyers’ agent until they get the closing statement for the sale.) Although, it is possible that the listing agent is providing extra services to the seller (like managing home cleanout and repairs), more often than not it is just a listing agent who is trying to get the most money they can without pointing out to their seller where that 6% is going. When I negotiate a listing agreement I am very upfront with the seller and tell them it is in their best interest to pay a good commission to the buyer’s agent, because that agent will have some sway with the buyer. Now, having said that, I can tell you right there is one of the flaws in this commission model. A buyer’s agent shouldn’t be swayed by commission when advising a buyer!
So, to summarize, I think there are two flaws in the traditional real estate commission model: 1) The listing contract doesn’t point out clearly enough to sellers how much is going to the agent on each side of the transaction, and 2) buyers’ agents are being incentivized to encourage their buyer to choose one property over another. But unfortunately, if buyers paid their agents directly, some buyers wouldn’t be able to afford an agent and therefore, wouldn’t be able to get adequate representation.
I don’t have a long-term solution, but I do have a short-term solution for how I’m going to run my business differently when working with buyers. Understanding that it is only a matter of time until MLS’s have to stop requiring that sellers offer some commission to buyers’ agents, I intend to start requiring buyers to sign an Exclusive Buyer Brokerage Agreement if they wish to work with me. The standard Florida REALTOR® buyer agreement essentially states that the buyer’s agent/broker will be paid a specified amount by the buyer at closing, but that fee will be decreased by any commission received from the seller. That means if a buyer’s agent requires that the buyer pay 2.5% of the sales price, and the commission from the seller on the house they choose is 2%, then the buyer would have to pay their agent/broker 0.5% of the sales price at closing. With this agreement in place, the financial incentive to the agent when their buyer chooses one property over another is often negated.
But I plan to alter the standard buyer’s agreement in a way that will completely negate that agent’s financial incentive to recommend one property over another, and also to incentivize the buyer to work with me. In my Exclusive Buyer Brokerage Agreement, I will agree to contribute to the buyers’ closing costs an amount equal to the excess received from the seller. So, if I signed an agreement with the buyer that said that my commission would be 2% of the purchase price, and the commission provided by the seller to the buyer’s agent was 2.5%, then I would give 0.5% of the sales price to the buyer by paying that amount of their closing costs.
It’s hard to say where the real estate profession is heading, but I have no doubt that it will have to adapt and change. My personal hope is that the changes to the way commission works, will decrease the number of agents in the profession. Specifically, I’d like to see fewer people getting into real estate as a side hustle because they think they can make some easy money by selling real estate to people they know. Ideally, agents should be knowledgeable professionals, not just sales people. But that’s a subject for a different article! The advice I’d like to leave for both buyers and sellers is find an agent that you trust, and know that everything is negotiable!