Commissions, Lawsuits, and NAR: Reality Check
/A family member asked me how I felt about the recent court decision on a lawsuit against NAR and some large brokers, and it took me a little while to answer that email. I honestly hadn’t thought about it a lot even though I was aware of the pending decision, because I try not to stress myself out over things outside of my control. But the more I look into the case, the more confused I am about how the court arrived at their decision and found myself wanting to think this through.
Based on the news articles I have read about this case and the decision, it sounds like the courts are accepting the plaintiff’s characterization rather than actually understanding how real estate works in our country. I’m not terribly surprised, because there are a lot of misconceptions and stereotypes about the real estate industry and probably plenty of bad actors out there. But there are a few points I would urge the court to consider (if they cared what I think, which I’m sure they don’t).
At the center of the complaint is that sellers of property end up paying the buyer’s side of the commission. Legally, based on the listing contracts I’ve seen, the seller is only paying their broker a commission, and that broker is choosing to split that with whichever broker brings the buyer. The brokers are not required to offer any compensation to buyer brokers – no compensation listings do happen sometimes, especially with corporate-owned properties – but if they are a member of an MLS, they are probably required to allow all MLS affiliated brokers to see their publicly advertised listings, and if they are offering compensation it has to be the same for any buyer broker.
You might wonder why it works this way…I know I did, when I was in real estate school back in 2014! As recently as the 1980s, all agents, even if they only worked with buyers, were legally required to represent the interests of the seller. They couldn’t point out flaws in a property and could be sued if it was found that they might have discouraged a likely buyer from making an offer. No one was actually working for the buyer unless they retained their own legal counsel to review the purchase contract. This wasn’t explained very well to buyers, though, which led to state and national laws regarding buyer representation and required disclosures about how commissions work. Buyer broker agreements, which are contracts between potential homebuyers and their agents about the commission to be paid and the commitment to work together for a period of time, are a relatively new concept in real estate and infrequently used. These agreements usually include language about what compensation the agent should expect from the buyer if the cooperating broker or a FSBO seller doesn’t choose to offer commission to the buyer’s agent.
No matter what it says on the listing contract, the listing itself, or a buyer broker agreement, commission rates are always, always, always negotiable. I’ve seen agents cut their commission to get a lucrative listing or to guarantee that the client buys through them. I’ve seen agents both chip in parts of their commissions to keep a deal from falling apart before closing. I’ve negotiated flat fee commissions on very low priced properties. So, while a company can encourage their agents to charge a certain amount of commission, there are always exceptions because we’re mostly independent contractors and every situation is different. If you’re a high producing agent and you want to charge someone half the company-recommended commission, your broker probably won’t care too much because they’re still getting plenty of money out of you. If they don’t decide to keep you in their company because of your commission strategy, another broker will gladly take you on.
Which brings me to the next point: if all agents only worked for one company their entire careers, I could understand why people might think there was some kind of collusion or price-fixing on commission rates. But to be honest, hardly any of us stay with the first company we join in real estate, so all of us have a good idea of what each company recommends as a commission rate. Which means our brokers also know, and not from sitting around in a back room somewhere deciding that there’s only one percentage that we all use. We also know that when your income is only based on commission, it’s super helpful to use an average commission rate when making goals and evaluating trends in your production. If the local market wasn’t willing to bear the commission rates brokers are charging, they would be lower.
And in fact, they are often lower than the 6% figure cited in the court case! There are plenty of alternatives for people who think that commission rates are too high. There will always be an agent or broker out there who’s willing to compromise on fees in order to get your business. Online brokers have existed for over 20 years, flat fee brokers have probably always existed, i-Buyers are a thing now and don’t even require an agent, and you can always go FSBO, especially in a sellers’ market with limited inventory like we are experiencing now. If you don’t want to pay for the services a broker is offering you, don’t. Or convince someone to do it cheaper. But don’t be surprised if you don’t have access to the same tools and networks to get your property sold that we do —we’re paying for the privilege of using them the same way we ask you to.
It will be interesting to see whether real estate actually changes as a result of this lawsuit and others like it. Personally, I think that real estate is an adaptable thing that should reflect local market conditions and norms, within the guidelines of applicable laws. At the end of the day, if commission rates end up decreasing then agents will just have to sell more properties to make the same amount of money, or renegotiate their commission splits with their brokers, or sell more expensive houses. With the drastic increase in home prices we have seen in the greater Cincinnati area, things are already moving in that direction (and I’m sorry if you’re waiting for prices to go down — it’s unlikely to happen here anytime soon). I just have one final note: in many pricier parts of the country, commission rates are lower than in the Midwest. It’s reasonable to assume that natural market forces would eventually drive broker commissions down in areas where average property values continue to rise. These things tend to happen in a capitalist economy.
P.S. I’m not sure I need to say this, but for the record, this is just my opinion as a licensed real estate agent. I’m not an attorney and this article doesn’t have any relation to the views of my broker, Coldwell Banker Realty, or any of the trade groups I represent.
