The $418 million settlement in the long-running lawsuit brought against the National Association of Realtors (NAR) has fostered breathless speculation about a future in which sellers’ agents will charge markedly lower than the 6 percent commissions that have long been customary in the real estate industry.
While many people have hailed the settlement as good news for an industry where commissions tear a significant chunk out of properties’ market value and sellers walk away with far less than they rightfully should, others believe that the lawsuit does not take into account the realities of selling agents’ vocation and could ultimately be a death knell for the profession.
Market Realities
The often-cited figure of 6 percent is actually more than many brokers have been charging, believes Mark Scheier, a name partner of the Acton, Massachusetts-based real estate law firm Scheier Katin & Epstein.“Real estate commissions, at least here in Massachusetts, have been reduced from 6 percent to 5 percent for a number of years. I have even seen some at 4 percent, but the prevailing commission structure is typically 5 percent split equally between the listing broker and the selling broker,” Mr. Scheier told The Epoch Times.
Mr. Scheier said that, when considered within the context of all the time and effort that brokers spend to stay on top of what is happening in the market and help oversee transactions, 5 percent is not a totally inappropriate figure.
“Don’t forget that this is typically split four ways, among the listing office, listing broker, selling office, and selling broker, so it is not the windfall that people think it is,” he said.
With the popularity of the listing service Redfin, many brokers following the traditional model find themselves increasingly edged out of the market. Redfin explicitly promotes itself as a service where the total commission omits the buyer’s agent’s fee and hence will be around 4.0–4.5 percent, as opposed to 5.0–6.0 percent.
“There are new players in the industry charging a reduced rate, sort of like low-cost airlines,” Mr. Scheier commented.
Transparency
The parties that negotiated the NAR’s settlement appear to have put little thought into envisioning how a market that abandons the Multiple Listing Service (MLS) model, where a selling agent lists a property, becomes paired with a buying agent, receives the total 6 percent commission on the sale when the transaction closes, and then splits that sum with that agent on the other side of the deal.That’s the view of Cara Ameer, a broker at Coldwell Banker in Ponte Vedra Beach, Florida, who questioned what will happen to transparency in real estate deals under the proposed settlement.
“The NAR settlement leaves more questions than it answers at this point, from a real estate practice perspective,” Ms. Ameer told The Epoch Times.
Ms. Ameer noted that under its terms, the MLS database may not disclose the compensation for buyer’s agents.
“This is a huge problem, because now there is a lack of transparency, not more of it. How will listing agents be held accountable for the compensation they say will be provided to the buyer’s agent, since all negotiations regarding compensation must take place outside the MLS and between agents?” Ms. Ameer asked.
“Will they tell one agent one thing and another something else, depending on whether they like that agent or their brokerage, or perhaps want to discourage compensation based on the buyer being a first-time buyer, or with limited funds? There is a lot of room for playing not so nice, and potential Fair Housing Act violations,” Ms. Ameer added.
Things Fall Apart
If selling agents seek commissions that appear high, it may simply be because they are looking ahead to what their take will be after the division of the commission among other parties to the deal. They are unlikely to want to enter into arrangements with buying agents if it means splitting an already small commission, 4 percent or lower, with others.Adopting a different system, where a buyer pays his or her agent directly, fails to anticipate all kinds of problematic outcomes, believes Ms. Ameer.
A scenario where the buyer works with the same agent as the seller is a formula for disaster, at least from the buyer’s point of view. The selling agent may have an entrenched relationship with the seller, and in the interest of maintaining that relationship will put the interests of the seller far above that of any other party.
Moreover, a system where a selling agent does not split a commission with a buying agent leaves it up for the buyer to pay his or her agent directly, and this raises all kinds of troubling possibilities, Ms. Ameer noted. If the buyer cannot pay the agent’s fee, it may result in that fee rolling over onto the mortgage payment for which the buyer is liable and potentially pushing that fee up well beyond what the buyer can manage—even potentially disqualifying the buyer for the loan that was a precondition of the purchase.
As things stand now, a buyer cannot use mortgage loans to finance that portion of closing costs that the buying agent’s fee comprises, Ms. Ameer pointed out.
