Commission Settlement: Transforming the Real Estate Industry

/ Buyer's Edge | BuyersAgent.com/

Real Estate Industry Undergoing a Significant Transformation

Written By:
Stephen Carpenter-Israel
President | Broker
Buyer’s Edge Company, Inc.

The real estate industry is in the midst of a significant transformation. The Department of Justice, in its regulatory capacity, has recently intervened to reshape commission structures, a move that will trigger a multitude of changes. Last week, the National Association of Realtors agreed to a $418 million settlement, paving the way for these changes to take effect this summer. The agreement calls for commissions paid to buyer's agents to be separated, or at least not made a part of the listing agent's advertisements on the Multiple Listing Services. The agreement also mandates that every buyer's agent signs a contract with their client specifying payment terms. Payment can be made directly by the buyer outside of the transaction, included in an offer to the seller requesting a credit to cover the expense, or through a commission offered by the listing agent. However, commissions won't be advertised as part of the transaction on the Multiple Listing. Fee arrangements with the client may include an hourly fee, a lump sum fee, or a percentage-based commission.

Regulatory Intervention Sparks Change for the Real Estate Business

While the path through these changes may prove challenging for some in the industry, it also presents new opportunities for growth and adaptation. Moreover, there are numerous uncertainties about how these changes will impact realtors, settlement companies, mortgage companies, title insurers, home insurers, and appraisers. It's crucial to grasp these changes swiftly to stay ahead and leverage their potential benefits.

Real Estate Legal Battles and Industry Dynamics

Amidst substantial lawsuits, many of which have been ruled in favor of the class action plaintiff sellers, the real estate industry is bracing for a wave of change. These legal battles, far from being isolated incidents, are a growing trend across the nation, targeting listing companies, local real estate associations, and the National Association Of Realtors for their role in compelling sellers to pay buyers agents their commissions and to keep commission rates high while stifling discount business models. The lack of transparency, a long-standing issue known to industry insiders, has been met with complacency in the industry's response. This complacency could have far-reaching consequences. 

Addressing Real Estate Industry Practices

On the surface, it has always made sense that buyers should pay their own agents and sellers should pay their own agents. However, the industry has always been run by companies that work for both sides of the deal, incentivizing everyone to do both and trying to keep all the commission money in-house.

Much mistrust has percolated over many years concerning dual agency (representing both sides on the same transaction), either with one agent or two agents in the same Firm. The genuine conflicts of interest of less than full disclosure, compromised or limited representation, and negotiating prices on an in-house deal are well documented. The refusal of companies to provide full disclosure about their inability to offer unconflicted services and the many other problems with these types of dual arrangements have led us to this point.

Dual Agency Under Scrutiny

Dual agency, a practice where an agent represents both the buyer and the seller in a transaction, will still exist under this plan. However, agents within the same Firm will be required to have their fees established separately, with two agreements - a listing agreement for the seller and a buyer agency agreement for the purchasers. These changes will do nothing to address the most significant issues in the industry. Yes, consumers may negotiate seller and buyer fees on both sides, but this has always been true, albeit with much push-back. In the past ten years alone, many areas have seen average commission percentages fall from 3% to 2.5% due to increased competition and the notion that fees were too high. This demonstrates the industry's resilience and ability to adapt to changing circumstances. 

Consumer Confusion and Homebuyer Protection

Confusion has long plagued consumers regarding how commissions work on both sides of real estate transactions. The DOJ's proposal that buyers could pay their agents on an hourly fee basis may seem like a straightforward solution, but it comes with significant complications. For instance, buyers may find themselves at a severe and expensive disadvantage in a competitive market, losing out on multiple offers and spending considerable time and money on their hourly agent and inspections for properties they may never acquire. This could lead to them owing their agents a substantial sum, surpassing a standard commission. 

A flat fee structure is also fraught with problems - how long will an agent agree to work for a client for a flat fee, and what services will be included? Agents will hesitate to agree to unlimited time and commitment to full fiduciary services for a limited fee. Homebuyers need to grasp these potential drawbacks when evaluating how a buyer's agent will be involved in the future. By being well-informed about these changes, you can better navigate the real estate market and protect your interests.

Real Estate Agent Responsibilities and Professionalism

Real estate agents, especially their brokers, must provide professional service and ensure that the transactions are carefully constructed, clients are appropriately advised, and state and local laws are followed. Expert real estate agents undertake the task of comprehending local ordinances, addressing environmental concerns, providing counsel on investment properties, negotiating strategies and mortgages, and adeptly guiding clients through this complex process. Their real estate licenses, professionalism, and good name are on the line. It is inconceivable that the best agents should or would work on transactions in a "partial" way. Providing the client with limited services may sound great, but there would have to be contracts that require the clients to accept full legal responsibility for all of the issues that today are considered a part of the agent/broker's state-mandated duty of care. Thousands of lawsuits and complaints are filed yearly by clients who believe they had inadequate representation or disclosure from their agent. Any limited service agreement may relieve these agents of some liability but saddle the buyer with the same.

There are concerns about Errors and Omission Insurance and how that will change with agents reducing their commitments to an entire homebuying process. 

As a potential positive consequence of these changes, the concept of Procuring Cause may become moot, given the increased difficulty in claiming a commission if the buyer's agent is mandated to have a payment agreement directly with their client. However, the full implications of this remain uncertain.

Future Industry Trends - Uncoupling Real Estate Companies Affiliated Services

Will the large real estate companies with their own mortgage companies, title companies, and insurance firms also be required to "uncouple" those services from the Firm? This issue may arise sooner than anticipated, as numerous buyers feel compelled or directed towards utilizing affiliated services, never truly understanding the financial ramifications of these arrangements. 

In the evolving landscape, the fate of "pocket listings" and private exclusives, subjects of criticism for their discriminatory and anti-competitive nature, also remains uncertain.

As the real estate landscape evolves, stakeholders must navigate these changes swiftly to leverage opportunities for real change for the home buying consumer while addressing challenges effectively. Keeping abreast of developments is essential to capitalize on the potential benefits while safeguarding interests in an ever-changing market.