Real estate commissions are fees paid to real estate brokers for their services in facilitating the buying, selling, or renting of properties. These commissions are typically calculated as a percentage of the final sales price and, in most cases, are covered by the seller of the property in question. However, there can be variations in how commissions are structured and negotiated, especially in light of the recent major lawsuits and settlements pertaining to real estate commissions.
How Are Commissions Calculated?
It's essential to note that commissions are negotiable, and rates can vary based on factors such as the local market dynamics, property type, and the level of service provided by the agent. The commission rate paid by a seller for listing the property for sale is negotiated between the listing agent and the seller.
In the past, as a rule, the listing agent was required to cooperate with other brokers and offer part of this commission to the broker who brought the buyer to the transaction. The amount of the commission that was being offered by the listing broker to the buyer’s broker was also required to be published on the Multiple Listing Service (MLS).
Impact of NAR Settlement on Commission Structures
In recent years, the real estate industry has undergone significant scrutiny over its practices, particularly concerning the structure of real estate commissions. The National Association of Realtors® (NAR), the largest trade association representing real estate agents in the United States, recently reached a settlement in a class-action lawsuit that accused the organization of anti-competitive behavior. This landmark settlement has raised questions about how it will impact real estate commissions and reshape market dynamics.
The class-action lawsuit, initially filed in 2019, alleged that NAR's rules and policies regarding the sharing of commissions between brokers stifled competition and artificially inflated costs for consumers.
The impact of the NAR Settlement on real estate commissions can be summarized as follows:
- The listing agent is no longer required to offer the buyer’s broker a share of his/her commission.The listing agent may or may not offer compensation to a broker bringing the buyer to a transaction. Since the decision to offer or not offer compensation to the buyer’s broker can significantly impact the efficiency of the sales process, as well as costs associated with marketing, a seller should discuss this topic with the listing agent and make an informed decision on whether or not the listing agent should offer compensation to a buyer’s broker. If the seller elects a strategy prohibiting the listing agent from offering any compensation to the buyer’s broker, a few things are likely to naturally follow:
- In order to gain desired exposure for the property and reach consumers effectively, the listing agent will likely need to resort to more extensive paid advertising and marketing than if compensation were offered to the buyer’s broker – this is likely to lead to an increase in the compensation payable to the listing agent in the sale of a home.
- Buyers represented by real estate brokers are likely to adjust their offers to account for the additional closing cost to cover the compensation payable to their broker (either in the form of a seller concession, a direct payment by the seller to their broker, or in the form of a reduced purchase price).
- If the buyer’s broker’s compensation is not covered by the listing agent or the seller, the additional cost to the buyer would become an out-of-pocket closing cost to the buyer. Inversely, if the buyer’s broker’s compensation is included in the sales price of the home and is covered by the seller/listing agent, it is not an out-of-pocket expense of the buyer and can be included in the buyer’s mortgage (as it has been in the past), thereby minimizing the amount of cash that the buyer needs to come up with for closing.
- The buyer and their broker will be required to enter into a written agreement specifying the commission payable to the buyer’s broker. Although many buyer’s brokers have already been requiring Buyer-Broker Agreements as a pre-requisite for working with buyers, it is new that all buyer’s brokers will now be required to enter into Buyer-Broker Agreements before showing homes to potential buyers. This change is expected to clarify any confusion that the buyer’s broker provides a professional service that they expect to be compensated for. As mentioned previously, in most cases this cost will still be negotiated to be covered by the seller. However, due to the requirement of a written agreement between the buyer and their broker, the new practice is expected to bring more transparency into the representation and compensation of a buyer’s broker. The change is also likely to increase a practice by leading real estate agents and brokers to require a reasonable retainer to be paid by the buyer before starting to work with them, which has been the norm in many other professional service industries.
- MLS’s will no longer be allowed to advertise the amount of buyer broker commissions. The proposed NAR settlement will prohibit MLS’s from advertising buyer-broker commissions going forward. This supports the change that the commission payable to the buyer’s broker is no longer required to be pre-determined, or offered by the listing agent, but it can rather be negotiated by the buyer/buyer’s broker, as part of the contract negotiations, to be covered in part or in full by the seller of a particular property. This is, as such, not a new model in the industry, as commercial real estate has already been operating with a similar model for some time.
Conclusion
Real estate commissions are a vital aspect of the real estate industry, providing agents with the financial incentive to facilitate transactions effectively. Understanding how commissions work can help buyers and sellers navigate the real estate process more effectively and negotiate fair rates with their agents/brokers.
The recent settlement reached by the National Association of Realtors® represents a significant milestone in the ongoing evolution of the industry. By addressing concerns related to commission practices and promoting greater transparency and competition, the settlement has the potential to reshape market dynamics and empower consumers.
While commission rates are typically percentage-based and negotiable, it is essential to consider various factors such as market conditions, property value, and the level of service provided when determining commission rates. By working with knowledgeable and reputable agents/brokers, buyers and sellers can ensure a smooth and successful real estate transaction while ensuring fair and incentivizing compensation for the real estate professionals involved.
In the new real estate environment, it is essential to utilize highly skilled professionals to represent your interests in a real estate transaction. We encourage you to contact us with any questions that you may have, and to secure representation by the top professionals in the industry to work with you on your next transaction.
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This article is provided for informational purposes only, and should not be construed as legal advice or making any legal representations. The views, information, and opinions expressed in this article are solely those of Realty ONE Group Beyond and do not necessarily represent those of Realty ONE Group or its affiliates. Each office is independently owned and operated.