If you’ve been hearing or reading about the recent shakeup in the Real Estate business, you’re not alone. Recent antitrust lawsuits against the National Association of Realtors (NAR) have led to a proposed settlement that could significantly impact how agents are compensated when homes are bought and sold.
Understanding the settlement’s implications is important for California homebuyers and sellers alike. The controversy centers around how real estate agents will be compensated. Until now, the traditional model involved sellers paying a commission that was split between the listing and buyer’s agents. The settlement changes how buyers’ agents will be compensated and, potentially, by whom they will be compensated.
One thing is for certain, there is a lot of misinformation being distributed everywhere you go. Sadly, even those sources we consider “trustworthy” have engaged in sensationalized headlines that are nothing short of outright lies.
We are going to set the record straight!
The most impactful part of the settlement is this: Buyer’s Agent Compensation Removed from MLS
Under the proposed settlement, starting July 15th, 2024, the Multiple Listing Service (MLS), subject to court approval, will no longer include offers of compensation to buyer’s agents. This change has generated speculation about potential disruptions to agent compensation and industry transparency. While buyers don’t typically pay their agent’s commission directly, this shift could lead to changes in how buyer’s agents approach their work and negotiate commissions.
In the past, buyers could rest assured that if they used the services of a real estate agent, they would not have to worry about compensating the agent directly. That commission has, with few exceptions, always been provided through the listing broker, who the seller pays. That offer was made through the Multiple Listing Service, in clearly expressed terms. As of July 15th of 2024, that will no longer be the case.
The settlement now expressly provides that sellers may communicate seller concessions such as closing costs via the MLS provided that such concessions are not conditioned on the use of or payment to a buyer’s broker. So essentially, there is no expressed offer of compensation to a buyer’s agent anywhere on the MLS. That is clear.
Real Estate Commissions Remain Negotiable
In California, commissions have always been negotiable between sellers and listing brokers. This fact has always been clearly communicated to sellers when they list their home through a bold paragraph that is actually initialled by the seller, acknowledging that they were informed commissions are negotiable. The settlement doesn’t change this fundamental aspect, but it does affect how an offer of compensation is communicated with buyer’s agents. Without MLS offers of compensation, these arrangements will happen off-platform.
Communication Challenges for Buyer’s Agents
The removal of buyer’s agent compensation from the MLS presents new communication challenges.
Buyer’s Agents will need to inquire directly about commissions, potentially creating inefficiencies and confusion. Because this offer of compensation will unlikely be public information, buyers will not know if a seller is offering to pay their agent. Rest assured, though, that once a buyer’s agent is made aware of the compensation offer on any listing, it has to be disclosed to the buyer.
The types of compensation available for buyer’s Brokers would continue to take multiple forms, depending on broker-consumer negotiations, including but not limited to:
- Fix-fee commission paid directly by consumers
- Concession from the seller
- Portion of the listing broker’s compensation
Mandatory Buyer Representation Agreements
The settlement requires buyer’s agents to enter into written representation agreements with clients before showing MLS-listed properties. While the goal is to increase transparency, it could also make the process feel more formal and pressure buyers to choose an agent quickly. Up to now, in California, signing a buyer representation agreement is the exception, not the norm. However, to be clear, buyer representation agreements have been optional for decades, and many agents have used them. There is nothing inherently wrong with having a formal agreement of representation. In fact, it is wise for both agent and buyer to formalize the unarticulated expectations into a clearly defined contract.
Potential Financial Burdens for Homebuyers
With the removal of buyer’s agent compensation from the MLS, in theory, buyers may become responsible for paying their agent’s commission directly. In California’s high-priced market, this could add a significant financial burden. However, many sellers and listing agents will likely continue to offer buyer’s agent commissions, and there may be room for negotiation.
Sellers Will Become Buyers
One area that is not being squarely addressed is how buyers’ agent compensation will impact sellers who will be buying a home after selling their current residence. If sellers collectively decide not to pay a buyers agent commission when they sell, once they become buyers they will end up having to deal with the consequences of that decision.
If the seller who becomes a buyer has to pay a buyer’s agent commission, it will potentially cost them even more. Here is why, a seller who is moving up, which makes up the majority of sellers, sells a home of $500,000 with a buyer’s agent commission of, say 3%, for example, that is $15,000. When they go buy their next home at, say, $800,000, and the buyer’s agent settles for even a 2% commission, that will end up being $16,000. Slightly higher than the buyer’s agent commission on their sale. Now, it would be hard to justify refusing to pay a buyer’s agent commission when selling AND expecting to pay nothing when they buy a house.
Buying a house without an agent
Some buyers might consider forgoing agent representation, but navigating the complex California market alone presents significant challenges for those unfamiliar with real estate contracts & legal issues.
To give you some perspective on the complexity of contracts, a residential purchase agreement with the minimum required disclosures ends up being over 100 pages of small print by the time it’s done. It would be impossible for the average person to make sense of such a copious amount of contractual terms, which, by the way, are written by attorneys.
Agents provide valuable service by explaining these contracts and disclosures to buyers. They also provide market insights, networks, and guidance throughout the transaction process, including home inspection negotiations, homeowner’s insurance, title reports, final walk-throughs, and more.While online resources have empowered buyers, working with an experienced agent remains the wisest choice for most.
Bottom Line
The NAR settlement will change how real estate agents are compensated in California. While the mainstream media sensationalizes and misinterprets the real impact of the settlement, sellers and buyers need to understand the truth behind the fanfare.
The narrative that this settlement “will slash commissions” is simply overstating and misrepresenting the settlement agreement. In truth, the only thing that changed is that buyers’ agents will not be offered compensation, only through the MLS
Buyers may end up footing the bill if the seller or selling agent decides not to offer compensation to the buyer’s agent in their listing—that is, unless the buyer decides not to purchase that property.
Commissions have always been negotiable. That has been made abundantly clear over the years, and it is in bold type in the California Residential Listing Agreement. It is not a secret as some journalists with zero real estate business experience may be representing.
The real dilemma after this ruling really is about how buyers and buyers’ agents are going to handle the home buying process and representation of the buyer.
