The headlines have been filled with news of the class action lawsuit in Missouri with a $1.8 Billion verdict. The mastermind behind the litigation was a little-known Minnesota attorney who has been litigating cases against Realtors for decades, but the settlement that was reached with the NAR is being touted as ushering in a seismic shift in the way Realtors charge their commissions.
Per the terms of the NAR settlement, as of July 1, agents will still be able to offer cooperating broker fees, but they will no longer be able to post them on the MLS. The general speculation has been that this will encourage buyers to go directly to the listing agent, which in theory would cut the commission in half, and have one agent represent both sides.
It remains to be seen whether this will be the case, and this certainly isn’t the first time that the death knell has been sounded for commissions as we know them. In fact, discounting commissions isn’t a new concept at all—it has been tried for decades.
In the 90’s it was Help-U-Sell and other discount brokerages, and in the early 2000’s it was Zip Realty. Then it was Zillow and Redfin who it was thought would render real estate agents irrelevant by making the data available to consumers.
The thing that each of these models failed to consider is that a real estate transaction involves a lot more than just the property. And while the big focus appears to be on the commissions that get paid when a place sells, many overlook the high number of fruitless searches and marketing campaigns that agents endure along the way. And when you view the statistics, a very different picture emerges: It turns out 70% of the agents in our local database didn’t do a single transaction last year.
The new rules could make things even harder for newer agents who don’t have listings and who typically have to get their start working with buyers. Under the new rules, agents will be required to have their clients sign buyer representation agreements, but without experience or established credibility this will likely raise the question of value when they ask for a 2.5% or 3% commission guarantee.
That said, most established listing agents aren’t willing to take on the liability and workload of a 2.5% or 3% commission, so the process after July 1 will likely be a reverse form of the variable rate commission structure, where it starts with the premise of the dual agency commission rate as the floor and includes a provision for how much the commission will be increased in the event that buyer comes with their own agent.
I would predict that when the dust settles, Buyers will be okay paying 1% to their agent, and the balance will be made up in the form of the listing agent paying a partial Buyer Broker fee. Ultimately the math will add up to the same thing, but with buyers paying a small premium to get the representation that they get under the current system.
