The residential real estate industry is bracing for potentially significant changes in how agents are compensated, stemming from a recent major legal settlement.
While the impact remains to be seen, brokers and agents will need to adjust their practices to align with new transparency requirements around commissions and buyer relationships.
A $418 million lawsuit settlement was announced March 15 between the National Association of Realtors and plaintiffs in multiple seller class-action cases across the country.
The lawsuit argued that rules governing homes listed for sale on the real estate trade group’s Multiple Listing Services (MLS) forced people to pay artificially inflated costs to sell their homes.
If the settlement is approved in court, the new standards would take effect mid-July.
As part of the proposed new rules in the settlement, real estate agents will now be required to have buyers sign representation agreements before showing properties. The purpose is to explain agent compensation and establish clear expectations upfront.
This means Realtors and buyers must enter into a written agreement before the buyer can tour any homes. The contract must specify the amount or rate of agents’ compensation.
Right now, typically, someone selling their house pays a commission of 5 or 6% of the purchase price to their real estate agent who then splits that commission with the buyer’s agent.
“It’s just a good, professional thing to have,” said Bill Jansen of Broker Risk Management, a Danville law firm that represents residential brokerages statewide.
He’s been advocating that practice since the California Association of Realtors developed the first forms in the early 1990s in response to a movement at the time for compensation of buyer agents. That’s when the buyer’s broker cooperation commission rates began to appear in the MLS.
Jansen said seller agents will likely move their notes about buyer agent commission splits elsewhere, such as brokerage websites, flyers or social media posts, which aren’t domains prohibited in the proposed settlement.
However, some agents are reluctant to ask buyers to sign agreements right away out of concern about damaging new relationships built on trust, according to Jansen and Gerrett Snedaker, partner in the Sonoma-based Wine Country Group and Ming Tree brokerages under the Better Homes and Gardens Real Estate franchise.
“There’s going to be a change in the dialogue,” Snedaker said. “You used to just try to build rapport with somebody before got them to sign an agreement. But now we’re just gonna say, ‘Hey, I’d love you to show you that property, but the law requires me to get this document signed before we can go out.”
According to a survey of about 1,000 homebuyers by real estate marketing firm 1000 Watts, many of them don’t fully understand how their agent gets paid. The new rules seek to improve transparency around commissions, which are often still presumed to be covered by the seller.
“Clearly, we’re not doing a good job explaining how we get compensated,” Snedaker said.
He said his brokerage has been advocating that agents secure agreements for each buyer they work with.
While the NAR settlement aims to reduce commission rates over time, most in the industry don’t foresee significant changes in the short term.
“There’s never been a standard 6% commission,” Jansen said.
In Jensen’s experience, most are already below 6% as rates are negotiable.
And more intense negotiating for the buyer’s agent share is something that’s been needed and not previously allowed under industry rules, according to Joel Rodriguez, broker-owner of Cornerstone Real Estate and Home loans in Vacaville. About three-quarters of the firm’s business is buyer representation.
Incentives are more prevalent for properties that may be more difficult to move in the marketplace.
“Builders offer buyers’ agents 4% commonly,” Rodriguez said. “Now the playing field has been opened.
One side effect of the new rules could be to increase the already high turnover rate of real estate agents. Based on what he’s seen in his career, Snedaker estimates that about 80% of agents will exit the business within two years of obtaining their state licenses. But he expects many buyers will continue to see value in having an agent represent them.
“It’s a big complex transaction,” Snedaker said. “The value of the real estate agent and broker has been set by the market over time.”
While the industry adjusts to more formal buyer agreements and commission transparency, the impact on commission rates themselves remains uncertain.
“I don’t think there’s going to be any real pressure on fees,” Snedaker said.
Other local agents have already seen a change.
“I’m looking at today’s listings and those coming soon, and I’ve seen that if there is a broker co-op listing, it is less than the standard 2.5%,” said Katrina Klam with Keller Williams Napa Valley.
Jeff Quackenbush covers wine, construction and real estate. Reach him at [email protected] or 707-521-4256.
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