Since the early 2000s, the U.S. Department of Justice has investigated and challenged the National Association of Realtors (NAR) rules and practices governing commission sharing on Multiple Listing Services alleging they violate the Sherman Antitrust Act that bans businesses from colluding or merging to form a monopoly. It’s becoming increasingly apparent that the DOJ’s ultimate goal is to force buyers to pay their own commissions.
How would the real estate industry change if buyers had to pay a commission to the agents representing them? Brian Boero, the CEO of 1000 Watt, raised the specter of what could happen in a recent post called, “The monster under the bed.”
What happens if cooperation and compensation (on the MLS) is obliterated? Have you thought about a fee-based model for buyers? And what if NAR’s Clear Cooperation Policy proves untenable? What happens when big listing brokers then starve out their buy-side dependent competitors by selling their own stuff?
Boero points to the danger in not having a contingency plan if these events were to transpire:
But here’s the thing: it’s not just giants like Zillow and Realtor.com that are at risk — both of these companies are currently expanding referral-fee businesses that are completely dependent on shared commissions — but also thousands upon thousands of brokerages and agents without a phalanx of lobbyists and lawyers.
The workaround that would make it possible for buyers to pay their own commissions
In a recent column, Teresa Boardman argued that the rules governing mortgages would have to be changed to accommodate buyers having to compensate their buyer’s agent.
Michael Lissack, managing broker of The Virtual Realty Group, weighed in with a workable solution to this issue using this approach.
According to Lissack, FHA, VA and USDA loans already allow buyers to finance at least a portion of their closing costs. Consequently, all that would be required would be a change in these types of loans would be to add the wording “buyer’s brokerage commissions” to the allowed closing costs that could be financed. As with any change, however, the challenge is in the details and then putting the new policy into practice.
For conforming loans and jumbo loans, especially for those sold on the secondary market, the process may be more complicated because, to the best of my knowledge, there is currently no mechanism for buyers to compensate their buyer’s agent by adding the amount of the commission to the loan amount. Nevertheless, these lenders could look to what FHA, VA and USDA are doing that may be workable for conforming and jumbo loans.
Would the MLS system go away?
Currently, no one at the DOJ or NAR wants to make the MLS go away. The havoc that would wreak would be catastrophic.
My concern, however, is unintended consequences. The primary purpose of the MLS since its inception has been to share listing data and the amount of commission the seller/listing agent is willing to pay to the buyer’s agent. If you force buyers to pay their own commissions, then what is the purpose of the MLS? With shared compensation ending, how is the MLS any different than a portal?
Over the last few years, MLSs have been positioning themselves as the ultimate data source, not just platforms for offering shared compensation.
Even without commission sharing, however, the MLS is still invaluable to both buyer and seller agents. On the listing side, maximum exposure to the marketplace through the MLS helps the listing agent to quickly reach all those buyers’ agents who may have a buyer for the property while also helping the listing agent fulfill their fiduciary duty.
On the buyer’s agent side, the MLS system makes it easy for them to provide their buyers with access to the maximum number of listings that match their buyer’s search criteria.
Impact on affordability?
Affordability is a huge concern, especially since so many buyers are struggling to save up enough for a down payment. Exacerbating the issue are the recent hikes in home mortgage rates to over five percent. Couple this with inflation, lack of inventory, and continuing price appreciation in many markets, and this additional burden would only exacerbate the severe difficulty many buyers are already experiencing.
What would happen to dual agency laws under this new system?
It’s highly likely that agency rules may also have to be rewritten and/or legislated to accommodate the end of shared compensation. Theoretically, the shift to ending shared compensation should solve the dual agency issue. The problem is that the “agent” is the brokerage, not an individual Realtor.
Dual agency, in the sense of a single agent representing both the buyer and the seller in a transaction, with fiduciary duties to both, is permitted in all but eight states: Alaska, Colorado, Florida, Kansas, Maryland, Oklahoma, Texas and Vermont.
To illustrate why dual agency would most likely remain an issue even if shared compensation went away, if a large brokerage has 10,000 agents in a major metropolitan area, none of those 10,000 agents could represent a buyer on the buyer’s side of the transaction. Clearly, this is not in the best interest of the seller who wants and needs that maximum exposure to obtain the best possible price for their property. Furthermore, it may even be a restraint of trade.
One potential workaround for brokerages that represent both buyers and sellers would be to create a separate listing and a buyer company in the areas they serve, both operating under two different corporate entities under the same parent company. Many agent teams already bifurcate their business this way as do some of the brokerages operating under an employment model.
Would buyers have to go on ‘buyer listing appointments’?
Instead of increasing competition among listing agents as Moehrl and Burnett lawsuits suggest if shared compensation were to go away, the real competition would occur among buyer’s agents. Up until the time that this change takes place, buyer’s agents don’t have to worry about negotiating commissions because the listing agent does the work for them.
This shift could be a tremendous boon to buyers who would now be able to experience how effective their buyer’s agent would be negotiating on their behalf. Here’s a script that I suspect many top buyer’s agents will rapidly adopt:
If a buyer’s agent can’t negotiate a full commission on his or her own behalf, how effective do you think that agent would be in negotiating the best possible price and terms for the property you want to purchase?
Whether representing the buyer or the seller, the best agents have no trouble persuading their clients to list with them at a full commission. It’s those who are unable to articulate their value who cave on the amount of commission they charge.
Would Realtor.com and Zillow survive?
As Boero noted, Zillow and Realtor.com are at risk because both companies are expanding based upon a referral-fee-based model dependent upon shared compensation. An end to shared compensation would mean both companies would have to do a major pivot to find other revenue resources to replace their current model.
How agents and brokers can prepare for a loss of shared compensation
Given how slowly change takes place in the real estate industry, any change in compensation may be years off. On the other hand, if the DOJ were to force the end of the shared compensation, the industry will have to scramble to shift to an entirely new environment.
For agents, the best course of action is to become trained on how to become an exclusive buyer’s agent. In addition, every brokerage, MLS and association needs a contingency plan to address this shift as well as to lobby for the necessary changes in the law to accommodate this new business environment where buyers pay their own commissions.
Bernice Ross, president and CEO of BrokerageUP and RealEstateCoach.com, is a national speaker, author and trainer with more than 1,000 published articles. Learn about her broker/manager training programs designed for women, by women, at BrokerageUp.com and her new agent sales training at RealEstateCoach.com/newagent.