On Thursday, June 30, 2022, the Northwest MLS updated its rules regarding compensation and transparency. The changes they are making provide the industry with a roadmap for ending accusations of price fixing among brokerages. NAR, every state association, and brokerage should take note, especially since these changes may provide the best protection against the ongoing “commission bombshell” lawsuits.
Andrea Brambila’s and Jim Dalrymple’s recent columns did a masterful job dissecting the issues around the current so-called “commission bombshell” litigation.
The battle over NAR’s Code of Ethics and MLS Policy Statement 7.23
The changes the NWMLS is making take specific aim at the issues raised in the so-called “bombshell lawsuits.” The original Moehrl complaint raised issues with both the NAR Code of Ethics and NAR MLS Policy Statement 7.23.
In the Moehrl complaint, the plaintiff’s attorneys coined the term, “The Buyer Broker Commission Rule,” to describe the guidelines in MLS Policy Statement 7.23 and the Code of Ethics that govern commission sharing on the MLS. The complaint alleges that these policies have resulted in price competition among brokers being restrained:
The Buyer-Broker Commission Rule ensures that price competition among buyer brokers is restrained because the person retaining the buyer broker, the buyer, does not negotiate or pay his or her broker’s commission. In addition, the seller’s inflated commission offer cannot be reduced by buyers or their brokers, as Defendants also prohibit buyer brokers from making home purchase offers contingent on the reduction of the buyer broker commission. (p. 4)
In subsequent litigation, Sitzer/Burnett and Batton have made similar allegations. For example, the amended complaint filed by eight homebuyers in the Batton litigation on July 6, 2022, alleged:
These rules, which include a requirement that sellers set aside a portion of the purchase price for buyer-agent commissions, prohibitions on modifying the commission, and permission to filter listings by commission, all enable NAR, its co-defendants, and its members to maintain buyer-agent commissions at supracompetitive levels unrelated to brokers’ experience or the services provided, steer home buyers away from lower commission homes, and drive out discounters — among other harms.
Two key steps to make commission bombshell lawsuits go away
The NWMLS made two significant changes that allow the buyer and the buyer agent to negotiate directly with the seller the amount of the buyer agent’s commission.
The first step in killing future commission bombshell litigation involves ending the current model of sharing commissions. Instead,
The compensation the seller offers to the buyer broker will be determined by the seller, rather than commission sharing between the two brokerage firms.
The second step clearly allows commissions to be negotiated between the buyer, the buyer’s agent, and the seller.
The compensation the seller offers to the buyer broker will be prominently stated on the first page of the NWMLS purchase and sale agreement, with an opportunity for the compensation to be accepted by the buyer and the buyer’s broker or modified by the parties in an addendum.
In my opinion, these two provisions do away with the arguments made in the previous bombshell commission complaints, including those alleging violations of the Sherman Antitrust Act.
Implementing the changes
For these two steps to be implemented, the NWMLS will have to make major changes in its forms, rules, and practices. The three additional provisions below address the changes that the NWMLS will have to make to its listing agreements and buyer representation agreements, as well as a provision allowing brokers to create other types of representation agreements.
The NWMLS listing agreement will provide new options for broker compensation to address the role of the listing broker ad buyer broker in the transaction;
The NWMLS buyer representation agreements will offer alternatives for buyers and their broker for compensation that depend on the terms of the listing;
Brokers will more easily be able to fashion their own form of representation agreements with sellers and buyers to differentiate their services and fees and compete in the market.
A primary argument in the bombshell lawsuits is that the buyer’s agent cannot negotiate the commission and that this restriction has resulted in a conspiracy to fix commissions. The NWMLS changes address these allegations head-on.
Making discrimination against discounters go away
A second argument is that the current system discriminates against agents who want to offer discounted commissions. In this NWMLS system, this issue also disappears.
For example, say that a listing agent is willing to take a listing at one percent for the listing commission and enters one percent as the selling commission on the MLS. There’s no longer any reason for a buyer’s agent not to show this property since the buyer’s agent can raise their portion of the commission as part of their buyer’s offer.
On the other hand, for the sellers alleging that they shouldn’t have to pay the buyer’s commission, (depending on how the NWMLS writes their rules) they most likely will have the option of paying the buyer’s agent zero. The buyer’s agent can either negotiate directly with the sellers to change this or obtain a buyer exclusive representation agreement and negotiate the commission with their buyer.
Potential scenarios as to how these changes may play out
The listing agent’s commission is negotiated when the exclusive-right-to-sell agreement is signed. Two possible scenarios as to how this plays out for the buyer’s agent include:
- The listing agent only negotiates their commission and makes no offer of compensation in the MLS to the buyer’s agent. In this scenario, the buyer’s agent must negotiate with either the seller and/or the buyer as to what their commission will be.
- The listing agent negotiates both their commission as well as the amount of commission the buyer’s agent will be paid. This amount is posted in the MLS.
Possible scenarios when seller agrees to pay the buyer’s commission
Most buyers and their agents will accept the commission offered in the MLS. For those who choose to negotiate the commission, here are several examples of what they might negotiate:
- A reduction in the commission that results in a lower purchase price for the buyer.
- A credit for closing costs deducted from the buyer’s portion of the commission.
- In the states where it is allowed, a commission rebate made directly to the buyer.
- In a buyer’s market where little is selling, sellers may offer an increased buyer commission to attract more buyers.
If there is a change in the current lending laws, it is also possible that the buyer may be able to roll the commission and their closing costs into the total loan amount.
Benefits to this new approach
In this new paradigm, listing agents will no longer have to justify how commission sharing works. Instead, the buyer’s commission is negotiable when the offer is submitted, not just when the listing is taken. Consequently, the seller may decide to pay the buyer’s agent more or less than the listing agent depending upon market conditions and other factors.
A second benefit is that this new paradigm should have little or no impact on how the MLS displays buyer broker commissions.
A positive step forward
NAR, state associations, MLSs, and brokerages should take note of these changes and consider implementing them. NAR should consider changing the rules in the NAR Handbook on Multiple Listing Policy and the NAR Code of Ethics to match what the NWMLS is doing. It’s one of the best ways to not only circumvent future litigation against members, but to be better positioned to avoid allegations of commission fixing that violate the Sherman Antitrust Act.
Stuart Heath, owner of Bellmark Real Estate and chairperson of the NWMLS board of directors, had this to say about these changes:
Buyers should be fully aware about how and how much their broker is compensated. Buyers should be given the opportunity to freely negotiate that compensation with their broker. These changes are a positive step to help the industry evolve.
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.