Real estate agent commissions have been making headlines in the last few months. I would be remiss if I didn’t address the pink elephant in this room we’ve built together.
Disclaimer: This article will refer to news sources to relay “typical” real estate agent commissions. Real estate agents cannot discuss commission structures in certain ways with each other as that can be illegal. Ultimately, it is between the broker and the individual client to negotiate what the fee or commission for the specified services will look like.
A $1.8B Verdict
Recently, a Missouri federal jury awarded plaintiffs, a group of home sellers, $1.8 billion in damages from the National Association of Realtors (NAR) and several large brokerages. Over 1.5 million real estate agents comprise the association and use the REALTOR® designation. Members adhere to NAR’s rules and ethics.
The plaintiff’s in this case alleged that NAR and these large brokerages conspired to artificially inflate the real estate agent commissions paid by sellers. The jury apparently agreed.
This lawsuit is really hairy when you start to pick it apart, so let’s take a closer look.
WTH is a Brokerage?
There’s a lot of confusion around brokers vs. agents. A broker is a real estate agent who has met additional licensing requirements. This certification allows them to supervise other real estate agents. A brokerage is the business owned by the broker in the course of operating as a broker, and potentially, overseeing real estate agents. You can be a solo person brokerage, and many brokers do choose to operate this way.
For example, I am a real estate agent. The great state of (Pure) Michigan grants my license. 😉 As I am not (yet) licensed as a broker, I operate under the supervision of a real estate broker. My broker owns and operates Keller Williams Showcase Realty, the brokerage of which I am a part.
In Michigan, the broker is the headliner and the agent is acting, well, as the broker’s agent. The broker has the final say. He or she keeps his or her associated agents in line with ethics and the law. His ass is also on the line if his agents go rogue or do bad things.
The Allegations
The plaintiffs in this case alleged, and a jury agreed, that the defendants conspired to require sellers to pay inflated commissions. NAR’s compensation rules for associated multiple listing services in regards to compensation of the brokers at a home sale’s closing compose the heart of the lawsuit allegations.
Basically, NAR required the seller’s broker to offer compensation to the buyer’s agent who brings them the ready, willing and able buyer who makes it to the closing table. National data suggests the seller broker’s fee is typically between 5-6%, with around half going toward the buyer’s broker from the selling broker’s commission.
NAR Required Buyer Agent Comp
So, NAR’s Participation Rule historically required listing brokers to offer buyer brokers a portion of their commission and to state the amount of that offer in the MLS. This commission can be as low as a penny. I have never personally seen a listing offering $0.01, but I have seen listings offer $1, so I can tell you sellers and listing brokers are making these arrangements.
In October 2023, NAR changed this rule to allow the listing agent to offer $0 to a buyer’s broker. Is there much difference between $.01, $1 and $0?
Commissions
Let me be extremely clear, pay structures for real estate brokers, and through them their agents, can take ANY number of formats. Buyers and Sellers can negotiate a percentage commission (most common), flat fees (less common) or hourly (practically unheard of but allowed) with their agent/brokerage.
The parties alone negotiate which services are used and compensated. You want the listing agent to list the property in the MLS, but you will handle showings, negotiations, and closing? Cool. That setup IS allowed currently.
The most typical commission structure I have run into is where the seller’s agent, aka the listing agent, negotiates a percentage of the sale price as payment for services related to selling your home, including finding a ready, willing and able buyer for the home. The listing agent then offers a portion of that commission she negotiated to a buyer’s agent who can procure that ready, willing and able buyer. Under this setup, it is actually the seller’s broker who is compensating the buyer’s broker. Through the buyer’s broker, the buyer’s agent can be paid.
Risky Business
Being a real estate buyer’s agent is actually quite dicey when it comes to compensation. Like an attorney “hanging out their shingle”, you eat what you kill. Graphic that analogy may be, but you only make money on the clients you bring on board.
However, an attorney generally bills by the hour. If the client doesn’t pay the bill, the attorney stops working and cuts his losses. If the client pays, the attorney can resume work.
On the other hand, a real estate agent may work with a client for 40-60-80 hours, drive countless miles, and not get paid. There is genuine risk in this profession. Deals fall apart through no fault of your own. Jobs are lost, parties back out, financing falls through, people die or change their mind.
Listing agents can be subject to similar fates. I once dropped $1000 (photos, staging, etc.) on a listing client who pulled her home from the market after less than two weeks and ghosted me forevermore. Not only did I not get paid, I was out $1,000. Was I embarrassed? Yep. Angry? Yep. Did I make those same mistakes again? Nope. If you only receive payment after closing, your income will always be subject to the wheels of fate.
An Uncertain Future
The news, social media and other outlets posit many theories on the future of real estate broker compensation. I have some thoughts, but not necessarily the space to capture those theories here. NAR and the brokerages have stated they will appeal the verdict.
Perhaps it is time to reimagine the industry’s compensation practices, but there are other hurdles to consider. For example, a VA buyer may not compensate a buyer’s agent representing them. Should sellers retain the upperhand because the buyers may not pay their own broker representative? The commission structure is so ingrained within the industry that government-backed loans don’t contemplate a scenario where the buyer’s agent isn’t compensated by the selling broker.
As always, thanks for joining me to review developments surrounding real estate agent commissions. I’m here for you for all things real estate!
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