Lawsuits, Bombshells & Ye Olde Broker

The real estate industry went into true Chicken Little mode last week. The National Association of REALTORS® (NAR) reached a proposed settlement in a class action lawsuit that threatens to destabilize an entire portion of the industry’s pay structure.

Caught off guard, I scanned the email from NAR (of which I am a member) before reading it two more times to digest the information. I gave myself 48-hours to doom spiral into the dark recesses of my brain where my Type-A overachiever anxiety shelters, and now I’m ready to write today’s article.

I had to flip my background music to something extra soothing because as I sat down to write this article my blood was seething in my veins. The public reaction to the news really threw me for a loop. The number of mainstream media on all sides of all aisles who were spreading flat-out wrong information was completely astounding. I honestly had no idea that members of the general public hated real estate agents with so much fiery passion.

The reaction was really disheartening to me, as I strive to kick ass at my chosen profession to ensure my clients get all the support of a mother hen while feeling confident that they are swimming through the ocean sheltered in the wake of the biggest, baddest shark in the area. (Must be Tuesday, Dabs is mixing her metaphors again.)

Today, I’m going to bring you up to speed on the proposed settlement and some of the history behind how real estate commissions evolved.

Background

I’ve written on the lawsuit and how Real Estate Agent Commissions typically function in Michigan, but here’s a TLDR for you: Typically, a listing broker negotiates a commission percentage from the seller on the sale price of a home. In an effort to maximize traffic to the home and generate the most interest, the listing broker offers to split their negotiated commission with a Buyer’s Agent who brings a ready, willing and able buyer to the closing table.

For whatever reason, this scenario is perceived by society, at large, as the seller paying both agent’s commissions. Some folks will call out that the buyer is footing the bill because their money is funding the entire transaction. Either way, everyone apparently thinks real estate agents are overpaid.

I personally phrase it like so when explaining to someone: Agents work on speculation, and it’s high risk, high reward. When we get paid from one deal, we have to make up for the other 1-2 deals we may have worked that didn’t make it to the closing table. This is we can, you know, put food on our table, pay our brokerage, pay our MLS fees, pay our membership dues, pay our double FICA and Medicare taxes because we’re both employer and employee plus save for retirement.

Today, I’m going to give an overview on the lawsuit and some of the history behind it. Most people don’t really understand real estate commissions because they don’t deal with them on any sort of regular basis. When you hear the store of the commission evolution, it will make more sense (hopefully).

The Settlement

Last week, the National Association of Realtors (NAR) agreed to a proposed settlement in the class action lawsuit. Within the settlement, there are two items that I feel merit discussion.

1. NAR agrees to remove any offers of buyer compensation from all NAR-affiliated MLS systems.
2. NAR agrees all Realtors will execute a Buyer Agency Agreement with a buyer client before embarking on a search.

Reminder, a REALTOR® is a specific designation for a real estate agent who is a member of NAR. Realtors agree to be bound by NAR’s rules and ethics. You can be a real estate agent without being a REALTOR®.

Ye Olde Broker

Before the advent of the internet, you used a broker to reach potential buyers. So, back in the day, if you wanted to sell your house, you’d call a guy, let’s call him “Joe”. Joe was in the business of helping buyers and sellers make deals. He “brokered” home sales. Joe would go to his network and ask his buyer list if they wanted to buy your house. Joe worked on spec, collecting a commission percentage on the sale if he got the deal done.

At some point, either Joe or the seller realized you could reach way more buyers if you also called the other brokers and asked if they had a buyer for your house. But that other broker still wanted to get paid. Joe said, “Hey, I’ll split the commission with you, and we both win.” At this point, BOTH brokers still worked for the seller. The buyer had to do their own due diligence and hope they weren’t getting the short end of the stick.

BUT, can you see how the buyer might be confused? How they might think the broker he worked with to find a house actually represented his interest, not the seller’s? Yes, it would be easy for that line to become blurred and there to be confusion on whose interests were being represented.

(This story is a loose translation of what I was able to dig up in my research.)

Modern Evolutions

In the 1990s, consumer protection watchdogs called for changes in transparency around agency and who the broker represented surrounding a $200m class action lawsuit focused on agency misrepresentation. This time period is when buyers effectively received their own protections and representation in the deal. In Michigan, a buyer’s agent has a fiduciary duty to put their clients’ best interests ahead of their own. This legal standard protects the buyer.

Along with this evolution, the MLS started to allow brokers to advertise in the MLS how much of the fee they would split with the buyer’s agent. When I review a house in the MLS, I can see if the listing agent is offering 3% or $1. (Yes, I have seen offers of $1.).

The commission structure of splitting the fee remained the bedrock of how business was done. The point of the split for the seller’s agent was in reaching as many buyers for the home as possible to drive up the price as high as possible for their seller. #biddingwars

There is some irony that a class action lawsuit is what put this structure into motion, and now another class action lawsuit is revoking it. (Hmmmmmmm.)

The Internet Strikes Again

Enter the internet. It is now easier than ever for listing agents and unrepresented sellers to reach potential buyers. Under the proposed NAR settlement, a listing agent can’t advertise a buyer broker commission offer. According to the media frenzy, this means sellers will cut the commission they pay their listing agent in half and the buyer’s agent will have to seek compensation for their services directly from the buyer.

Why would a seller still pay a commission for the buyer’s agent to bring a buyer? Will buyers actually be willing to pay their Buyer’s Agent directly? Who will be hurt by the terms of this proposed settlement? Will housing prices come down now that agent commissions aren’t “artificially inflating the price of homes and this underpinning of every problem in the real estate universe will be gone”? /sarcasm, my friends.

We’ll dissect NAR’s proposed settlement’s impact in the next article. Ohhhhh, cliff hanger!! Thanks for joining me this week as I get way more specific on the nuts-and-bolts of the actual home sale process than normal. As always, I’m here to help with all your homeowner questions!