By Mandy Miles, Jim McCarthy and Alex Rickert
Realtors nationwide are facing new rules pertaining to their commissions following a legal settlement that affects both real estate professionals and consumers buying and selling homes. The terms of the settlement will take effect in July pending its approval by the courts.
The National Association of Realtors on March 15 announced it had settled an antitrust lawsuit that had claimed the organization and its real estate agents colluded with brokerage firms, pressuring home sellers to pay high commission fees to agents.
In addition to a $418 million payout over four years to the plaintiffs, the settlement changes the industry’s overall business model in which the seller of a house typically paid a 6% commission — $60,000 for a $1 million home — that was split between the seller’s agent and the buyer’s agent.
Plaintiffs in the recent lawsuit claimed the 6% fee was expected and anything less would discourage agents from showing a seller’s property. But according to several agents who spoke with the Weekly following news of the settlement, that “standard” commission, and the agreed-upon split between sellers’ and buyers’ agents, is far less universal than has been portrayed.
“There’s no such thing as a standard commission,” said Coldwell Banker Schmitt agent Josh Mothner. “I view the fact that they’re all roughly the same as the same reason many products are the same price, even if they’re not from the same company – competition.”
Under the terms of the settlement, as of July, the buyer and seller could each have to pay their own agent’s commission fee. The seller will not be burdened with both, unless they choose to pay both commissions in order to facilitate the sale – an option still very much on the table, contrary to some national headlines. However, where sellers’ agents could previously add proposed commission offers for buyers’ agents on the Multiple Listing Service (MLS), they will no longer be permitted to do so, regardless of their intent to strike a deal.
These changes concern some Florida Keys real estate brokers and agents.
“These new rules will make real estate transactions more complex and slow,” said Sebastian Del Negro, co-managing broker with Ocean Sotheby’s International Realty. “At OceanSIR, we never made it compulsory for sellers to offer commissions to buyer’s agents. Although we usually followed industry standards, commissions have always been negotiated. Historically, sellers offering compensation to buyers’ agents has been a tool to attract buyers.”
Some buyers may not have the funds to pay their own agent separately, which becomes particularly problematic if a Federal Housing Administration (FHA) or Veterans Affairs (VA) loan is involved.
“With any FHA or even VA loan, the loan rules do not allow buyers to finance the cost of their agent’s compensation,” said Ocean Sotheby’s Realtor Ally Kelley. “Should a seller not choose to offer a buyer’s agent’s compensation, the buyer, not the FHA or VA loan, will have to pay for the representation. This only increases the closing costs … and may make the property even less affordable.”
“This could have an adverse impact on buyers with limited funds for a down payment and closing costs,” said Key West broker Bascom Grooms of Bascom Grooms Real Estate. “In the event their Realtor finds them a property that the seller has not agreed to compensate a buyer’s agent for procuring a buyer, they would have to compensate their Realtor out of pocket, and they may not have the resources.”
Del Negro agreed, saying, “With our current system, commissions were rolled into the loan, whereas in the future, buyers will negotiate commissions with agents and then need to bring additional funds to the closing table.”
Derek Epperly, principal broker of Keys Atlantic Realty in Key West and president of the Key West Association of Realtors, has similar concerns for VA buyers and others with limited funds.
Grooms added that sellers will still have the option to pay both agents’ commissions, which is customary. “Sellers may elect to just pay their listing agent, but it remains to be seen if this structure will actually benefit a seller,” Grooms said.
The commission fees will be negotiable and, according to the settlement terms, cannot be included in the MLS listing for a property. Rather, the fee must be negotiated individually for each sale with each agent.
“For realtors, the proposed settlement just means more paperwork; for the consumer, it means a clear understanding of who pays for what,” Epperly said.
“Who this is really going to impact are inexperienced agents who aren’t able to have frank conversation about commissions and being compensated,” Mothner added. “It’s going to cause a lot of confusion initially, but it will settle out.”
Finally, the settlement includes a new rule that requires buyers to enter into written agreements with one agent. The designated agents handle all showings and offers.
“This is going to be an adjustment for buyers,” said Grooms. “Historically they have never had to sign a representation agreement to work with a Realtor. For sellers this is common practice that they sign a listing agreement. Buyers would still have the option to represent themselves if they did not want to commit to an exclusive agreement, much like sellers have the option to sell their property as a for sale by owner.”
But buyers representing themselves, Del Negro said, “translates to delayed transactions and extra work for listing agents and title companies.”
“(Having a buyer’s agent) has always been allowed and personally, I encourage it as there is more protection for the buyers,” added Kelley.
For some agents, a standard written agreement with buyers before starting any significant amount of work is nothing new. Regardless, multiple agents who spoke to the Weekly said the new across-the-board requirement would heighten competition, forcing companies to re-examine the quality and depth of services offered to buyers. And on the buyers’ end, “shopping around” until the moment a deal is struck won’t be as easy as it once was.
“This is one of the good parts of the proposed settlement, in my opinion,” Grooms said. “Our company has been encouraging our agents to enter into buyer representation agreements with buyers for several years and have made this part of our business model. The buyer representation agreement establishes our duties and responsibilities to the buyer and it establishes the buyers’ obligations to their realtor.”
“It’s going to tighten up the ship for those people who love to call around and call a different agent every day,” said Mothner. “They’re going to have to be careful, because they will have formal, likely binding, agreements with buyers’ agents.”
In announcing the settlement, NAR did not set a new suggested commission fee, but the current 6% standard is significantly higher than the 1% and 2% commissions paid in other countries such as the U.K. and Israel, according to CNN.
Grooms said he doesn’t expect the proposed settlement to significantly affect the Florida Keys’ listing inventory or local agents’ livelihoods.
“Our income is driven more by the health of the economy, strength of financial markets, interest rates, etc.,” he said. “This is not the first change our industry has experienced and it won’t be the last. We as real estate professionals will adapt and change our business models accordingly.”
Del Negro added, “Real estate agents are one of the few professionals that only get paid after all their work is done and finished. The reward is great, but the risk is considerable.”
He also specified that, “Anywhere Realty, our umbrella company, had settled this lawsuit last November and is excluded from any current or future copycat lawsuits.”
Anywhere Real Estate Inc. owns and franchises several recognizable real estate brands, including Coldwell Banker, Century 21 Real Estate, Sotheby’s International Realty and Better Homes and Gardens Real Estate, among others.
