You have likely caught wind of a recent verdict in Missouri against the National Association of Realtors (NAR) and some larger real estate brokerages which made national news and led to widespread speculation on the future of how real estate agents who represent buyers are compensated. The verdict released a torrent of misinformation about the selling process and likely ramifications for sellers, buyers and buyer agents. The goal of this article is to clearly define what happened, what the verdict got right, what it got wrong and where the buyer agents go from here. I also realize that this article may be viewed with a certain amount of skepticism and seen as self-serving. I understand that notion and I would likely have those same concerns myself. However, those that have read this site for over 15 years will tell you that I always go out of my way to highlight the positive news as well as the more challenging news about real estate and the industry in general. I have always told other agents that if you only highlight the positives, your credibility will be immediately dismissed. So, please understand that I have gone out of my way to write a balanced article which concludes with my personal perspective on the developments with NAR and the recent court cases.
Prior to going any further and as some background for those who are new to this site, my name is Bob Bredel and I have been an agent in San Carlos since 2005. From 2008-2023, I have been the #1 agent for San Carlos sold listings, buyer representations and gross sales volume. Additionally, I am a licensed California attorney. Prior to practicing as an agent, I was a practicing attorney in a few subject areas, including transactional and real estate litigation. Having the combination of these two perspectives, I believe, puts me in a unique position to lend some insight into the developments with NAR and how it relates to agents representing buyers.
Synopsis of the Lawsuit
In October, a group of seller/buyer plaintiffs in Missouri were successful in their lawsuit against several larger real estate brokerages, accusing the brokerages of conspiring to inflate home sale commissions. They put forth the claim that since the seller pays the total listing commission, which is then split with the buyer’s brokerage, there was an incentive for represented buyers to view MLS listed homes that offered traditional cooperating compensation. Confused? No problem, let’s break it down a bit further:
Let’s start with the basics of a listing agreement as it is the listing agreement that is at the core of the lawsuit. When you list your home in San Carlos (or anywhere in California and most of the United States), you sign a listing agreement with a residential real estate brokerage. That brokerage agrees to list your home, undertake a strict fiduciary with the seller and promise to use best efforts to sell the property for the highest price and best terms. In exchange for the brokerage performing that service, the seller agrees to pay the listing brokerage a fee. In San Carlos, this is traditionally 5% of the value of the home. The listing agreement goes on to say that the listing brokerage agrees to cooperate with the brokerage that represents the buyer by splitting half of that 5% fee with the brokerage that represents the buyer. This “cooperating” fee is advertised through the MLS to ensure that the brokerage representing the buyer understands they will be compensated for their efforts.
It is this cooperating compensation that is at the very heart of the lawsuit. The plaintiffs essentially want to sever any compensation whatsoever that flows from the seller to the brokerage representing the buyer. To recap, the seller pays the listing brokerage a fee, (likely 5%) for the representation and sale. Half of that 5%, 2.5%, is then advertised on the MLS by the listing brokerage as the cooperating compensation to indicate to a prospective buyer brokerage the fee that will be paid to them for a successful transaction. So, while the 2.5% compensation is not coming directly from the seller to the buyer’s brokerage, it is constructively doing so through a conduit, which is the listing brokerage and their listing agreement.
The plaintiff’s lawsuit alleges that this sharing of the commission through the cooperating compensation is equal to brokerages conspiring for their own benefit, with sellers perhaps having an advantage over buyers as well. The plaintiffs would like to see buyers pay their own agent, attorney or represent themselves to eliminate the inflated pricing built in by the cooperating compensation. The plaintiffs were also successful in obtaining a 1.78B judgement against the defendants. The verdict will now spend years in an appeal if it is not settled prior to duration of the that process.
- There is nothing in this verdict that will take away from the way homes are listed in a traditional sense by brokerages other than there may be a change at some point in the future as to how the buyer brokerages are compensated.
- Commissions are, and always will be, fully negotiable between agents and their clients.
- This lawsuit will likely be duplicated in just about every state, including California, and it will take some time for the dust to settle and make a meaningful impact on local markets.
I have not been shy about making my feelings known over the years that the real estate industry is behind the times in many of its endeavors. It is always well-meaning, but suggesting change in the real estate industry is like asking a cargo ship to execute a U-turn under the Golden Gate Bridge. It’s not exactly a fast process. That needs to change.
I believe there are two layers to this lawsuit. The first layer, the public one that was litigated, was grounded in a legal cause of action, as discussed above. The second layer had nothing to do with the lawsuit itself, but rather it preyed upon the perception that real estate commissions are too high and the value being brought by the particular agent was not equivalent to the compensation that was offered. It is the clear elephant in the room. In my opinion, it was also a leading reason that a jury trial was likely selected and not a bench trial.
The Buyer’s Brokerage
Before going any further, it is the appropriate point in the article to take a closer look at the role of the buyer’s brokerage as its role is at the core of the lawsuit. If you are like many in San Carlos, you probably had a buyer’s agent work with you on your purchase. That agent’s brokerage was then compensated via the cooperating compensation in the MLS and you were successful in your purchase.
As to the first layer of the lawsuit, I can unequivocally state that with regard to every buyer I have assisted in San Carlos, I do not think it ever crossed my mind, that I was somehow conspiring with the listing agent on cooperating compensation with a grand plan of keeping commissions and housing costs high. I was simply trying to negotiate the best price and terms for a home that worked well for my clients. I do, however, understand the plaintiff’s notion that a transaction multiplied out thousands of times could have a more broad-reaching effect on the market. I do not agree with that sentiment of brokerages conspiring to keep home values and commissions high when examining both sides of the case, but I understand the derivation of the argument.
As to the second layer regarding buyer’s agents being overpaid, I certainly understand that notion too. The perception of writing up a contract and being paid 2.5% on a $2M home does seem, on its face, to be extravagant. In fact, I remember distinctly thinking this as well before I had any meaningful time in real estate. However, the reality is something far different. Consider these facts with regard to the buyer’s agent commission:
- That 2.5% does not go directly to the buyer’s agent. It goes to the brokerage that employs the agent as an independent contractor. The agent receives a split of that total commission, but not before it is split up several more times between transaction coordinators, agent support staff, insurance and other fees.
- Buyer agents are their own independent business. They do not receive a salary or any benefits from their brokerage. As with anyone else who is self-employed, they are entirely on their own.
- For every successful transaction that a buyer’s agent completes, know that there are two other sets of buyers who worked with that agent whose purchases never came to fruition after that agent spent months, even years with them and they ultimately ended up deciding to rent or relocate.
- There is a reason most really good agents that make it in real estate slowly start to concentrate on having more listings than buyers. Representing the right buyer group is wonderful, but it is an area of real estate that is littered with pitfalls at every turn. Experienced agents are very careful with who they take on as buyers.
The Latest of Many Attempts
This verdict is the latest in a very long line of attempts to disrupt the buyer’s side commission aspect to the sales process. It has been bombarded over the years from hundreds of different discount brokerages and start-ups trying to offer a discount or partial reimbursement of the cooperating compensation on a successful transaction for buyers willing to use their service.
The ideology behind these companies is that there are so many more tools available to buyers in today’s market, that buyers do not need the full services of a buyer’s agent as they are able to do much of the process on their own. I agree with this notion. Buyers today are much more educated, are not solely reliant on their agent for listings and they are certainly capable of conducting much of their own research. However, this begs the question, “Why have the vast majority of these brokerages and start-ups failed to gain even a 1% market share in towns like San Carlos?”
My Personal Perspective
It is a question that cannot be ignored. Why do the vast majority of the discount brokerages and start-ups fail, and why are all unable to gain even a 1% market share in similar towns. I am going to spill the beans on what most of these discount brokerages, start-ups, and now, lawsuits, still do not understand and it is the essence of what makes real estate unique:
Residential real estate is and always will be, personal.
What most onlookers and commenters do not understand about residential real estate is that it is not solely about the MLS, open houses and mining data. While those are certainly important aspects of the overall process, it is not what truly makes residential real estate flow. There is a reason real estate has been the one industry the internet has struggled to upend. The really good agents, the ones that make a difference, are the glue that not only put the deals together, but more importantly, hold them together. These are the agents that can relate to any personality and make them all work inside a single transaction. Apps do not have this skill. Residential real estate is stressful for most buyers and sellers. Often it is their largest purchase or the sale of their largest asset. They are trying to make the best decisions possible in an area they rarely deal in with any regularity.
My wife will sometimes ask why I am so exhausted when I come home. I tell her it is because I had to transform myself into eight different personalities during the day to make sure the buyer wasn’t offended by the seller, the seller wasn’t offended by the property inspector, the property inspector wasn’t offended at the unsolicited advice from the buyer’s father who wanted to be at the inspection and the buyer’s father wasn’t offended by the mortgage lender’s request for more documentation on his down payment gift to the buyers. I call the end of that part of the day, “lunch time”. This goes on endlessly behind the scenes with every transaction. The really good agents handle all of these issues with minimal or no impact to their clients and keep the transaction moving forward. The best visual I can think of is a lifeguard trying to pass a certification class while holding a cinderblock over their head while treading water. The really good agents know how to protect their client’s interests, keep the transaction above water and see it to the finish line. They can adapt quickly and be who their clients need at the moment and be what the transaction calls for at any given time.
If you were to poll the top 1% of all agents in San Mateo County and ask them what the majority of their job entailed, I am guessing not one would tell you it has anything to do with the MLS, open houses, broker tours, etc. The majority of their time is spent keeping everyone in the transaction on track, solving issues and moving forward.
In my opinion, you do not get that from solely having an attorney represent you, an app or calling into a call center. The odds of success go up dramatically while using a buyer’s agent that is experienced, a fierce advocate for their clients and has the ability to morph into what is needed each day. If that agent has earned the trust of the buyers, the odds for a smooth transaction go up even higher.
I am not against changes in the real estate industry and I certainly think we are overdue for a change of course in some key areas. For instance, our barrier to entry needs to be fortified substantially. Brokerages need to be far more selective on the agents representing them. In short, the bar needs to be raised.
This lawsuit is going to bring out all sorts of opinions and new business ventures. My humble advice would be to research all of the options, ask lots of questions and use common sense. Remember that real estate is and always will be, personal.