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Homing In | More about the changes coming to real estate commissions

By GERI and BOB QUINN - Homing In | Apr 15, 2024

Geri and Bob Quinn

This week we are going to continue our deep dive into the recently proposed class action lawsuit settlement by the National Association of Realtors (NAR) that would resolve the litigation brought on behalf of home sellers related to the structure of real estate broker commissions. We will state right upfront, the current system is not perfect and we think it has some flaws. From what we can tell at this point, the newly proposed system resulting from the NAR’s settlement will also not be perfect and it will also have some flaws.

This settlement will change the structure of how real estate business is transacted across the entire country in several ways, and if it is approved by the court, these changes are slated to go into effect in July of this year. Contrary to a lot of the “inside real estate” thoughts and conversations we are hearing, our past life experiences tend to make us think the real estate industry is about to go through some dramatic changes over the next one-to-five years. We think these changes will ultimately lead to lower transaction costs for consumers and a fairly significant reduction in the number of real estate agents. No offense intended, but kind of a culling of what has become a massive herd of people who work locally as Realtors.

To clarify this point, we acknowledge that there are some really good, hard-working, highly ethical Realtors running solid businesses in our market. But let’s be realistic, a lot of people get into real estate here locally because the “barrier to entry” is pretty minimal in that the process to obtain a real estate license is not that difficult and you do not necessarily need to sink a lot of money into the business to get started and established. When we experience a “hot market” like we did during the post-COVID boom beginning in the summer of 2020 through the middle of 2022, people pile into the real estate business because they think it is “easy money.” When the market shifts negatively the way it has since June of 2022, and the less established Realtors realize that the so-called “easy money” is gone and the business turns into a grind, a lot of people flee the business. We think the upcoming changes will force some people to reconsider their career choice to be a Realtor out of financial necessity.

Getting back to the NAR’s settlement, there is a lot of misinformation out there in the media about it and real estate commissions and fees. First, many media outlets make it sound like there is a standard 6 percent commission paid to Realtors when a home is sold. However, the amount of any commissions and fees is currently negotiable and it will remain negotiable under the new format. There is also a general view in the media and amongst some outside market analysts that the changes are likely to ultimately result in the total amount of future commissions being paid by consumers on real estate transactions to shrink by upwards of 30 percent. The real estate industry insiders are not seeing it that way, but we tend to think things are about to change a lot more than the insiders are willing to admit to. Time will tell.

Part of this is likely to come down to how much consumers are willing to pay a Realtor, and in a competitive world, how much will Realtors be willing to work for? In essence, what services will be offered by Realtors, and at what price? What will consumers view as a fair amount of compensation to pay a Realtor for their local knowledge and expertise and what “menu” of options will be available to consumers in the future? The real estate business is likely to evolve in ways that most within the industry choose not to imagine. As a case in point, back in the 1990s, as discount stock brokerage firms were making some headway against the “establishment” stock brokerage industry at a time when the Internet, emails, and cell phones were in their infancy, who could have ever imagined investors would someday be able to buy and sell stocks online free of any commissions? Going forward, we think there will be a place and a need for Realtors to be involved in the process of buying and selling homes, but that the “value proposition” of a Realtor may become somewhat watered down in the minds of more consumers as technological advances in the do it yourself information age continues to grow and real estate commissions become more commoditized.

Under the new rules in the proposed NAR settlement, sellers will still be able to negotiate the amount of commissions they will pay to the listing brokerage and they will be able to decide whether or not they want to offer any “cooperative compensation” to a buyer’s broker. For example, a seller will be able to say they will pay the listing brokerage “x” amount of commission and that they do not want to pay any commission to the buyer’s side. For the sake of argument, let’s say that today a seller might agree to pay a 5 percent commission on the sale of their home with 2.5 percent going to the buyer’s broker in the form of cooperative compensation. In July, based on the terms of the settlement, the seller could negotiate a listing agreement in which they pay 2.5 percent (or whatever number) to the listing brokerage, while paying no cooperative compensation to the buyer’s side, thus reducing their out of pocket costs. The seller will also be able to choose to offer any amount of cooperative compensation to the buyer’s brokerage. The wildcard to a seller will be the risk that some buyers might tell their agent to avoid homes where the seller will not contribute anything to offset the buyers costs under the new system.

In addition, it will no longer be legal for the listing brokerage firm to disclose the amount of cooperative compensation being paid to a buyer’s broker in the Multiple Listing Service, in an attempt to prevent agents from “steering” buyers towards homes paying them a higher commission. However, there will be other ways for a buyer’s agent to find out if a seller is offering any cooperative compensation. It will just be a more time consuming process for the buyer’s agent to uncover this information. The other significant change to the process is that potential buyers will be required to sign a buyers agreement with a Realtor before the Realtor will be allowed to take the buyer out to show them any homes. In this agreement, the buyer will have to commit to paying a commission or fees to the Realtor for their services in the event the seller is not willing to pay any cooperative compensation to the buyer’s agent. If the seller is offering compensation to the buyer’s side, it will offset the amount the buyer has agreed to pay. So if the seller offers to pay 1 percent to the buyer’s broker and the buyer has agreed to pay 2.5 percent for their agent’s services, the buyer will have to come up with the additional 1.5 percent out of their pocket. If the buyer agreed to pay 1 percent to their agent and the seller was offering 2.5 percent of cooperative compensation, the buyer’s agent would only be entitled to the 1 percent and it would be paid by the seller and not by the buyer.

Since a lot of time can be spent in the process of working with buyers that often does not result in them buying a home, the changes requiring a buyers agreement before doing work for a buyer may end up resulting in agents charging the buyer an hourly fee or flat rate for a certain level of work. This could be in addition to the buyer committing to pay the agent a commission when they purchase a home. This may drive more buyers to choose to deal directly with the listing agent, who will also need to have the buyer sign a buyers agreement before showing them their listing. Again, the new process will not be perfect and it will probably lead to some unintended consequences for buyers, sellers, and Realtors.

The sales data for this article was obtained from the Florida Realtors® Multiple Listing Service Matrix for Lee County, FL, as of April 9, 2024, unless otherwise noted. It was compiled by Bob and Geri Quinn and it includes information specifically for Cape Coral single family homes, and does not include condominiums, short sales, or foreclosures. The data and statistics are believed to be reliable, however, they could be updated and revised periodically, and are subject to change without notice. The Quinn’s are a husband and wife real estate team with the RE/MAX Realty Team office in Cape Coral. They have lived in Cape Coral for over 44-years. Geri has been a full-time REALTOR since 2005, and Bob joined Geri as a full-time REALTOR in 2014. Their real estate practice is mainly focused on Cape Coral residential property and vacant lots.