Background: The Traditional Commission Structure
Traditionally, when a seller hired a listing agent, they negotiated a fee, which often included sharing a portion of the commission with the buyer's agent. This system aimed to ensure that buyers, especially those unable to afford additional fees on top of down payments and closing costs, could still have representation. This arrangement was likened to our court system, where the state provides an attorney for those who cannot afford one, ensuring fairness in representation. The policy required any agent who published a listing in the MLS was required to offer compensation to a buyer's agent, and state the amount offered.
The Lawsuit and Its Implications
The crux of the Sitzer/Burnett lawsuit was that sellers were often unaware that commissions were negotiable and that their fees were being used to compensate the buyer's agent, who might negotiate against them. The plaintiffs prevailed, leading to a significant ruling against the National Association of Realtors (NAR) and several major brokerage firms, culminating in a preliminary settlement to avoid a potentially larger penalty and further litigation, as copycat lawsuits ensued prolifically after the Sitzer/Burnett victory. Notably, due to the sheer number of participants, the sellers in the lawsuit are expected to receive amounts of $10-20, while the attorneys are going to make millions.
Details of the Settlement
The NAR initially promised to appeal the verdict, but they were unable to do so due to the requirement to post bond at a percentage of the awarded damages. The awarded damages exceeded 5 billion dollars, which meant appealing would cost millions, and they didn’t have the funds. Additionally, they needed to put a stop to the slew of copycat lawsuits in order to protect their members. As such, they proposed a settlement, which has been “preliminarily” approved by the DOJ and is scheduled for an official decision in November 2024.
The settlement includes the following key elements:
-These changes will take place in July of this year
- NAR and involved brokerage firms will pay $418 million over four years.
- New guidelines will prohibit agents from disclosing the compensation offered to a buyer's agent by the seller on the MLS. Although compensation cannot be disclosed on the MLS, sellers still have the option to pay a buyer's agent.
- Agents must secure a buyer representation agreement before showing homes. NAR is not dictating any terms of the agreement and has stated it must be an agreement in writing and it must discuss compensation.
Industry Concerns and Consumer Advice
Many industry professionals are concerned that these changes may reduce transparency and potentially allow manipulation of the system, because conversations about compensation will have to take place behind closed doors, behind the eyes and ears of the clients. Additionally, the new rules could disadvantage new entrants into the market, particularly buyers who are less financially affluent. These are the buyers who are least equipped to afford their own agent fees, and most in danger of making a bad or risky purchase without guidance, as they have no home buying experience to lean on.
For Sellers and Buyers: Moving Forward
Sellers: While it might seem appealing to save on commission by having buyers pay their own agent fees, consider the potential complications. In current market conditions, due to high interest rates and inflation, buyers are already strapped for cash. If they have to pay for their own agent in addition to their down payment and closing costs, they will have less buying power, which may result in a lower offer. If a buyer interested in purchasing your property cannot afford their own representation, this presents a dilemma. Your agent may need to handle both sides of the transaction, which can lead to conflicts of interest and reduced advocacy for your interests. Alternatively, if the buyer remains unrepresented, they may struggle with understanding the contract, navigating inspections, and meeting crucial timelines. An unrepresented buyer can introduce unpredictability and risk into the transaction, potentially leading to chaos and even jeopardizing the deal. Discuss with your agent the strategic implications of various commission structures and choose the one that best aligns with your selling goals and minimizes transaction risks.
Buyers: While bypassing a buyer's agent might seem like a cost-saving measure, consider the broader implications. A buyer's agent not only opens doors but also refines the home-buying process, making it clearer and more efficient. This expertise can significantly reduce the number of properties you need to view. Some suggest hiring an attorney to handle the contract as an alternative; however, while attorneys are skilled in legal aspects, they aren't equipped to advise on the optimal offer price or analyze market conditions and comps. Additionally, their availability is often limited to business hours, which could delay the process, potentially causing you to lose out on purchasing your ideal home.
Under the new regulations, you'll need to sign a buyer representation agreement before touring homes. Remember, the term of this agreement is negotiable. If you are unfamiliar with the agent, we recommend starting with a shorter term to assess compatibility without long-term commitment. However, frequently changing agents can disrupt your search, as each new agent must learn about your preferences and is not privy to feedback you provided during earlier tours. To avoid inefficiencies, approach hiring a buyer's agent as sellers do when listing their homes: interview multiple agents to assess fit, fees, services, and value. Ideally, begin with a three-month contract, which can be extended if you need more time to find the perfect home.
For more insights into the comprehensive value a buyer’s agent provides, refer to our article, "Do I Need A Buyer's Agent?"
If you have any questions or need help navigating these changes, we are here to help.
