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  • Writer's pictureDana Cohen

Changes to the Real Estate Industry – Form or Substance?

Updated: Apr 1

By now, many of you may be aware of the recent proposed settlement reached by the National Association of Realtors (“NAR”) and a group of homeowners who argued that they were forced to pay an inflated sales commission that, unbeknownst to them, included compensation to a buyer’s agent. Homeowners alleged that this coupling of commissions was a violation of antitrust laws. In California, there is greater transparency because the listing paperwork clearly delineates the amount for each side. This was not the case in most other states, where only the total was stated.

Under the proposal, sellers will no longer be required to offer a portion of the listing commission to buyers’ agents, effectively opening the door for buyers to negotiate the terms of compensation directly with their own representative through a Buyer Broker Compensation Agreement. Furthermore, the homeowners argued that the offer of a buying commission on the Multiple Listing Service (“MLS”) was unfair and had the effect of keeping commissions artificially high by incentivizing buyer agents to steer clients to those listings with stated compensation. The offer of compensation will now be removed from the MLS and third party sites like Zillow and Redfin. While this is certainly a change, it may very well have little consequence since commission can still be disclosed in various other ways including property websites, brochures and communication between buying and selling agents.

Since your questions are starting to surface, I thought it might be useful to share some of my preliminary thoughts with you.

My general reaction is that only time will tell whether the proposed settlement winds up being form over substance or if it genuinely changes the economics for buyers and sellers. Some experts predict that by decoupling the buying commission, lower costs to sellers means lower prices for buyers. The reality is that many sellers who want to attract the greatest amount of attention to their property will continue advertising (through non-MLS means) the offer of a buyer commission. For those properties that are the most in demand, I worry that the opposite will be true… buyers will be further priced out as competitive bidding moves the cost of buyer agents, originally covered by sellers, to them.

I have also seen predictions that buying commissions will go down as homebuyers negotiate directly for the scope of services they require. The popular argument is that the internet has allowed people to require fewer services from their agent (i.e. access to available listings). Frankly, I believe this is an oversimplification of the industry. Buyer agents, like any other paid professionals, need to clearly articulate the value of their services. Yes, there will be those people that are engaged for a limited scope of services at a fixed fee (i.e. to prepare the contract). At the other end of the spectrum, there will be agents who navigate nuances in neighborhood and home selection, explain contract terms, scrutinize the disclosures, provide effective negotiations, and offer post transaction support. Ultimately, the commission paid should reflect the negotiated value of the services provided.

At the end of the day, anything that increases transparency in a real estate transaction is positive for the industry. As the rules and contracts related to home sales change, it is important not to lose sight of finding the appropriate strategic alternatives for your unique situation. To me, it’s a matter of substance over form. As a seller, how competitive is the market for your property? To what extent does the commission you offer impact your overall return? As a buyer, what is the scope of services you require? How creative do you want your agent to be in structuring a deal that minimizes your upfront cash requirements? The industry may evolve, but it remains my goal to ensure that my negotiated compensation continues to be reflective of the services I provide my clients.

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