Commission Changes Cause real estate Fireworks this summer

There are big changes coming to the real estate industry in August.  Twenty nineteen started an onslaught of lawsuits against the real estate ruling class, i.e. the National Association of Realtors (NAR), some of the nation’s largest brokerages and the Multi-List services (MLS). The general allegation was collusion to fix/set commission rates.  Although the NAR, the brokerages and the MLS (the Industry) have settled, they do not admit any wrongdoing.  However, the resulting settlement agreement, which changes real estate agent commissions will certainly cause some fireworks this summer.

As a lowly agent, I have no insider information that would give insight into any backroom deals/agreements that the Industry has made among themselves.  I don’t know if it’s true or not true that there was a conspiracy to keep prices “high”.  Conspiracy is a strong word and "high" is pretty subjective in my opinion.  Regardless, the plaintiffs prevailed as the Industry has settled for almost a billion dollars at this point. 

The changes

There are a few big changes that are resulting from the settlement and they're sure to cause some discomfort for everyone involved.

The first change is that buyer compensation will not be listed on the MLS.  Since the 90s, the accepted practice has been a “cooperative commission” structure.  The seller and the listing agent would come to an agreement about the commission paid to the listing agent.  The listing agent would then split this with the buyer’s agent.  So, for example, if a seller and listing agent agree to a 6% commission, that amount would be split between the buyer’s and seller’s agents.  The buyer’s agent (at least here in Pennsylvania) typically accepts whatever the seller is offering.  Now, disclosing that on the MLS will not be permitted.  Cooperative commission is still allowed, but it can’t be “advertised”.

The second change is that buyers will need to sign an agreement with an agent before seeing any property.  In my opinion, this is the most significant change.  Getting a signed Buyer Agent Agreement (BAC) is not required or not used in all states.  In Pennsylvania, where I practice, it is required but not immediately.  So, it’s possible for an agent to show a property without the BAC, but that buyer is not your client and could easily buy the home on their own and the agent would get paid nothing.  Most buyers are quite reluctant to sign any type of contract right away.  Many are in their “window shopping” era and have no interest in making a commitment.  Now, however, they will not have a choice; they must sign an agreement to have any private showing of a property.  The timeframe of the BAC is negotiable, but it must be signed to see a property.

Behind the scenes, this will create a lot of anxiety for the agents.  It’s a very substantial change that will most likely affect an agent’s income. This type of uncertainty for anyone is difficult.  It’s one reason I call for changing the compensation model for the industry.

Upcoming Challenges (and opportunities)

These changes will create much more friction for the buyer.  The seller can save 3% and pocket that extra cash.  However, the buyer will be under greater pressure to decide about an agent before searching (which is advisable by the way) and then they will need to be ready to have more cash at closing.  These changes, although a difficult adjustment for buyers, will ultimately be a good change in my opinion.  It will require agents to spend more time in the initial consultation explaining the process, and allow the buyer to become confident in the agent's ability.   Buyers, however, must be willing to participate in this new system, which may be a tough sell.

Although sellers may save 2-3% on a transaction, because of the new pressure on buyers, they may not have as many showings , offers, and therefore may lead to a decrease in prices.  This will be frustrating for sellers.  The past several years have seen an unhealthy appreciation rate in the real estate industry.  If sellers expect to have the same buyer fever and record-high prices, they will be disappointed.

In my opinion

Ultimately, in my opinion, these changes will reduce demand, and stabilize prices.  Since this recent housing boom has increased the average home price so dramatically, it has forced many out of the market.  We’ve been in a very strong seller’s market for several years, and hopefully this will bring us back to a more healthy and viable neutral market.

Update

There is going to be more at stake for buyers this August. Agents and brokers will have to adapt to a new way of doing business. Clarity will be paramount. I have developed a novel pricing model that will help all of my clients. It is clear, transparent and most importantly in the benefit of the consumer. Check it out here.