Deeded Interest

New rules over commissions causing confusion

By now, you may have read about the about the $1.8 billion jury verdict against the National Association of Realtors (NAR) and national brokerage firms. Plaintiffs successfully argued the practice of sellers paying 5-6% of brokers commission with half of that typically going to the buyer’s broker was unfair. The court found sellers can no longer be compelled to provide so-called co-op commissions, in effect “decoupling” payment on the part of sellers to both the seller’s broker as well as the buyer’s. The NAR plans to appeal but I and other experts expect the decision will be upheld.

Jumping right in and at risk of being accused of protecting my own interests, I am of the strong opinion this is not only a bad outcome for brokers but also for buyers, sellers and the industry as a whole.

This watershed decision will certainly make brokers jobs harder, affect earnings and may compel some to leave the profession all together. But for those of us who intend to continue in the business, the ruling requires us to put our hand out not once, but twice, as now we must also ask buyers to pay us a commission rather than just our sellers.

Too bad, so sad you might say. Brokers make too much money for too little effort anyway. But let’s play this out for the buyer or seller.

If you decide to use a real estate broker to aid your search, before you hit the streets to shop, you’ll likely now to be asked to sign an agreement obligating you to pay a percentage commission to your broker, should the seller of the home you decide to buy not be offering one as in the past. Because of this decision, the frequency of homebuyers paying broker commission on the buy side, when before they paid none, surely will increase.

So why use a buyer’s broker at all? Afterall consumers can shop for houses on their own using Zillow and Realtor.com and go directly to the listing broker. True, but if the seller is only offering a commission to his own broker, then again it’s highly likely that same broker will then ask the buyers for a separate commission to ensure both parties are equally represented, and each receive fair treatment.

Why not just hire an attorney to write and present the offer? Around here legal fees are likely to be higher than broker commission. And lastly some buyers might opt to go it on their own, but akin to defending yourself in court, that’s risky.

The Department of Justice (DOJ) has created a colossal and confusing mess, one that will further erode confidence in the homebuying process and well as in honest brokers who work to protect their client’s interests. And just watch, those more self-serving are likely to start charging buyers up-front or hourly fees even if they don’t buy a home!

Here’s how I’m advising my clients on these changes:

If you’re planning on listing your house this summer, although I’m now obligated to tell you don’t have to offer a co-op (i.e. — 3% instead of 6%), I’m strongly suggesting sellers do exactly that and at a competitive percentage. Why? Buyer’s brokers can see if a seller co-op is being offered and how much.

Studies show properties offering a commission to the buyer’s broker are shown and sold more often. That’s why when you see a home offered for sale by the owner (FSBO), you’ll commonly see the words “brokers protected” on their homemade signs.

Also, doing so will also eliminate any of the confusion as to who’s getting paid, how much and when. By sticking to what’s worked the last 50 years, sellers take any delays and distractions regarding commissions off the table and by doing so, put attention where it belongs, on the sale.

Will sellers lose money by doing so? No, as they’ll just build the cost of the commission into the asking price as always has been done. And that’s yet another pitfall for buyers, as a house showing a lower asking price than a similar one may end up costing more if a co-op is not being offered.

Another reason this suit was unnecessary in my view is broker commissions have always been and remain negotiable. Yes, 5-6% is the norm but not set in stone. In fact, it’s illegal we brokers conspire to “fix” an exact percentage as doing so is a violation of the Sherman Act.

Further, these fees can be changed as late as at the closing table. Several times in my career I’ve given up a portion of my fee to keep deals together and bridge the price gap between buyer and seller.

Bottom line, this outcome will spawn more problems than it’s meant to solve. Unfortunately, it’s always been difficult for brokers to rationalize their own existence. Perhaps if we as individual brokers and the national organization that represents us had done a better job doing so, we wouldn’t be in this mess.

That said, if your broker isn’t talking to you about this development and your rights as a buyer and seller, you’re skiing down a black without a helmet.