You don’t have to be a rocket scientist to figure out the buyer’s agent commission is held artificially high by the current way we do business.
Simply call any discount broker such as Redfin, and they will gladly help you sell your home for 1 percent. However, when it comes to the buyer’s agent commission, a commission they probably will not get, there is no reduction, so 2.5 percent it is.
Same for every other broker that offers sellers a discount on their side of the transaction.
So while sellers get to choose how much they pay from many discount brokers, the buyer’s agent commission is locked in at 2.5 percent to 3 percent as the lawsuit states.
Everyone in the industry takes this status quo for granted. Now this lawsuit is saying it’s time to change it.
How NAR’s code of ethics keep buyer’s agents commission high
The National Association of Realtors’ (NAR) code of ethics helps to make sure the commission for the buyer’s agent is locked in.
For example, a seller says they will gladly pay 3 percent to a buyer’s agent who brings them an offer.
However, once they get that offer it is much lower than they wanted.
They suggest to their agent maybe they could pay the buyer’s agent 2.5 percent instead of 3 percent. This would help make the offer more attractive and easier to accept.
What is the seller’s agent response?
“Sorry, if I do that I would be going against the NAR Code of Ethics Standard of Practice 3-2. I could get an ethics violation and a fine.”
The seller would say: “So there is no way to negotiate the buyer’s agent commission.”
Their agent responds: “You can only negotiate the buyer’s agent commission prior to getting an offer per NAR’s Code of Ethics”
Seller says: “That is crazy, how can you negotiate something before you even have it?”
Their agent responds: “Well, that is NAR’s position on negotiating the buyer’s agent commission.”
The Realtor’s Future
I don’t see this as the end of the MLS or Realtors or anything else. This lawsuit aims to change the way buyer’s agents commissions are established, and I see that as a good thing for buyers and sellers.
One solution is to have the buyers pay their agent’s commission. This would immediately generate several different options for buyers including some discounted options. Buyer’s agents would have incentives to offer more services and/or discounts to attract more buyers.
Competition is a good thing for the public. It creates innovation and new valuable services.
The MLS Will Survive
To me, the idea that this could be the end of the MLS does not make sense. The MLS’s value is giving buyers and sellers a centralized place to go for listings.
Its value is not in artificially keeping buyer’s agents’ commission high. So, changing the way buyer’s agents are paid does not reduce the value of the MLS at all.
This does mean the public pays less commission overall to Realtors, which probably means a reduction in the number of Realtors, as each Realtor tries to get their slice of a smaller pie. However, I believe there will still be plenty of Realtors to fund the local MLS and NAR too. After all, the same number of homes will still be bought and sold.
The local MLS has already invested a lot of money to have good technology to store all the listings and distribute them. As this system is in place and working, there is no reason to get rid of it. Perhaps fees will go up as the total number of Realtors goes down, but the MLS will continue to work.
This will require a new law
Realtors will currently boycott a listing that is not paying a specific buyer’s agent commission, so a new law will need to be passed to make sure these changes take hold.
If the defendants settle by saying the commission is negotiable, that won’t do a thing as sellers will continue to be scared Realtors will not show their home if they pay less commission.
The law should state that the seller is not allowed to pay the buyer’s agent a commission. That would get buyer’s agents to start collecting their commission from the buyer instead.
I believe the law should also state that inclusion of homes in MLS should not be contingent upon buyer’s agents compensation. If they do not pass this law than sellers will continue to feel pressure to offer buyer’s agents compensation to have their home shown.
The real ethics violation
The whole idea that the buyer’s agent commission influences which homes are shown should be against our code of ethics. Buyer’s agents should show the homes that they think are the best for their client, not the home they feel offers them the most commission.
The very first thing it says in our code of ethics, Article 1 is:
“When representing a buyer, seller, landlord, tenant, or other client as an agent, Realtors pledge themselves to protect and promote the interests of their client.”
If a Realtor decides what homes to show based on how much money they will make, that is the opposite of what is in the best interest of their client.
How Realtors think
I understand these ideas are not popular with NAR and Realtors.
Anything that has the possibility of reducing one’s income is going to be vigorously defended as unnecessary.
With this change NAR, the local boards of Realtors and Realtors themselves all lose money, so everyone in these groups will come up with many reasons for why changing the status quo is not a good idea.
NAR and the big brokers are already saying this case has no merit, and you can expect them to spend millions defending their position.
However, if you are not in one of the groups mentioned above, you would see this change as a good thing.
Ask any seller if they would prefer to pay the 2.5 percent to 3 percent commission to a buyer’s agent or pay nothing, and the answer is obvious.
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Bryn Kaufman is the creator and principal broker of OahuRe.com. You can follow him on Facebook and Twitter.
