Is a shake-up to how real estate agents are paid on the horizon? Not yet, but recent scrutiny of the custom of having a home seller foot the commission for the buyer’s agent has sparked a debate around what’s best for homebuyers and agents, while allowing more competition.
Last month, a federal jury in Missouri ruled that the National Association of Realtors, a powerful real estate organization that owns the trademark to the title Realtor and controls much of its members’ activities, and several other large brokerages conspired to inflate agent fees.
The Sitzer/Burnett commission lawsuit, a class-action lawsuit filed in 2019 on behalf of 500,000 home sellers, is among several cases against NAR and national brokerages. The outcome could ban cooperative agreements between agents, known as co-op fees or commissions, where the home seller, via their real estate agent, agrees to pay a fee to the buyer’s agent.
Consumer advocates, in favor of changing how commissions have been typically paid, say this ruling could force more competition into a system that remains dominated by NAR-affiliated traditional agents despite the availability of more affordable online options that could save homebuyers and sellers thousands in agent fees.
“This ruling will force buyers to negotiate a fee with their agent, and I expect that this will make it easier for lower-priced agents to catch the attention of buyers, and lead to greater price competition,” said Mark Nadel, a Washington, D.C.-based attorney who has written scholarly articles in favor of reforms.
But some agents say this case could leave most Seattle-area homebuyers to fend for themselves in an ultracompetitive and pricey market. And they would have to shell out more money upfront to buy a home.
If co-op fees are prohibited, homebuyers might have to pay for their agents out of pocket. That cost could be out of reach for many buyers in expensive markets such as King County, where the median price of a home was $883,000 in October. For this median home — assuming the normal range of commission for the buyer agent is 2.5% to 3% of the sale price — the buyer’s agent fee would run around $22,000 to $26,500.
“If we were to break it down and say, ‘all buyers have to pay their own agency fees,’ only rich people would be able to do that,” said Sharon O’Mahony, president of the NAR-affiliated Seattle King County Realtors.
“And that would really hurt our veterans, our minority buyers, first-time homebuyers. That would be really skewing the marketplace in a way that would only favor people who have a lot of money.”
But consumer advocates, like the Consumer Federation of America, say this verdict could be a big step in breaking up a murky system where broker fees are rarely negotiated and typically become an afterthought of a home sale. It is assumed that some, or all, of the buyer agent’s commission is baked into the price of the home, but it is not clear precisely how much of the cost is ultimately borne by the seller. Advocates favor a system where the ties between the buyer’s broker and seller’s broker are severed, and buyers make their arrangements for representation separate from sellers.
Nadel noted that buyers also have more affordable options than traditional agents, including not using a buyer’s agent at all.
Online platforms, like Zillow, have made it easier to search for homes and discount online brokerages, such as Seattle-based Redfin, are also available. And there are fairer payment models, Nadel said, such as flat fees and hourly rates, that would enable the buyer to pick what services they want from a broker rather than have to pay for a bundle of services.
“This will make it easy for the buyer to pay zero for a buyer’s agent and handle things on their own, maybe assisted by a real estate lawyer for a flat fee,” Nadel said.
Washington state and the Northwest Multiple Listing Service, which serves most of Washington, have already made several changes to make the system more consumer-friendly. For example, four years ago, NWMLS, which is not affiliated with the National Association of Realtors or subject to its rules, started publishing agent commissions on its webpage. The seller is also not required to offer the buyer’s agent a fee, which is a key issue in the federal class action lawsuit.
NAR has control of most of the multiple listing service databases in the country and requires agents to be members of the trade group to access them. Its cooperative compensation rule requires that listing agents offer the buyer’s agent a fee. Shortly before the Sitzer/Burnett trial began, however, NAR announced a change that allowed for the offered fee to the buyer agent to be $0.
NWMLS has also more recently made changes intended to ensure that buyers and sellers are negotiating separately with their brokers.
Effective Jan. 1, revisions to the state’s Agency Law will require agents to have a written agreement between buyers and sellers that spell out the scope of the agent’s services and compensation.
It’s unclear if these changes will reduce agent fees. Past efforts barely made a change.
“We really haven’t seen a big shake-up in the compensation being offered by sellers,” said O’Mahony, who is also an agent with Windermere.
Seattle Realtor Danny Greco said there hasn’t been a lot of haggling over broker fees, especially with buyers because of how competitive the Seattle-area housing market has been until very recently.
In an environment like the Seattle-area market, Greco said, buyers are focused on getting competent representation and getting the deal done rather than the agent’s commission.
“It’s seldom ever brought up,” Greco said. “And when it is, we bring it up when we go over our buyer agency agreement or over our listing agreement.
“But this image of being at the kitchen counter with the buyer or seller having a fierce negotiation over the compensation structures just doesn’t happen, yet.”
Sellers, said Greco, are usually willing to pay a fair commission to the buyer’s agent.
“Guess what? It’s going to be really hard to sell a home if you’re not offering compensation to the person who is bringing you a buyer,” Greco said. “It is not helping the cause of the seller to offer $0.”
Future scenarios
It is not clear, however, how the buyer’s agent would be paid if co-op agreements are banned, and the seller could no longer pay it.
Nadel said the easiest path to national reforms would be to have requirements that force buyer agents to truly compete for clients over price but allow the seller to pay the fee from the proceeds of the sale; an outright ban on co-op agreements should not be considered unless lenders signal a willingness to finance the buyer’s representation.
That could be tricky to do, though. Lenders might start financing the fee of the buyer’s agent as part of the closing costs associated with a sale — like title and appraisal work, or attorney fees — that are sometimes rolled into the mortgage. The loan, however, would likely be viewed as riskier and raise the buyer’s mortgage rate. Lenders may also need approval from government agencies that oversee national loan programs, such as Federal Housing Administration and Veterans Affairs loans, that are popular with first-time homebuyers.
It is also possible that the changes will be minimal. The judge in the Sitzer/Burnett case has not yet issued a final ruling on co-op fees and may continue to allow co-op agreements between buyers and sellers over agent fees.
In the Sitzer/Burnett case, NAR, Keller Williams and HomeServices of America were found liable for at least $1.8 billion in damages, and two other brokerages, Anywhere Real Estate and RE/MAX, settled. NAR plans to appeal the verdict, which could take years to conclude.
However, there is a lot of pressure to end co-op commissions. Aside from the federal lawsuits, NAR’s rules and policies also face scrutiny by the U.S. Justice Department, which has previously sued the trade group for antitrust violations.
Nadel said that if co-op commissions are banned, it would reduce cases of steering, where a buyer’s agent steers the client toward deals offering high commissions. However, it won’t stamp out every case of that. He noted that traditional agents may continue to steer clients toward homes listed by their peers.
“By favoring each other, such brokers could help deter nontraditional, lower-priced, brokers from succeeding in the local market,” he said. “Moreover, traditional brokers can try to punish traditional brokers that seem to break that unwritten boycott attempt.”
O’Mahony says she doesn’t believe steering is happening; however, brokers do expect to get paid.
“Nobody’s going to work for free,” she said. “Most of us are full-time agents, and this is what we do. We show you the property, we negotiate on your behalf, we’re going to go to the inspections, we’re going to be in contact with the lender, making sure everything is copacetic.”
Seattle-area homebuyers would lose if they have to do it alone, she said.
“As a consumer, the reason why there is a buyer’s agreement and a buyer’s agent in the first place is that the buyer needs protection … just as a seller deserves protection,” she said. “Home sales are the biggest financial transactions most people enter into in their lives.”
