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BARRISTER'S BRIEFING: Broker Representation and Commissions: 2023 and an Uncertain Future
Usually, as the year comes to a close, I often do a “year in review.” However, this year I’d like to gaze into my crystal ball (actually, it’s a Magic 8 ball) and look at what the future might hold for the real estate industry. As many of you know our industry is under attack by many different factions and for many different reasons. One of those attacks comes in the form of lawsuits related to the way agents receive their income by way of cooperating compensation. If some of these lawsuits are successful, the results may radically change the landscape of how real estate agents do business. So, let’s look deep into my Magic 8 ball and see what 2023 might look like.
Representation of Clients
Years ago, real estate agents represented only the seller. The listing broker represented the homeowner/seller and his/her interests and agents endeavored to list the property for sale and also find a buyer for the seller. With broker agency and sub agency, which was common at the time, the broker for the homeowner sought assistance through other broker/agents to find a buyer. These agents also worked in the best interests of the seller, not the buyer. The agent’s fiduciary duty, like that of the listing broker, was to the homeowner/seller. As for the buyers, they were on their own to fend for themselves. The problem was that most buyers believed their agent (broker or sub agent) was there to protect their interests; however, as explained above, this was not true. As a result, and with government interaction, the creation of the buyer agent came into prominence in the 1980s, with the buyer agent acting in the best interests of the buyer. Since then, any agent must identify to whom they owe their fiduciary duty and therefore the agent representation is, more or less, balanced, with both parties receiving guidance from their respective agents.
Current Compensation Scheme
Under the current cooperating compensation scheme, a homeowner enters into a contract with a listing broker and, in exchange for the work performed, the listing broker is offered a commission. Historically, because the listing broker employed the assistance of other agents to find a buyer (i.e., agents within the brokerage, broker agents, or sub agents), the listing agreement also offered cooperating compensation to any licensee that brought a buyer who was ready, willing and able to purchase. With the inception of buyer agency, cooperating compensation was also extended to a buyer’s agent who might bring a buyer. Today, this offer of cooperating compensation is made through the Multiple Listing Service and it’s offered to any member of the MLS, although any licensee is free to negotiate their own compensation. Under the National Association of Realtors rules, some offer of cooperating compensation must be provided if the listing is on the MLS.
Challenges to the Compensation Scheme
Numerous lawsuits have been filed alleging that the current cooperating compensation scheme is improper and violates various laws. Some assert that the non-negotiable cooperating compensation fee adversely impacts the parties. It’s also alleged that, as a result of the NAR-required offer of cooperating compensation, the purchase price of homes has a “baked in” increase to the purchase price that takes into account the cost of the commissions paid. As a result, buyers are detrimentally impacted. Others argue that because the homeowner wants to incentivize buyer agents into showing the property, the cooperating compensation is being artificially bolstered, thus causing the homeowner to incur excessive costs, which reduces their net profits from the sale of the home. As a result, there are lawsuits that look to “decouple” the commissions and require the buyer and seller to pay only their respective agents. The assertion is that if this is done, the homeowner will pay a lower commission overall, and the buyer will be able to negotiate a more reasonable buyer-side commission; particularly, where they argue that, due to the proliferation of Internet marketing, the buyer’s agent does less (Note: This is their argument and many do not agree with this premise).
While the premise of “decoupling” seems promising, the impact may be problematic. First and foremost, requiring NAR to remove the required cooperating compensation offered on the MLS would certainly upset the current real estate commission model. Without it, buyer agents might be required to negotiate their commissions with their buyer clients (presently, some agents do this and have verbal or written agreements, but they are relatively rare). This prospect might be challenging for some agents, particularly where the public perception is often that the buyer agent does less than the listing agent. It can be even more daunting for the newer agent, where they have less experience to justify their commission.
Second, while the current model is alleged to have commissions that are “baked in” to the sale price, it has the advantage of the seller paying the commissions from the net proceeds of the sale. Even though the buyer is funding the cost of the sale, it is the seller that paid the commissions. As a result, the buyer was usually able to obtain a mortgage, which covered the sale price, presumably with the commissions included. Now, if the situation would be that the buyer was saddled with the burden of paying buyer-side commissions, the question could be raised as to whether a lender will permit commissions be added to the mortgage. Currently, it is rare that lenders will include commissions into a mortgage. This means that with the buyer being unable to finance commissions, the buyer would be required to come up with substantially more cash to purchase (which would also include down payment, title insurance, legal fees, etc.). This could come as a barrier to homeownership to many first-time buyers and marginalized members of the population.
Another outcome to this possible alteration in commission structure could be a change in fiduciary duties, with more and more buyers no longer seeking an agent to assist them with the transaction. This could detrimentally impact the buyer and his/her ability to fairly negotiate a transaction based solely upon the cost associated with the representation. An additional possibility is the resurgence of broker and sub agent representation, which would be unaffected, due to the fact that the seller would continue to fund the cooperating commission. A third outcome could be the increase of “For Sale by Owner” properties, where no agents are involved and no commissions are paid (or they are negotiated with the homeowner/seller). This could be detrimental not only to the real estate industry as a whole for licensees, but it may also have a negative impact on the real estate market and the public as they engage in making, what may be the largest purchase of their lives, with no professional assistance. That becomes a frightening proposition. Alternatively, more office exclusives might become prevalent, as these listings are not on the MLS, no offers of compensation are provided, and they tend to be marketed only to in-house agents, with limited availability to the general buying public.
There are other alternatives as well. Perhaps the suing parties will not prevail. Maybe the inclusion of some “small print” language will be added to contracts to permit cooperating commissions. Perhaps an entirely new structure will be adopted. The possibilities are endless.
Next year will certainly come. Recent news is that one of the main cases, Sitzer v. NAR, et al., which was supposed to be tried in early February/March, is now postponed to a date in late 2023, so we will have to wait to see what happens in that case. If it comes to pass that NAR must revise or remove the cooperating compensation provision in the MLS, the results may not be what the suing parties intended. In the long run, sellers may have to pay more for the sale of their homes. Buyers may not be able to buy. Marginalized members of the community may be further shut out from the prospects of home ownership. Buyers may lose representation and deals may go awry. Regardless, agents will always adapt, irrespective of the disruption, but at what cost?
Currently, my Magic 8 ball, says, “Reply hazy, ask again,” so I’ll ask again in 2023. Stay tuned.