Did the Real Estate Industry Get a Spanking - Again?
The real estate industry has an ongoing problem with transparency, especially regarding representation and sales commissions. November 2020, the Justice Department filed an Antitrust Case against the National Association of Realtors® to Repeal and Modify Certain Anticompetitive Rules. Let's have a look at the outcome and how it may affect consumers.
When something seems more complicated than it should be, there is often an underlying purpose. Ever since I can remember, there has been confusion about who represents who in a real estate transaction. If that weren't enough, try and figure out who is paying who for that representation. It should be simple, right - A homeowner contracts with a real estate broker to sell their home. They agree on a price for the service, and away you go. If only it were that easy.
The Advent of Buyer Agency
When I started real estate in 1993, buyer agency was not prevalent in Pennsylvania. I would list a house and act as the seller's agent. The seller and I agreed on a service fee (commission), half of which would go to a cooperating broker that brought us a ready, willing, and able buyer. The agent bringing us a buyer acted as a sub-agent to the seller. If I found the buyer, I received the full commission. - Yes, virtually all agents at that time represented the seller.
Sub-Agency became a problem because agents never told the buyers they were working with that they represented the seller and not them. By the late '90s, influenced by countless complaints and lawsuits, almost every state practiced buyer agency. In fact, the Pennsylvania State Real Estate Commission mandated all customers sign a Consumer Notice explaining what agency is before discussing a real estate transaction.
The Buyer Agent Solution Causes More Confusion
Buyer Agency targeted a problem that was caused by a lack of transparency. Unfortunately, the fix was somewhat short-sighted and caused other issues. The fix did not precisely define who would pay the buyer agent. Without a clear answer, Brokers continued to charge the seller commission and pay the buyer agent half the same way they did when that agent represented the seller. So the seller pays the whole bill and loses half the representation. Many home sellers are still not aware they fit the bill for another agent to represent another party and not them.
Since agency representation is now split between the buyer and seller, the listing agent must disclose what dual agency is and ask the seller if they agree to allow their agent to represent both the seller and the buyer at the same time. Maybe not so unexpected - According to Realtor Magazine, the number-two reason real estate Brokers get sued is for undisclosed dual agency claims and breach of fiduciary duty. Both the buyer and seller think the agent is working in their interest only to find out they represent both.
The Buyer Agency and Compensation Fix - Sort of
Whan an agent and a customer decide to work together, they sign a contract called a Buyer (Tenant) Agency Contract. It is like a home listing contract but for buyers. Paragraph 2(B) of the buyer agreement states the following: "Broker's fee, paid by Buyer to Broker is a follows." It sounds pretty simple - The buyer pays their agent to represent them in a real estate transaction - So why do so many buyer agents tell buyers they represent them for free and the seller pays them (More on this and the antitrust case later)? Maybe this is the reason - Paragraph 2(B) 3. states: "It is Broker's policy to accept compensation offered by the listing broker." It goes on to say that if the amount offered by the listing broker, AKA, the seller, is less than the amount agreed to by the broker and buyer, the buyer must pay the difference or ask the seller to pay it as part of the agreement to purchase the home.
The Justice Department Calls Out the National Association of Realtors®
In the words of the DOJ: NAR has adopted a "series of rules, policies, and practices governing, among other things, the publication and marketing of real estate, real estate broker commissions, as well as real estate broker access to lockboxes, that have been widely adopted by NAR's members resulting in a lessening of competition among real estate brokers to the detriment of American homebuyers."
The federal government alleged that the Chicago-based trade organization violated the Sherman Act and "restrained" free trade by:
1.prohibiting NAR-affiliated multiple-listing services ("MLS") from disclosing to prospective buyers the amount of commission that the buyer broker will earn if the buyer purchases a home listed on the MLS;
2.allowing buyer brokers to misrepresent to buyers that a buyer broker's services are free;
enabling buyer brokers to filter MLS listings based on the level of buyer broker commissions offered and to
3.exclude homes with lower commissions from consideration by potential home buyers;
4.and limiting access to the lockboxes that provide licensed brokers with physical access to a home that is for sale to only brokers who are members of a NAR-affiliated MLS."
Because the practices have been widely adopted by NAR-affiliated MLS networks, they are "therefore, agreements among competing real estate brokers each of which reduces price competition among brokers and lead to lower quality service for American home buyers and sellers," the complaint alleged.
"Buying a home is one of life's biggest and most important financial decisions," said Assistant Attorney General Makan Delrahim in a statement. "Homebuyers and sellers should be aware of all the broker fees they are paying."
How did the National Association of Realtors® respond?
A NAR spokesperson stated that while NAR disagrees with the DOJ's characterization of rules and policies, and admitted no liability or wrongdoing, "we have agreed to make certain changes to the Code of Ethics and MLS Policies while we remain focused on supporting our members as they preserve, protect and advance the American dream of homeownership."
In short, NAR got caught not being transparent with consumers again and rolled over while not admitting any wrongdoing.
What Effect Will the New Rules Have
The main takeaway will be that the commission sellers offer buyer brokers is fair game for home buyers. The commission a seller offers to a buyer agent will now be displayed on consumer-facing websites. A buyer sees a seller is offering a $9,000 commission and wants representation, so they call an agent and offer them $5,000 for home purchase representation. The seller would pay the buyer's agent on behalf of the buyer, and the buyer would get a $4,000 credit or a sales price reduction.
Sellers may decide not to offer any commission to buyer agents and let it be negotiated into a deal. Sellers may also request that their agent not represent a buyer and not get any buyer agent commission whether the buyer has an agent or not. Once sellers realize they are offering a credit to the buyer, they may decide to stop that practice.
Transparency is the Key
This is NOT a shot at people in the real estate industry. I have had the pleasure of working with some fantastic professionals during my 28 years in the business. Their service is much needed and genuinely respected. Unfortunately, the NAR seems to cater to the weaker agents and creates policies that make it easier for them to piggyback and get paid at the public's expense.
Good professional agents do not have to operate under a cloak of secrecy or bad policies relating to representation or commissions. I have always prided myself on being transparent and working in the interest of my clients. One of the reasons I write these articles and speak on WEEU 830 AM Radio is to educate the general public. I will continue to be forthright and honest to all my clients, no matter what the NAR policies are.
Knowledge is Power!
Jeffrey C. Hogue