Broker commission decoupling could happen

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Agent commissions of the future could be vastly different than they are today as a Justice Department investigation into the issue of decoupling buyer and broker commissions continues, class action lawsuits progress and that associations and MLS adjust their policies.

Those who examine commission coupling argue that it stifles competition in the market and violates antitrust law, while those who defend the status quo argue that the system of sharing seller-agent commissions paid by their clients strengthens the market and makes it cheaper for first-time buyers.

This coupling commission arrangement, promoted by the National Association of REALTORS® and most realtors across the country, where the selling broker typically pays half the commission to the buying broker, makes it difficult, if not impossible, for the buyer to negotiate the compensation rate.

Decoupling news

The latest news on the agent pay debate comes from the Pacific Northwest, where Northwest MLS, which covers most of Washington state and part of Oregon, has announced it will adopt new rules in October to increase transparency on agent commissions. The aim is to make it easier for brokers to “create their own form of representation agreements with sellers and buyers in order to differentiate their services and fees, meet the needs and interests of consumers, and be competitive.” in the market,” the listing service said in a statement. June 9.

These changes include prominently displaying the selling broker’s compensation to the buyer’s broker on the purchase and sale agreement. NWMLS will also give the buyer the option of accepting this indemnification amount or modifying this amount in an addendum to the agreement.

The new rules also state that the buyer’s broker compensation will be a direct offer rather than the current structure of splitting commissions between brokerages, and the new listing agreement will include more options for broker compensation. . Buyer Representation Agreements will additionally provide alternatives to compensation of the Buyer’s Broker based on the terms of the listing.

The rules update follows similar reforms in 2019, when the rating service became the first in the country to publish and allow – but not require – brokerages to publish the amounts of compensation between the buyer and broker.

While the NWMLS represents a fraction of the overall market, the changes could trigger a trend to list services across the country. In an email response to questions, NWMLS CEO Tom Hurdelbrink told the Chicago agent, “We have discussed these concepts with many of our colleagues across the country, and we believe that others who are able to do so are discussing similar changes.”

Hurdelbrink also noted that while MLS does not track the websites of all of its member brokerages, most now post brokerage compensation with their online listings. This gives buyers greater ability to negotiate compensation, he said.

Some of the region’s largest brokerages — John L. Scott Real Estate, Windermere Real Estate and Bellmark Real Estate, to name a few — have endorsed upcoming rule changes in the Washington market. “Buying and selling a home is the most complex and expensive transaction most people will ever engage in,” said Bobbie Petrone Chipman, the Pierce/South King County regional manager of John L. Scott, in the NWMLS press release, adding, “Consumers deserve a truly competitive marketplace, a variety of service and pricing options, and meaningful transparency when making such important life-changing decisions.”

What impact this will have on the long-term market is uncertain, however, even for NWMLS executives. “We believe these changes will provide more awareness and flexibility for brokers and their clients to better understand and agree on compensation and service levels that work for both parties,” Hurdelbrink said.

Generalized rate uniformity

While the changes to the NWMLS are a starting point for reform, even the 2019 changes have yet to break the uniformity of commission rates there, according to the Consumer Federation of America’s April 2022 report. (CFA) “Real Estate Commission Rates in 35 Cities: Uniformity and Variability.”

Stephen Brobeck, senior CFA researcher and author of the report, notes that a “remarkable degree of uniformity between commissions paid to buying agents” remains in markets across the country — and that includes Washington state. Seattle was one of eight cities in the study where more than 88% of buyer’s broker commission rates ranged between 2.5% and 3%.

Changes enacted to the NWMLS may require more time before generalized commission rates develop. But the enrollment service disputes the accuracy of the study, telling the Chicago agent that “…we understand that the study included a very small sample of the Seattle market and focused only on the compensation offered to the buyer brokerage firm and did not include data on the compensation actually received by the firm (for example, whether the firm credited compensation to the buyer at closing or otherwise changed the compensation offered in the ad).

The study of the western half of the United States – 7,000 home sales in 14 western cities – follows a November 2021 CFA report that included 11,000 home sales in 21 cities in the eastern half of the country. . Western state analysis shows that in five of the 14 cities – Albuquerque, Boise, Dallas, Houston and Oakland – more than 82% of the commission rates examined were identical, and in 13 of those cities, at least 49% were identical.

Brobeck says that while some sellers try to negotiate rates with their broker, they usually fail and are often told it could jeopardize the sale of the home. The reason this might scuttle the process is due to a practice known as steering. “Compelling research has shown that at least some buyer’s agents drive their clients away from low-commission properties. Yet why, in a buyer’s market, would some sellers not ask listing agents to offer a higher commission rate than the standard rate? he asks in the study. Brobeck argues that sellers are rebuffed by agents because those selling agents fear “violating the standard of the area and discouraging buying agents who also would not want to gain a reputation for violating that standard”.

Changes at NAR

The National Association of REALTORS® is at the center of the issue, due to the rules and ethics guidelines it issues to its 1.4 million members establishing the compensation structure. This industry standard has made the association a target for class action lawsuits in Illinois and Missouri and an ongoing investigation by the Department of Justice.

NAR appeared to be close to reaching a settlement agreement with the DOJ last year, but in July 2021, the DOJ’s antitrust division pulled out of negotiations, stating that the proposed settlement “will not sufficiently protect the ability of the Antitrust Division to pursue future claims against NAR.” The DOJ argued that while the settlement was intended to remedy antitrust activity and encourage competition in the marketplace, “it also precludes the department from pursuing other antitrust claims related to the NAR rules.”

NAR moved forward with parts of the settlement, including requiring MLS to publish the seller’s broker’s compensation offer to the buyer’s broker both on consumer-facing sites and in data feeds. referral services used by subscribers and others. Another reform enacted by the NAR in November prohibits buyer’s brokers from presenting their services as free.

Former NAR President Charlie Oppler wrote in November that the association’s reforms also prohibit the practice of buyer’s brokers who drive customers away from homes that have a lower than average commission rate. Critics argue the changes fall short of the full decoupling of compensation between buyer and seller, but NAR argued such regulations would make buying a home more expensive for first-time buyers. home. This is because the cost of compensation could be passed on to buyers, which would end up excluding more people from the market.

Mortgage lenders and government-sponsored companies generally prohibit including brokerage commissions in the cost of the mortgage, so that’s money the buyer should find in addition to their down payment. But Brobeck says mortgage lenders and GSEs could change their policies in response to such reform. “If there is a decoupling, then it would be a very high priority of the real estate industry and the mortgage industry to allow the funding of buyer agent commissions,” he said in a telephone interview.

A legal conclusion?

While it’s still unclear what impact the changes to the NAR and MLS will have on commissions across the country, or whether the DOJ will take action anytime soon, a court ruling could ultimately determine the outcome of the issue. The two class action lawsuits — one filed in Illinois by Christopher Moehrl and the other by Joshua Sitzer and Amy Winger in Missouri — accuse NAR, Keller Williams Realty, RE/MAX, Realogy and others of conspiring to artificially inflate commission rates in violation of antitrust law.

Both lawsuits threaten to upend the current fee structure that brokers have used for decades, and they seem to have some power. Judge Stephen R. Bough began hearing oral arguments in the U.S. District Court for Western Missouri in April. And as the Illinois case continues to move through the system, Judge Andrea R. Wood, presiding over the case, gave a strong indication that the plaintiffs’ arguments had merit in 2020, when she dismissed defendants’ motion to dismiss.

In its ruling on this motion, it stated that by comparing commission rates to broker rates in other countries, which are generally uncoupled and significantly lower, the rate difference “is sufficient to draw a reasonable conclusion that the buyer-broker commission rules (enforced by NAR) have resulted in supracompetitive commission rates in the US real estate market.

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