Question: What is the status of the Realtor commission lawsuits and the resulting changes?
Answer:
Lawsuit/Settlement Background
The residential real estate industry, nationwide, is in the process of transitioning to a new era of how Realtor commissions are structured, specifically the model for buyer agent compensation. The changes stem from the industry-wide settlement of multiple class action lawsuits and years of pressure from the DOJ, which I explained in depth in this article.
At the heart of the settlement is an issue with the model for buyer agent compensation in most real estate transactions. For decades, when a seller signed a listing agreement with a real estate agent to sell their home, it was common practice for them to agree to a fee that would be divided (usually evenly) between their agent and the agent who represented the buyer. The fee for the buyer’s agent gets entered into the MLS (database of record used by agents) and is enforceable by the MLS and local Realtor Associations.
No More Offers of Compensation for Buyer Agents
The judges in the class action lawsuits and the DOJ believe this practice was anti-competitive so a settlement was reached with the Realtor industry to decouple the seller agent and buyer agent commissions by preventing the advertising of offers of compensation to buyer agents via the MLS.
The settlement is explicit in eliminating offers of compensation to buyer agents in the MLS, but there is legal debate over whether the settlement prevents offers of buyer agent compensation off the MLS -- the DOJ and many attorneys argue that the intent of the settlement is to eliminate all offers of compensation to buyer agent, via any channel not just the MLS.
Sellers Can Still Pay Buyer Agent Commission
It’s important to understand that while the settlement prevents sellers and their agents from making offers of compensation to buyer agents, it does not prevent sellers from paying buyer agent commissions. Going forward, seller-paid buyer agent commission is a negotiable term in the sales contract, like any other term like price, closing cost credits, contingencies, etc.
Per the settlement and the DOJ’s communication, the intended process for buyer agency compensation is for buyers and their agents to sign a Buyer Representation Agreement before they begin showings (this is an explicit requirement of the settlement) that states a specific buyer agent commission. The compensation must be clear and specific (e.g. a dollar or percentage amount) and not generalized like “as negotiated with the seller.” With the Agreement signed, it will be up to the buyer whether they want to pay their agent’s commission themselves, request full payment of their agent’s fee from the seller, or something in between.
New Forms Issued, Full Implementation is Next Month
As of July 1, the Northern Virginia Association of Realtors released new forms that agents in Northern VA will be using and among the many changes (non-commission changes detailed here), the most significant for consumers is the addition of Section 2E in the sales contract, shown in the screenshot below, which adds a line for “Seller Payment towards Buyer’s Brokerage Compensation.” Of note, the Greater Capital Area Association of Realtors (GCAAR), which handles forms for DC and the Maryland Suburbs, has not released their new forms yet.
Even though the new forms are out and in use, we have not fully transitioned to the new commission rules yet. Offers of compensation to buyer agents via the MLS are still allowed and enforceable until August 14. On August 14, the field will be removed for good and any attempt to advertise an offer of buyer agency compensation through the MLS or a platform connected to the MLS will be a fineable offense.
Bright MLS (our regional MLS) has introduced a new “Seller Concession” field where a seller can advertise their intention to offer buyers a concession (credit against closing costs), which on the surface may seem like the buyer agent compensation field, but there a few key differences. First, the concession cannot be tied to buyer agent representation, it is a general concession/credit to buyers. Second, it is not enforceable – the fact that a seller advertises a concession does not mean the buyer automatically gets it, it must show up in the sales contract. A seller can advertise a $50,000 credit to the buyer to spark attention, but if it doesn’t end up in the ratified contract, it means nothing. Finally, a buyer can choose to use a seller concession to pay their agent, as a credit against closing costs, or a combination of the two.
How Will The Changes Play Out?
I think this change makes sense for our industry on multiple levels, but it will also have negative, unintended consequences for consumers. In the article I wrote earlier this year, I shared some thoughts on who I think the winners and losers of these changes will be and after a few more months of analyzing these changes, I still think that it creates new challenges for a lot of buyers who are already struggling to purchase a home. Whether these rule changes produce enough positives for consumers to outweigh the negative consequences is to be determined and will likely take 12-24+ months to know.
The natural question is to ask how this will play out in actual transactions once the changes are fully implemented next month…and it’s a great question! My best guess is that most transactions will have sellers paying partial or full buyer agent compensation, but buyer agency compensation will vary more than it has in the past (link to my 2023 study of buyer agency compensation), at least during the first 6-12 months.
During periods of high competition (first 4-5 months of the year or if rates drop rapidly), I imagine we’ll see a much higher percentage of buyers paying their agent’s compensation in order to be competitive, which will give an even greater advantage to cash or well-funded buyers and investors.
I think it’ll take 12-18 months before we start observing more predictable patterns of behavior from the market and in the meantime, we will see a wide, and sometimes unpredictable, range of behavior from consumers and agents as people adjust to the new rules and figure out how to use it to their advantage.
If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at [email protected].
If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to [email protected]. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.
Video summaries of some articles can be found on YouTube on the Eli Residential channel.
Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH Real Estate, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.
