Updated: 4/6/2024
A recent lawsuit came to a judgement concerning the National Association of Realtors and some large real estate firms regarding the way commissions and fees are handled. Like most lawsuits, a settlement is in process and the first set of changes to real estate transactions are in place. More changes will take effect in Mid-July 2024.
What was this class action lawsuit about? How will it affect real estate transaction going forward? Here’s a brief look at the changes today, what the lawsuit was about and a few of the changes that could be coming this year as well as a forward thinking region that anticipated the changes and how they are doing so far.
Here’s a few of the changes that have already started:
- Buyers agents must have a written buyer broker agreement with the buyer before the agent can show a property for sale in the State of Nevada.
- When the buyer & buyer agent write and submit an offer on a house, the buyer can choose to include a buyer broker fee that is paid for the seller. The seller has three options:
- Accept the offer to buy the home with the seller paying the buyer broker fee, which is paid in the escrow process.
- Negotiate the buyer broker fee, which if an agreement is reached between the buyer and seller, the sale of the home can proceed to the next steps.
- Reject the buyer offer completely.
- It is now optional for sellers to pay a buyer broker fee from the sale of their house. The buyer broker fee can be any amount or % of the price of the house that the seller chooses.
- The seller broker fee is negotiated between the seller and seller agent, actually that’s not a change, the seller broker fee has always been negotiable.
You probably have questions and rightly so. Please use the comment box below and I’ll post the answer in this blog as well as reply individually.
Let’s take a look at how things used to work in the Reno/Sparks real estate market:
- Step 1 – An owner of a home decides he wants to sell his house. He interviews several realtors and signs a contract with a Realtor, of his choice, to represent him/her in the sale of his property. The fee for representation is negotiable. The Realtor informs the seller of the past system called, “Cooperative Commission Offer”, that 1/2 seller broker fee will be paid to the buyer agent. Here’s a brief overview of the realtor expenses:
- All Realtors are required to be a member of a licensed real estate brokerage firm. The cost to be a member of that broker firm is about 30% of the fee for each sale, plus a monthly fee.
- Next, all Realtors must pay their own taxes and therefore the realtor usually sets aside about 30% of the fee for taxes.
- As an independent contractor, both Realtors pay for their own medical insurance and retirement plans.
- So, in the end, the buyer and/or seller realtor receives about 30%-40% of the transaction fee.
- In addition to the above, there are other fees involved like membership to the Multi-Listing Service (MLS) so a listing can be posted on the web, electronic lock boxes, business and realtor licenses, association fees and so forth.
- Step 2 – The seller agent lists the home on the MLS which is connected to all the 3rd party websites like Redfin, Zillow, and others. This makes the listing visible to buyer agents and buyers on the website the buyers prefer to shop on.
- Step 3 – Buyer Agents connect their buyer(s) to the MLS and send the buyer email updates on homes that the buyer would be interested in. The buyer will select homes that they want to see in person and if the buyer chooses, they have their buyer agent prepare a Offer & Acceptance Agreement (O&A).
- The Northern Nevada O&A Agreement is 10 pages with several clauses and contingencies. Once the buyer approves the O&A Agreement, it’s sent to the Seller Agent to present to the owner.
- A negotiation process takes place and if an agreement can be reached between the buyer and seller the signed O&A Agreement & Earnest Money Deposit (EMD) is sent to an Escrow/Title company and the property is now in Escrow.
- Inspections, Appraisals, Loan process take place if applicable.
- Step 4 – If all goes well, the escrow company schedules dates and times for signatures and when the purchase is funded, the buyers’ are registered as the new owners with the county, the keys are handed to the buyers.
- Step 5 – The escrow company ensures all parties are properly paid including the Buyer/Seller Brokers as well as any other parts designated in the contract.
This process normally takes 4-6 weeks if there is a mortgage loan involved or 3-4 weeks if it’s an all cash buyer.
What was this lawsuit about?
The plaintiffs claims that sellers shouldn’t have to pay for the buyer broker fee. That the buyer broker fee should be paid for by the Buyer. Prior to recent changes, one fee is paid to the seller broker and the seller broker agrees to pay 1/2 of the total fee to the buyer broker. Of course, there are other scenarios, but this is the most common.
Now there are several reasons why this business model worked for the last 80 years:
- Transparency – it’s very clear from the start, what the fees are and how they will be paid.
- The seller can use a limited service provider and the fees/commissions would be much less. However, history shows that a professional realtor with the sales and marketing skills bring much better results to the closing table. That’s because a good realtor understands that his/her job is also a marketing professional. The Seller Realtor’s Job is to find and bring the best buyers to the closing table.
- It ensures professional representation on both sides of the transaction. For first-time home buyers this is essential.
- If the seller refuses to include a buyer brokerage fee in the transaction the buyer will need:
- The down payment (3.5% to 20% of the purchase price)
- Buyer closing costs (approximately $8k-$12k and higher)
- And the buyer broker fee. This is negotiable and you should discuss this in detail with your realtor. The buyer realtor’s job is to represent the best interest of the buyer and ensure the property has the appropriate inspections to best protect the buyers purchase. Another important aspect is the process of negotiations and contract law for the state where the transaction is taking place.
Here’s an interesting true story from the Northwest MLS and how they’ve changed Commissions and Fees.
The Northwest MLS (Washington State) anticipated the potential changes we are looking at today and changed their Realtor fee program in October 2022, and it could be a template for other states and regions. Here’s a brief highlight of the changes:
- If fees are to be paid to the buyer broker, in the sale of the seller’s property, it is determined by the seller, not the seller agent as a cooperative commission agreement.
- If no buyer broker commission is offered by the seller, a negotiation could take place and if an agreement can be reached, all fees are distributed via escrow at the close of the transaction.
- Any unfulfilled buyer broker fees in a pre-signed buyer broker agreement, are paid for by the buyer.
So far, the Northwest market has seen very little change to the actual buyer broker & seller brokerage fees. For the majority of transactions, the seller wants to sell his property and the buyers prioritized looking at homes that paid for the buyer broker fee at the top of their list of homes to see in person.
Click here to see a brief article from the Northwest MLS about how their system is going as of 11/03/2023, about one year after they initiated their changes.
I believe this will allow the broker fees to flex as the market changes.
In a strong seller’s market and the seller doesn’t need to sell his property, the seller could refuse to pay a buyer broker fee and wait for a buyer with the funds to pay the down payment, closing costs and buyer broker/agent fee to come to the table.
If it’s a strong buyer’s market and the seller needs to sell his property, the seller will be more inclined to pay a buyer broker fee to bring more buyers to the table.
It will be interesting how things develop over the next few months. Stay tuned for updates!