Most consumers are unaware that when real estate agents are involved in a transaction, there are typically two commissions, one paid to the company the places the property for sale on behalf of the seller (called the listing agency) and one paid to the company that procures the buyer (called the selling agency). What makes this more confusing to some, is that the same company can put the property up for sale and also procure the buyer so that company is paid both commissions. This business practice is at the heart of case that will change the industry.

With the rising cost of homes, this will be a welcome relief to those buyers who understand the huge significance of the settlement. Commissions often add tens of thousands of dollars to the cost of buying and selling a home. While sellers usually focus on what they want to “net” , buyers often bear the brunt of the commission cost as a result of an increased sale price (at times making the buyer automatically “upside down” should they have to resell the property in the near future).

Courts are in the process of approving an historic 418 Million Dollar settlement after a verdict of more than twice that much in the case of Burnett v National Association of Realtors (NAR). This will bring a monumental shift in how consumers pay for real estate services. No longer will Sellers “PRESET” the amount of the commission paid to an agency for the Buyer (also known as “selling agencies” and/or “cooperating brokers”). Let me say that again, in the past, Sellers would unilaterally and unconditionally state an amount that they would pay the agency for the Buyer.  This amount would be published for only other realtors to see. A buyer’s agent would know, before recommending properties to buyers, how much they would be paid. No longer will Sellers be “required” to offer to pay any commission for the buyer. In fact, no longer will buyers be required to pay a commission at all if they elect to forego hiring a real estate agent. And if buyers do want to hire an agent, they can decide how much their agent is paid and this MUST be done upfront before touring any properties. Buyers can represent themselves or hire a professional of their choosing for things such as drafting a sales agreement. The NAR settlement specifically acknowledges and anticipates that buyers may opt for other representatives (e.g., a real estate attorney, page 37 of the agreement). In New York, a federal court case has been filed by an attorney with a claim that he was forced to pay dual commissions despite the fact that he did not want to hire a real estate agent. He found properties by himself, he was capable of preparing the documentation and had his own group of inspectors yet he was required to have a selling agency side commission paid in addition to the listing agency side.

Consumer protection lawsuits are not new for the real estate industry. Legal actions have been filed in the past to permit FLAT FEE brokers (brokers who place properties on the multi-list service [MLS] for sellers at a modest flat fee) to be members of a multiple listing service and to permit companies to use their own agreements when sellers place their property for sale. Mortgage companies underwent their own historic revolution a bit more than a decade ago when the law changed to prevent mortgage companies from adding certain fees after the issuance of a loan estimate, absent a valid “changed circumstance”. 

The Burnett settlement, out of Missouri, in addition to the monetary agreement, requires changes to certain policies. The case included issues related to a conspiracy to keep commissions high aided by the size and power of the national association enabling anti-competitive practices to exist.

Once finally approved by the courts, the section of information appearing in a multi-list website, that can be accessed only by real estate agents, showing the percentage of the sales price that the seller agrees to pay to a buyer’s agent, will be removed. The seller will be permitted to offer to pay a commission to the Buyer’s agent but not required to do so. Even if, the seller agrees to pay a commission to the buyer’s agent, it is the buyer’s decision on how much, if any of that amount, will be paid to an agent. The agreement between the buyer and an agent must be signed up front without regard to how much, if anything, a seller will pay.  Buyers should take great care in understanding the services for which they are paying. For example, buyers tend to believe that they must hire an agent in to gain access to a home that is for sale. That is not correct. If there is an agent representing the Seller, that agent should be able to provide access without the requirement that you work though a different agent or that you hire them. Furthermore, it would logically follow, under the NAR agreement, that equal access should be granted to those buyers who have hired an agent and those who have not; meaning that lockboxes which are available to real estate agents should have a comparable counterpart for non-real estate agents. [ This may require changes to some multi-list rules].

Buyers should consider the services performed and the experience of the agent. Driving you from house to house may have one value and searching for recent sales and active listings another. Buyers may want to leave the drafting of agreements of sale to attorneys who have largely been left out of the process because buyers believed that they were unnecessary since their agent was being paid for this by the seller’s commission. Now, buyers can hire an agent to show them homes (or not) but hire an attorney to represent them. The NAR settlement makes it more transparent that buyers get to decide how much they want to pay; what services they are paying for and the value of those services. It is unclear whether a real estate agent for the buyer is permitted to discover what a seller is willing to pay them prior to the making of an offer, since that amount is required to be masked from the information available to agents on the multi-list website. It seems that the seller’s agent will be permitted to share what the seller is willing to pay to a buyer’s agent but is not required to disclose that information in advance of an offer. Going forward purchase contracts between buyers and sellers will probably contain a provision stating what amount of commission a seller is paying for a buyer’s agent. Our view with respect to future offers for buyers is that buyers should include a provision in the agreement that makes their offer contingent upon the commission built into the transaction does not exceed a certain amount since any commission would, in all likelihood, serve to increase the sales price. Again, this transparency has not been part of the business of buying and selling since the buyer has had no idea of what the agency for the seller was being paid; an amount that increased the purchase price. As an illustration, a listing agency and seller may agree to a commission of say 5% ( just for sake of illustration) and the listing contract could say that the seller’s agency, in their discretion, has the ability to share some of that with a buyer’s agent, but if there is no agent for the buyer, then the listing agency could retain the total amount. Buyers should require full disclosure to protect their interests especially when taking advantage of the new rules ( email confirmations are a good practice in this regard). Sellers should also understand whether that they are paying for a buyer’s agent commission when no such agent exists. This also begs the question, if you the Seller are paying an agent to sell your home, if the same agent produces the buyer, why are you paying them a second commission? Furthermore, if they are charging more, is double the commission fair? Can the same agent get you the seller the best deal and highest price while also getting the buyer the best deal and the lowest price. 

If the buyer wants to “finance” the fee paid to an agent or other representative such as an attorney and if the seller is willing to pay, say for example, $10,000 toward a buyer’s agent fee, the buyer can decide if they want to pay the agent, $5000 dollars and keep the other $5000 to pay for closing costs or reduce the price of the house by $5000 dollars.  A new model is emerging in which buyers can pay an hourly fee for representation and for the services received and not to automatically add tens of thousands of dollars to the sale price, which presumably would happen if the seller wants to “net” a certain amount. An hourly rate model also helps to assure the advice given is unbiased and not influenced by an agent’s desire to “close the deal so that they can be paid.” In any event, the broker for the Buyer will not be permitted to receive any compensation in excess of the amount contained within the agreement with the buyer which must be CONSPICUOUSLY DISCLOSED AND THE AMOUNT MUST BE SPECIFICALLY STATED, NOT OPEN-ENDED ( eg. “buyer-broker compensation shall be whatever amount the seller is offering the buyer”).

The manner in which these changes are communicated to buyer customers is as important as the papers that they sign. We encourage buyers to confirm, by email or other writings, their understanding (based upon representations of an agent) of the provisions, options and conditions contained within any agreement. Even if they are merely confused by conduct leading up to the signing of an agreement with an agent, it could give rise to claims such as a violation of the Unfair Trade Practice and Consumer Protection Law, breach of fiduciary duty, violation of the Sherman Act and more.

Sellers may want to consider not offering any compensation to pay for the buyer’s agent and only pay for the agent who represents them and has been hired to show and sell their home to buyers. This lets them give the lowest possible competitive price. But even before considering this, sellers may want to think about how much they want to pay to sell when homes are leaping off the market. Is it worth tens of thousands of dollars? What does the price of the house have to do with the services to sell the home? Why do sellers pay more to sell a $600,000 home than a $400,000 home when the process is virtually the same?

A step progression might offer the most benefits, such as first, attempting to sell as a For Sale by Owner and using various free or websites with modest costs; then trying a FLAT FEE listing with access to multi-list agents and next a more traditional listing as outlined above but without offering compensation to a buyers’ agent. Think about this, sellers have always been able to negotiate paying some of the closing costs to help the buyer purchase their home but it’s not usually built into the price upfront. The same can be applied to the payment of the buyer’s commission. As stated earlier, if the buyer wants to “finance” the cost of the commission, the sales price can be adjusted upward with transparency. Agencies like Fannie Mae have said so far that having a seller pay the fee for the buyer’ agent would not be treated as an Interested Party Contribution that would affect financing so the seller could still also pay a percentage of the buyers closing costs to help them purchase the home (as long as the home appraises for the sales prices if a mortgage is involved). It is unclear if Fannie Mae would treat the payment to a buyer’s other representatives such as attorneys in the same fashion, so buyers should check with their mortgage company when obtaining pre-approvals in that case.

While not all real estate companies are covered by the Burnett settlement, in the weeks following the settlement, additional companies have given their own approvals to their own settlements. The actual changes under the agreement states that they are to go into effect in July ( rumors are circulating that this could be pushed back to August) but current consumers would most likely want to ensure that they will receive the full benefits of Burnett before signing a contract with an agent. Buyers should keep in mind that real estate commissions are costs and don’t add value to a home. We recommend speaking with a real estate attorney and a financial planner familiar with the NAR case.

Keith Eliou is an Attorney in Pittsburgh, Pennsylvania; owner of Keith Eliou Real Estate Services, Advocate Mortgage Services, Advocate Insurance Agency and has conducted hundreds of closings. He is a Certified Financial Planner, Registered Investment Adviser and holds a Masters of Business Administration.