There has been a lot of talk by the news media, politicians, and even President Biden about the now settled lawsuit against the NAR (National Association of Realtors). Much of the talk about how agent commissions are decided has been incorrect. Agent commissions have always been negotiated and paid by the seller. This cooperative compensation structure gave buyers more flexibility in their purchasing power.  The commission was then recorded on the MLS for buyer agents to see when searching for homes for their clients.

This lawsuit makes two big changes to the commission structure. As stated by the NAR:

  1. NAR agreed to create a new MLS rule prohibiting offers of compensation on the MLS. This would mean that offers of compensation could not be communicated via the MLS, but they could continue to be an option consumers could pursue off the MLS through negotiation and consultation with real estate professionals.
  2. NAR also agreed to create a new rule requiring MLS participants working with buyers to enter into written agreements with their buyers before the buyer tours a home. NAR has long encouraged its members to use written agreements to help consumers understand exactly what services and value they provide, and for how much.

Under this new structure, the commissions will not be recorded on the MLS meaning they’ll need to contact the listing agent to get the information. This could become an issue depending on how well the agents communicate. The most pressing issue with this lawsuit revolves around buyer’s ability to purchase a suitable home. This may get a bit detailed, so stick with me.

Under the cooperative compensation structure, it has been a foregone conclusion that the seller would pay all the commission, thus leaving the buyer without a need to think about it. If the buyer bought a $300,000 house and wanted to put 3% down, they would need $9,000 in addition to closing costs. Because of this lawsuit, the buyer will be required to sign an exclusive buyer representation agreement with their agent. In that agreement, the buyer will need to negotiate the commission with their agent in case the seller isn’t paying. So, instead of needing just the $9,000 downpayment, the buyers also will need to commit to a commission amount. Regardless of the negotiated commission amount, the buyer will need to have that much more over their downpayment and closing costs available which could reduce their purchasing power.

The alternative to this is, of course, not hiring a buyer’s agent. It has never been advised to go into a legal transaction without representation, even less so under this new rule. Most buyers have erroneously believed the seller would lower their price if they didn’t need to pay the buyer’s agent. The truth is that the listing agent either lowers the total commission compensation or keeps the entire amount and buyer still pays full price. Under this new rule, however, if the seller isn’t paying the commission, an agent may be able to negotiate a lower price so that the buyer can afford the extra expense.

The new rules are set to go into effect in mid-July. At first, very little will change. Smart listing agents will explain to their sellers the negatives to not offering cooperative compensation, and savvy buyer’s agents will offer alternatives and additional options to their buyers. I do, however, look for these new rules to become more of a problem next year due, in part, to inflation and other reasons yet undefined.