Lew Sichelman
I have stayed away from covering the recent lawsuits challenging the way realty agents set their fees because the situation has been too much of a moving target. But the reporting on the recent $418 million settlement with the National Association of Realtors and several large national brokerage companies has been so atrocious that I must jump in.
For starters, the resolution does not mean the end of the so-called “standard 6 percent” commission. Although most agents tend to charge the same as their competitors, there is no set rate. There can’t be, at least not legally. If agents cooperated to set rates, it would be collusion.
Moreover, rates vary from place to place. Generally, they range from 5 percent to 6 percent, with each side’s agent taking a piece. Technically, brokers set their agents’ commission rates, and the listing agent decides how much of their portion to share with the buy-side agent.
On top of that, sellers have always been free to negotiate with their agents. Granted, most agents won’t budge: According to a study by the Consumer Federation of America, 73 percent of listing agents said they would not haggle. That’s perhaps why less than a third of buyers and sellers even try to bargain, according to a LendingTree survey. (More than a third didn’t even know they could try.)
Besides all this, the recent lawsuits weren’t about what listing or selling agents are paid; they were about how buy-side agents are paid. Generally, listing agents tell buy-side agents what their cuts will be – which has meant that buyers had little room to negotiate with their agents.
Status Quo Has Staying Power
Now, under the settlement – which still must win court approval and won’t go into effect until mid-July – listing agents will no longer be allowed to advertise their commission splits on NAR-connected multiple listing services. But that doesn’t mean agents on both sides of the transaction won’t find some way to maintain the status quo for as long as possible. After all, we’re talking about thousands of dollars in each side’s pocket.
Commission splits “aren’t going way,” sales coach Hoss Pratt told agents in a recent webinar. “We just can’t advertise them” on the MLS. The webinar attracted hundreds of agents, which Hoss said tells him “the industry is scared. But we’re going to adapt.”
While the settlement agreement bans agents from advertising splits on their local MLS, it does not prevent them from doing so on their own websites. Nor does it stop them from doing side deals outside of the MLS’ purview. They could, for example, agree among themselves that once the sale closes, the listing agent will send the buy-side agent a check for their share of the commission.
More likely, though, the lister will insert a clause in the sales contract saying that the buy-side agent’s share will be paid at closing. Another possibility: Half the commission will be rebated to the buyer, who will then use that money to pay their agent directly.
Each of these options removes one of the supposed drawbacks of the settlement: that buyers will now have to come up with extra cash to pay their agents. And each one preserves the commission status quo, at least in the short run.
How long that lasts depends on how hard buyers and sellers negotiate fees and how hard agents fight to keep their earnings at the current levels. Human nature being what it is, agents are likely to hold the line better than consumers can bargain.
Commissions probably won’t move much until Fannie Mae and Freddie Mac – the giant secondary-market outfits that purchase mortgages from primary lenders – change the rules to allow the buyer’s share to be included in the loan amount. That way, buyers would be able to “borrow” their portion rather than coming up with extra cash. (They’d pay interest on that amount, but that’s a story for another day.)
For government-sponsored enterprises Fannie and Freddie to make that change, they’d need approval from their federal regulator. Right now, the GSEs are said to be “monitoring the situation.”
What’s Still Undecided
Yes, $418 million is a huge number. But the settlement covers 180 brokerages with a total volume of $1.7 trillion last year. And it only includes brokerages and listing services with annual transaction volumes of $2 billion or more.
Smaller brokerages and services not covered by the settlement will have to opt-in at a price or take their cases to mediation. (Most lawyers are advising them to mediate.) The settlement also doesn’t cover HomeServices, the lone holdout, which is facing a $4.7 billion suit of its own.
How much higher the settlement will grow is anybody’s guess, but one estimate puts the final amount at $2 billion.
As in most class-action suits, though, no matter how large the deal becomes, the real aggrieved people – in this case, individual homebuyers – won’t receive much. A large chunk of the total payment, anywhere from 30 percent to 50 percent, will go to the lawyers. According to one breakdown, the current $418 million total equates to $418 per agent and $31 per transaction.
“No one is going to get rich off this, other than the lawyers,” industry consultant Marilyn Wilson of the WAV Group told me.
“Structural changes were the only reasonable outcome,” said the CFA’s Stephen Brobeck, a longtime advocate of decoupling commissions. “There’s just not enough money in the industry to adequately or meaningfully compensate consumers who overpaid.”
Lew Sichelman has been covering real estate for more than 50 years. He is a regular contributor to numerous shelter magazines and housing and housing-finance industry publications. Readers can contact him at lsichelman@aol.com.
