Under the weight of class-action lawsuits and a $1.78 billion jury award against Realtors in Missouri, real estate has been gobsmacked. With the possibility of triple damages, the National Association of Realtors is staring down a staggering $5.34 billion penalty. Could this bankrupt NAR? More importantly, what does this mean for the future of real estate transactions?

A clear mandate has emerged: Change how commissions are structured. Many in our field, committed to best practices and integrity, are already adapting and rethinking how we present professional fees to clients, while bracing for the Department of Justice’s imminent guidelines.

Yet, some wring their hands, deny wrongdoing and lash out at the attorneys and plaintiffs shining a light on these practices. They’re stuck in the initial stages of grief, consumed by anger and denial, awaiting direction from the DOJ. They resist any change to the way they do business.

The accusation is stark: the industry allegedly conspired to inflate commission costs by mandating that sellers pay the buyer’s agent for multiple listings service access. The argument? Sellers shouldn’t fund the buyer’s agent who bargains against them on price, terms, and post-inspection property repairs.

It’s vital to note that historically, MLSs did mandate seller compensation to the buyer’s agent, at least a minimum of $1. Many have since revised this mandate due to the litigation. MLS PIN in Massachusetts, with its pending $3 million settlement, led the way by promising not to force sellers to compensate the buyer’s agent for listing their property. Yet, the DOJ hasn’t endorsed this settlement, leaving the future of real estate commissions here in limbo.

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While others await instructions, my partners and I are reading the tea leaves. As the industry braces for a marathon of compliance when the DOJ rules, we’ve already implemented new standards, new presentations, new contracts and new options for our clients and agents.

You Must Have a Buyer Agreement

Buyer agents must have a clear agreement, detailing both parties’ responsibilities and explicitly stating payment terms. Clarity and transparency are overdue.

While speaking on national panels, I was astonished to learn that huge swaths of this country are allergic to buyer agreements. Further, requiring buyer agent agreements, recommended by NAR for nearly two decades, has been sporadic, even here in Massachusetts. Simply stated, brokers and their agents are afraid to discuss how they are paid, and many agents have been working as buyer agents without clear definition of what services will be rendered and how they will be compensated.

I’ve heard of two cases where buyer agents, lacking an agreement with their buyer, were shocked at the closing table to learn that the seller had not offered compensation. These agents were not paid. This means these buyer agents did not read the MLS listing which indicated no compensation was offered.

Worse still, in agencies where buyer agreements are broker-mandated, some agents have wrongly suggested their services are free, expecting compensation from the seller via MLS. If a contract specifies no compensation, any fee should rightly go to the buyer, aligning with the contract and MLS offerings.

The DOJ, NAR, and courts have unequivocally stated buyer agents cannot claim their services are cost-free.

Immediate overhaul is needed: of listing presentations, commissions and contracts.

Sellers must understand that they have the option to offer a cooperating broker fee when listing their property. It is not required.

Paying the Buyer’s Agent Is Strategic

While Michael Ketchmark, the lead attorney in the Missouri case, insists sellers should never pay the buyer’s agent, and buyers should cover their own agents’ fees, I know there are advantageous reasons for sellers to consider offering a professional fee to the agent who successfully closes their property with a buyer.

A Bright MLS study found that off-market, privately listed properties received an average of 16.98 percent less than those marketed on an MLS due to lack of exposure to buyers. In this vein, if sellers choose to offer a fee to cover compensation for buyers, this undeniably expands the number of buyers who can make offers on their home.

It is well-known that housing is becoming increasingly less affordable and that buyers are being crushed by a market of high interest rates and low inventory.

Adding the buyer’s commission to the mix only heightens the barrier to homeownership.

I propose that, like other strategies, sellers consider incentivizing buyer agents as it is in their best interest to expand the available qualified buyers for their property.

Offering a fee, while optional, is strategic. Many buyers can’t afford this fee upfront.

Remember that demand drives price. Offering a buyer agent fee expands the buyer pool and stimulates demand, addressing a crucial hurdle for buyers working with agents.

Traditionally, commissions are deducted from the seller’s proceeds at closing. Sometimes, buyers partially cover their agent’s fee if the seller’s offer falls short, or pay the fee directly.

There is a compelling case that buyers, who have always supplied all the funds for the transaction, are essentially underwriting every participant getting paid in the deal – attorneys, title companies, brokers, the transfer tax and more. Yet, since these expenses are deducted from the sale’s proceeds, sellers receive recognition for covering all these transaction costs.

Additionally, with current lending practices, a buyer cannot simply add the fee to the purchase price of the property, because the secondary market will not cover the cost of a service when there is no collateral.

Paradoxically, buyers can negotiate with sellers to cover the fee or request a closing cost credit to cover the buyer agent’s professional fee.

What Might Happen?

As we anticipate the DOJ’s decision, three possible outcomes loom:

First, the DOJ might allow sellers to optionally offer a broker fee.

The DOJ could alternately eliminate co-broker fees altogether, which would force buyers to pay their agents either by cutting a check, requesting that the fee be paid by the seller as part of the terms of their offer or using a seller closing cost credit so that the amount could be mortgaged.

Or, as the Wall Street Journal has reported, the DOJ might prohibit sellers from funding the commission altogether, profoundly impacting real estate professional fees.

This last possibility will undeniably make it harder for buyers to purchase a home with representation. It will also deprive sellers of the strategic option to enhance their property’s marketability.

In a market already grappling with affordability challenges, buyers will struggle to pay their broker. Banning sellers from covering the buyer’s agent fee might inadvertently resurrect a form of redlining, privileging only those who can afford an agent to represent, guide and counsel them.

The unrepresented buyers would be in the hands of the seller’s listing agent, whose fiduciary duty would be to work for their seller client and against the buyer in all negotiation. In the biggest financial transaction of their lives, buyers with less financial backing who can’t afford to pay an agent will need to go it alone.

What would a buyer lose if they could not afford to be represented? Without an agent, they would not have anyone to guide them on price, share negotiation strategies or perform the tasks of the buyer’s agent.

Ironically, the introduction of buyer agency into Massachusetts law in 2005 was heralded as a major consumer victory. Rolling back the option for sellers to compensate the buyer’s agent would undermine two decades of consumer protection advancements.

The Path Forward

The industry faces a crucial moment: it must reckon with its history of self-serving brokerages and agents. Transitioning towards transparency in how agents are compensated isn’t just a necessity – it’s a long-overdue reform.

Linda O’Koniewski

Sellers need to grasp that they have the autonomy to decide if they wish to offer a fee to the buyer’s agent upon listing their property. It’s imperative that both listing and buyer presentations highlight the significant value that a skilled professional contributes to the client’s experience.

Keefe, Brunette and Woods, a consulting and stock analysis firm, forecasts that the lawsuits will purge 60-80 percent of agents from the industry, leading to commission compression and a 30 percent  reduction in the revenue flowing through agents and brokerages.

While many real estate firms struggle to navigate these changes, grappling with the need for rapid adaptation once the DOJ mandates immediate reforms, Leading Edge is ready. We not only anticipate but welcome a future defined by transparency and an unwavering commitment to the consumer’s best interest.

To delve deeper into the lawsuit, buyer agreements, and new listing contracts, join me, our house counsel Bob Bell, 2023 GBAR President Alison Socha and Ramsay Fretz from Leading Edge for a lunch webinar on Monday, Feb. 26. Contact Jennifer@LeadingEdgeAgents.com.

Linda O’Koniewski is the CEO of Leading Edge Real Estate.