By: Sara Pakula, Broker Owner of Modern Realty LLC, on 6/25/24
(Disclaimer: This blog is opinion based. Nothing in this blog should be construed as legal advice.)
My husband and I were chatting at dinner last night about the upcoming changes to the real estate industry. He had a lot of good questions and as I did my best to answer them, I thought maybe it’s time to try to explain this further to others who are curious about what is going on in the world of residential real estate. Here are some of my thoughts and opinions about this so far.
THE HISTORY
Let’s start with how traditional brokers have functioned up to this point. While sellers and buyers have always been responsible to pay for their own real estate agents, and there have never been any industry standards for commission rates, sellers have typically ended up paying the real estate commissions for BOTH sides of the transaction and the commission rates have been more similar than different within a geographical area, from a practical standpoint. Let’s look at an example.
EXAMPLE
Sally Seller hires Firm Sells-a-lot to sell her home. A listing contract is created which specifies that Sally will pay X% at closing, but gives the Firm permission to offer portion Y to the buyer’s broker. In the end, X% - Y = LBC (the effective listing broker’s commission).
Bobby Buyer hires Buynow Realty to help him purchase a home. A buyer agency contract is created which specifies that Bobby will pay Buynow Y at closing, but gives Buynow the ability to ask the owner or the owner’s agent to pay this on his behalf.
A deal comes together and closing is successful. Here is how the real estate commissions shake out:
Sally pays X% (= LBC + Y)
Bobby pays nothing
Firm Sells-a-lot gets LBC
Buynow Realty gets Y
The MLS platform has been used by listing brokers to advertise “Offers of Compensation” to buyer/selling and sub agents. In our example, Sells-a-lot stated in MLS that Y is offered to a buyer’s agent at closing. How great that Y is exactly the amount Bobby owed Buynow.
ENTER THE LAWSUITS
Plaintiffs and the DOJ have determined that the historical model of traditional real estate brokerage has led to inflated commissions and price fixing. I’m not here to say that the DOJ approved settlement is right or wrong. In my opinion, there is a wide range of consumer understanding of how the commission structure works. While some get it, some have a fuzzy understanding, and some just don’t get it, throw their hands up, and just trust their listing agent to get it done. On a personal note, it’s not uncommon to hear sellers say, “Oh, I didn’t know that,” when I break down the commission into its pieces (Y and LBC in our example above) so that each part is addressed separately and the sellers understand where their money will be going. Sadly, this doesn’t just happen with first time home sellers. We only know what we know, and if sellers have not experienced sufficient explanation of this process, and with that, the ability to negotiate this process, I can understand how we have gotten where we are now.
In my experience, offers of compensation are not typically negotiated between seller and listing agents, and you can’t ignore the fact that the offers of compensation often match what buyers agree to pay in their confidential buyer agency agreements. It’s kind of a sticky issue. Buyers and sellers alike need to be sure they choose agents who take the time to listen, explain, and answer all of your questions.
THE NEW NORMAL
The new normal is a work in progress right now and what I say today may not be true in a week. I am thankful that there is a fantastic group of staff and attorneys at the Wisconsin Realtors Association, which is overseeing these industry changes. To the best of my knowledge, these are some of the biggest changes I foresee:
1. Offers of compensation in any MLS platform will be illegal come August 17, 2024.
2. State approved listing agreements, buyer agency agreements, and offers to purchase forms will be modified prior to August 17th. Buyers will be able to ask sellers to pay for all/some of their real estate fees as a term of the offer to purchase.
3. It will still be possible for sellers to give their agents permission in the listing contract to offer compensation to buyer’s agents. Any payment of compensation from a listing firm to a selling firm will be addressed transaction by transaction as opposed to in a platform such as MLS. It is still unclear the best way for agents to communicate this to other agents during the listing phase.
4. Buyers MAY be on the hook for their agent’s fees as part of their closing costs. This may pose an extra burden on a buyer if the seller is not willing to assist with a seller credit.
5. There MAY be more variation in commission rates broker to broker. This also opens up the possibility of further industry disrupters.
WHAT REMAINS
1. I still recommend using a buyer’s agent if you’re buying a home. Trying to represent yourself in a home purchase may backfire as you go against a licensed/experience listing agent.
2. Licensed agents are overseen by managing brokers and firms, which have the right to set commission rates for their company. Consumers still have the right to negotiate any terms proposed.
3. Real estate agents legally and ethically must put their client’s interests ahead of all other parties in a real estate transaction, including their own.
QUESTIONS REMAIN
As August 17th approaches, there are still some loose ends. Modern Realty’s commission structure is not set up as the traditional model above and sellers are given control over what is offered as an offer of compensation in MLS. This may allow for an easier transition than an agent currently using a traditional model. Moving forward, is it in the seller’s best interest to continue offers of compensation, for seller and buyer to negotiate this as just another term in the offer to purchase, or to allow for a little bit of both? Will further changes will be required by the DOJ? I don’t know. For now, I feel like allowing sellers and buyers to have the ability to negotiate this piece of the commission structure is a positive thing. So for now, we’ll end on that!
If you have questions or comments, please feel free to reach out to me at SPakula@modernrealtywi.com
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