Thank you to everyone that attended last week’s Seismic Shift: Mastering the New Commissions Lawsuit Changes class. This post is a follow-up to that presentation and includes an infographic on the new buyer representation steps we’ll likely be working with as the changes are implemented. A text version of the presentation is also copied in below.

As we received feedback that some registrants were unable to log on to the presentation, and because we have had additional subscribers, we will be holding the Seismic Shift presentation again. You’ll find a link to the registration page below. This time there will be a Q+A emphasis so please prep any questions important to you.

To check out all of our classes, visit our Eventbrite page here.

Seismic Shift In Real Estate: Mastering the New Commissions Lawsuit Changes

Introduction

Welcome to today's presentation - Seismic Shift in Real Estate: Mastering the New Commissions Lawsuit Changes

I don't consider myself a dramatic person, but there has been lots of hyperbole and different takes on the recent commissions lawsuits and NAR settlement. Some indicate that this is no big deal - we can no longer display the commission amount in the MLS, so what's the big deal? Move on. Others say this is going to collapse commissions and end buyer agency as we know it. 

However, while much of the focus is on the potential fallout, to really make sense of these shifts, it’s important to start with the changes themselves. The key factor is how the commission is structured and handled throughout the buyer representation and transaction phases in a real estate deal. 

Essentially, we are moving from a world where the buyer agent commission is included in the transaction to one where it has to be asked for and negotiated. Twice. And that is perhaps the biggest change in real estate since the inception of the NAR and modern real estate as we know it. And that is the seismic shift referenced in the title. This change gets at the very bedrock of real estate as we know it. And that is no small thing.

So, let’s take a look at how we got here, what this means, and what you as agents can do to best prepare and put yourself in a position to succeed as real estate enters this next chapter.

Background

In recent years, the real estate industry has been hit by class action lawsuits challenging the traditional commission structure. The most well-known of these suits, Sitzer Burnett (Sitzer v. NAR) and Moerhl (Moehrl v. NAR), were filed in 2019 against the National Association of Realtors (NAR) and other defendants, including major real estate companies like Anywhere, Berkshire Hathaway, Keller Williams, and Re/Max. Since then, several similar suits have emerged.

At the heart of these lawsuits is the claim that the Cooperative Compensation commission structure is unfair to home sellers. But what exactly is cooperative compensation? 

Think about a typical transaction or negotiation where buyer and seller each have representation to guide them through a transaction. One would assume that buyer and seller each pay their representation themselves. What’s unique about real estate is that the seller not only pays their agent’s commission, but also pays the buyer agent's commission. While there are some additional nuances, this is the heart of Cooperative Compensation.

The plaintiffs in these lawsuits argue that Cooperative Compensation artificially inflates commissions and leads to anti-competitive practices. They claim that there is an upward pressure on commissions to ensure that properties get shown, as agents may be less likely to show homes with lower commission rates. This fear of a home not gaining traction due to a lower commission can lead to commissions remaining high. Relatedly, the plaintiffs argue that displaying commissions in the Multiple Listing Service (MLS) can lead to steering, where agents may prioritize showing homes with higher commissions.

To support their claims, the plaintiffs point to real estate models in other countries, where commission rates are often lower. They also highlight the fact that despite the rise of technology and an increase in the number of agents, commission rates have not been significantly impacted. Historically, commission rates started around 6% and gradually decreased over time. In 2018, rates dropped below 5% for the first time, but they have since rebounded to approximately 5.3%.

Verdict and Settlement

In a landmark decision, the jury in the Sitzer-Burnett case ruled in favor of the plaintiffs in October 2023, awarding $1.78 billion in penalties. While Berkshire Hathaway HomeServices (BHHS) continues to hold out, the National Association of Realtors (NAR) settled on March 15th, 2024, agreeing to pay a fine of $418 million and implement significant changes in practice, particularly in how buyer agent commissions are structured.

This settlement marks a foundational shift in the real estate landscape, as the industry moves away from a model where the buyer agent commission is included in the transaction by default. Instead, under the new structure, the buyer agent commission will need to be asked for and negotiated with buyers up front, and potentially asked for and negotiated with the seller side subsequently. 

This change is the biggest shift in how commissions are handled in the representation phase and transaction, especially in regard to the role of the buyer agent. While no one has a crystal ball, how these changes play out in practice could range from mild to wild, once implemented.

This change has the potential to bring about significant transformations in the real estate industry, especially concerning the role of the buyer agent. The extent of these changes is difficult to predict at this stage, but they could range from mild adjustments to wild disruptions in the way real estate transactions are conducted. The true impact of these changes will only become apparent as they are implemented and play out in practice.

Important to Note

It is important to note that while the verdict has been reached and the settlement terms have been agreed upon, the changes are not yet final. The implementation of these changes is expected to take place in July 2024, pending the final approval of the Sitzer settlement terms, which is anticipated to occur in April.

The upcoming changes will address various aspects of the real estate industry, including participation rules and internal practices, which may lead to a reckoning within the industry. However, the heart of the matter remains the commission structure and how it will be adapted to comply with the settlement terms.

What To Know

These are the specific changes outlined in NAR’s settlement:

1. Removal of Cooperative Compensation from MLS

   1. Offers of compensation to buyer agents will no longer be allowed in local MLS, listing sites, IDX feeds, syndication feeds, and elsewhere.

   2. However, these offers can still be displayed on brokerage websites.

   3. This change is designed to address concerns about agents steering clients towards listings with higher commissions and sellers feeling pressured to offer higher commission rates to attract buyer interest.

   4. Sellers can indicate if they are willing to make concessions.

2. Mandatory Upfront Negotiation of Buyer Agent Success Fee

   1. Before showing homes, buyer agents will be required to negotiate a success fee with their clients, likely either a percentage-based fee or a flat fee.

   2. Open-ended compensation arrangements, such as "commission rate offered by sellers," will no longer be permitted.

   3. The negotiation can address how extra compensation from concessions will be handled.

   4. This change effectively ends the practice of checking listing cooperative commission amounts, as it is no longer about the other side.

3. Mandatory Implementation of Buyer Representation Agreement prior to Showing Homes

   1. Buyer agents must have an executed Buyer Representation Agreement in place before showing homes, requiring increased effort in preparing, presenting, and negotiating the terms of their representation with clients.

   2. This step ensures transparency regarding the services provided and the agreed-upon commission or success fee.

   3. This change may introduce new challenges and friction points when discussing compensation with clients.

   4. The goal is to firm up representation and, to some extent, buyer commitment to their agent, which may impact lead generation companies that provide only one lead per prospect.

4. Potential Inclusion of Buyer Agent Compensation Requests in Offers

   1. Buyers and their agents will have the option to include a request for buyer agent compensation in their offers to sellers.

   2. Sellers may provide concession offers upfront, and buyers and their agents can renegotiate if there is additional money available from the concession amount.

5. Not About Calling to Get Commission Rate from Listing Agent Anymore

   1. It's important to note that the way agents handle cooperative compensation is changing. It's no longer about calling the listing agent to inquire about the commission offered. 

   2. Sellers may indicate concessions upfront, but the new world of real estate will call for buyer agents to lock in their commission rate with buyers first, and then discover what concessions may or may not be available when making offers and structuring buyers’ offers accordingly. 

What Does This Mean?

The NAR Settlement effectively does away with the automatically built-in cooperative commission for buyer agents. It mandates a world where listing agents negotiate their success fee with sellers, and buyer agents negotiate their success fee with buyers, only to meet in the transaction.

This structural change in real estate represents a significant shift from a world where the buyer agent commission is included in the transaction to one where it has to be asked for, potentially twice. This will be no small thing. And opens the door to a world of possibilities, ranging from mild to wild.

At the very least, the new structure of commissions in transactions, where buyer agents have to negotiate their rates with buyers upfront and secure a buyer representation agreement, will have an impact on agent performance, execution, and career prospects.

The changes could be limited to just standards of practice, or they could impact commission rates, potentially pushing them downwards. The full extent of the impact will be played out in front of us, and it will be crucial to watch how the industry adapts and evolves.

At the ground-floor level, this is how the old buyer representation process compares to the new process:

Key Questions

What will happen to buyer representation? How will the new world of buyer presentations and negotiations look? What impact will this have on rate of buyer using buyer agents? What impact will this have on commissions and agent earnings potentials? 

How will Sellers respond? Will a world where a 2 or 3% concession is the norm emerge, more or less providing the same type of experience as we’ve had with Cooperative Compensation and providing plenty of opportunity for Buyer Agency to thrive? Or, will this lead to a race to the bottom in fees, as sellers may be reluctant to dig into their pocket to pay the other side’s agent compensation. 

What Terms Will Be Approved In April? Will The Changes Carry Through? As the industry awaits the final approval of the settlement terms in April, we’ll finally know with more certainty and clarity exactly what the next chapter of real estate will look like. However, while there are still unknowns, it seems very likely that these commissions changes and end of Cooperative Compensation will be included. That was the heart of the lawsuits and subsequent NAR settlement, and would be very unlikely to not see those mandates carried through. 

What Can Agents Do To Be Ready

As the real estate industry undergoes significant changes, it's crucial for agents to adapt and position themselves for success. Here are some key strategies you can implement to navigate this new landscape effectively:

Be Proactive - Maximize Your Value Proposition

Invest in your skill set and develop a strong, unique selling proposition. Have a good hook that sets you apart from the competition and be able to back it up with exceptional negotiation skills and impressive performance stats.

Buy-Side Strategies

For those focusing on representing buyers, it's essential to invest in yourself, your business, and your value proposition. With commoditized services likely no longer being sufficient, you'll need to justify your fees by offering a turn-key value proposition and a compelling presentation that makes it easy for clients to say "yes." If the game is going to be raised, ensure you've done the work to remain relevant.

Strengthen your presentation skills and be prepared to answer questions, concerns, and objections about commissions and how they will be structured in the transaction. Demonstrate how you can be competitive and knowledgeable about buyer representation agreements, anticipating and addressing any questions or objections that may arise.

Listings Side Strategies

In this new landscape, listings will become even more critical and paramount. With buyer agent commissions no longer automatically included in transactions, securing and effectively marketing listings will provide agents with greater control over their business, increased visibility, and multiple revenue streams. To thrive in this environment, agents must sharpen their listing presentations, invest in targeted marketing, leverage their networks, and provide exceptional service to their clients.

Mindset Matters

Embrace change as an opportunity, just as many did during the 2008 market shift. Control what you can and influence the rest. Put in the work to build confidence and earn your business – it will show when you walk into a meeting. If there ever was a call to action, this is it.

Innovate and Adapt

Consider niching down or offering list-side bundles to differentiate yourself. Explore bundling your rate with other services, such as turn-key concierge services that help coordinate moving companies and other aspects of the transaction. Think about what consumers value – convenience, ease, savings – and find ways to deliver on those desires.

In Closing

While nothing is set in stone yet, we are on the cusp of significant change as the structural changes in how commission are to be handled moving forward will almost assuredly be implemented come July. The extent to which that structural change impacts buyer representation, commission amounts and earnings potentials, and real estate as we know it in general, will remain to be seen