But Really, How Do Realtors Get Paid? / by Lee McKnight

You may have heard about recent developments in the class action lawsuit against the National Association of Realtors (NAR) and some of the nation's top real estate firms in the news lately. Though both suits were filed months ago, last week, one of the largest brokerage firms in the nation* submitted a proposal to settle their part of the pending class action lawsuits for $83.5 million and a promise to change their practices around Buyer Agency. A judge will review the offer in mid-October. The "promise to change their practices" details have not been publicly announced yet, but I predict this will have a domino effect, creating industry-wide change. 

The fundamental argument in both class action lawsuits is that NAR and the top brokerage firms collude to keep commissions unnegotiable for the consumer. The plaintiffs (the parties suing) are claiming that by requiring sellers to pay the buyer's agent if they want their home listed in the Multiple Listing System (the database we all use to advertise our homes for sale to other agents and the public), Realtors are violating the Sherman Anti-Trust act and causing real estate commissions to be higher than they should be. The plaintiff also alleges that having a seller pay the buyer's agent's commission prevents consumers from negotiating that fee with their buyer's agent. Note that this arrangement also ensures that realtors of all caliber and experience make the same amount of money on the sale of any given house. 

I stand by what I wrote about these lawsuits in September 2019. 
"I have long felt that how we get paid could be more transparent. I'm in favor of anything that unbundles the costs and clarifies how we get paid. By unbundling, I mean that there should be a way for sellers to pay Realtors to list their property and for buyers to pay Realtors to help them buy a property. Separating these costs is difficult in practice because many buyers don't have the cash to pay their broker, so the cost of the broker gets bundled with the price of the property. Allowing buyers to finance the cost of being represented by a broker is one possible way to address this issue."

Several things are wrong with how we are paid as agents. For starters, we are only paid if a sale closes, which could encourage Realtors to fixate on the transaction closing rather than what is good for the client. Neither of the current lawsuits would, on the surface, change that. However, they will likely lead to a system where Buyers pay for their Realtor rather than having that cost included in the Seller's Realtor commission and later split between the seller and buyer agents. That seems reasonable on the face of it, but–as I mentioned previously–would require lenders to get on board and allow those fees to be part of the loan, as most buyers don't have the cash available to pay their Realtors at the closing of the transaction.  

So, just like in every other corner of the world, change is in the air for the Real Estate industry. These lawsuits and settlements are not affecting how I do business other than motivating me to continue educating clients about how we are paid, making sure they know what their costs will be and what benefits there are to having representation. I do think these changes may make it hard for newer, less experienced agents to sell their services should the cost of Buyer Agent representation be de-coupled from the listing fee. But as in any market, unbundling the cost of goods can help consumers make better decisions and save money. Let's hope that's the net result of all this uproar.

*Anywhere Real Estate Inc. (parent company of Sotheby's International Realty, Coldwell Banker, Century 21, Better Homes and Gardens Real Estate, ERA, and Corcoran brands with about 195,000 real estate agents combined)

If you have questions about Realtor compensation (current or future), I'd love to talk>>