We are pleased to share this guest blog provided to our readers by Michael Repka, Chief Executive Officer, Managing Broker, and General Counsel of DeLeon Realty, a leading Silicon Valley based brokerage firm.
Recent Changes in Commission Rates
Real estate agents in the United States are among the highest paid in the world - both in terms of actual dollars and as a percentage of the sales price. Unlike other countries, such as the United Kingdom and Australia, where sellers typically pay around two percent (2%) to sell a home. American sellers have grown accustomed to paying significantly more, often ranging from 5% to 6%.
One major factor contributing to these high costs in the US is the so-called Buyer Broker Commission Rule, where agents tell sellers they have to pay a 2.5% commission to the buyer's real estate agent, in addition to the commission for their own listing agent. A recent study revealed that 94.9% percent of Palo Alto sellers of homes priced from $2 to $10 million offered exactly 2.5% to the buyer's agent.
However, this longstanding practice is now facing significant scrutiny. Recent federal lawsuits have accused the real estate industry of collusion to inflate commissions by forcing sellers to make unilateral and non-negotiable offers of compensation to the buyer's agent for listings on the Multiple Listing Service (MLS).
In a landmark federal legal ruling with far-reaching implications, a Kansas City jury found the National Association of Realtors (NAR), HomeServices of America (including Berkshire Hathaway and lntero), and Keller Williams guilty of conspiring to inflate or artificially support high commission rates. This decision arose from the Sitzer/Burnett buyer broker commission lawsuit. It should be noted that Anywhere Real Estate (including Coldwell Banker and Sotheby's), RE/MAX, and Keller Williams all reached settlements in which they agreed to pay over $200 million. Subsequent lawsuits targeting brokerages and Realtor associations in California, including Compass and eXp, are ongoing.
Despite reaching a tentative settlement, it is uncertain whether the Court will approve it. On February 15, 2024, the US Department of Justice (DOJ) submitted a legal filing known as an amicus brief arguing against approving the settlement. The DOJ argued that the settlement would not cure the underlying inequity of agents persuading sellers into paying the buyer's agent a non-negotiable amount of commission that is not tied to the value of the services provided.
The DOJ appears adamant that the amount of commission paid to the buyer's agent should be permanently decoupled from the listing agreement. Instead, the buyer and the buyer's agent should negotiate the appropriate compensation based on the agent's level of experience, education, time invested, and extra service provided.
On the other hand, some in the industry are arguing that the buyer's obligation to pay any commission would limit their funds available for a deposit. Unlike Deleon Realty, most brokerages in Silicon Valley do not offer an alternative for buyers to purchase a home completely free from buyer's-side commission. Consequently, buyers may need to allocate funds to compensate their broker, potentially impacting their deposit. However, this argument overlooks the likelihood that market competition would naturally reduce the buyer-side commission.
The New World Order
This legal development marks a significant shift for sellers, as it is now clear that they do not have to offer a 2.5% commission to the buyer's agent. According to guidance from the California Association of Realtors® and the Silicon Valley Association of Realtors®, agents should inform sellers that they are not obligated to offer any particular amount to the buyer's agent - or even anything at all. The amount of compensation paid, if any, is up to the seller.
Even if the seller chooses not to offer any compensation to the buyer's agent, the home can still be showcased on the MLS, ensuring visibility on popular platforms such as Zillow, Trulia, Realtor.com, and MLSlistings.com, as well as brokerage websites like DeleonRealty.com, Compass. com, and ColdwellBankerHomes.com. In essence, buyers will have access to information about all homes available for sale, irrespective of whether the seller offers minimal or even no compensation to the buyer's agent.
While some listing agents may resist this change and continue to pressure sellers to pay 2.5% to the buyer's agent, others are engaging in transparent discussions with sellers about their options. If a listing agent is unwilling to reduce the amount offered to the buyer's agent, then the seller should consider alternative listing agents.
It's worth noting that some unethical buyer's agents may insist on inflated commissions to show certain properties. As such, it is important that listing agents continue to put all listings on the MLS and invest in a robust advertising campaign to reach all buyers. Meanwhile, buyers should continue to monitor the MLS and other advertising materials to verify that their agent is presenting them with all available properties. Again, if the buyer's agent is not looking out for the buyer's best interest, then the buyer may want to find a different agent - or consider properties which they can purchase with absolutely no buyer's-side commission.
Although many buyer's agents are willing to prepare the offer paperwork and provide appropriate guidance for "only" $10,000 or $20,000, there may be circumstances where the agent's long-term involvement with the buyer warrants compensation exceeding $20,000. In such instances, buyers are routinely being asked to compensate their agent with an additional amount based on the agent's education, experience, services, and time invested. Fundamentally, this concept makes sense in that the buyer, rather than the seller, is the one who benefits from the enhanced services provided by the buyer's agent.
The Path Forward
Looking ahead, this shift is expected to significantly reduce the cost of selling a home, potentially removing barriers to selling and, in turn, increasing housing inventory. Sellers can now expect total commissions as low as 3% to 3.5%, a notable departure from the previously common 5% to 6%.
Illustrating this point, we recently listed a property that "only" offered $10,000 to the buyer's agent. Despite this, we received an impressive 17 offers, resulting in the property selling for a very high price, surpassing both the seller's expectations and comparable sales. It was rewarding to witness most agents prioritizing their clients' interests and submitting strong offers. However, one buyer's agent stated that they would not represent the buyer unless the seller increased the compensation offered to buyer's agent even before they submitted an offer. After the seller declined this request, the interested buyer simply submitted their offer with a different agent. Ultimately, everyone won - everyone except the agent who refused to submit an offer, that is.
Summary
While references in this article are made to San Francisco Bay area properties and brokerage firms, the cited legal ruling pertains nationally. All US based sellers are therefore advised to closely review listing agreements when selling their properties to make sure they are not overpaying for the services provided.
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