What The New Class Action Lawsuit Against Realtors Says about Buyer’s Agent Commissions
You may have heard about the new class action lawsuit against the National Association of Realtors and the four largest brokerages, Moerhl v. National Association of Realtors (NAR), et al. The suit is gaining national attention in the news and in social media. Since my real estate brokerage’s business model is essentially based in part on the premise that typical real estate commissions are too high, it would be easy to pile on, trumpeting the plaintiff’s claims. However, after reviewing the Complaint, it is clear that the lawsuit mischaracterizes the fundamental way today’s real estate brokerages work. Obviously, the lawyers would like a huge payday, but the fact this case is even possible and has gotten so much attention indicates that there are a large number of people – even educated ones – who fundamentally do not understand how real estate agent commissions work. This post will hopefully shed some light on that process.
Who Pays the Buyer’s Agent?
One of the plaintiff’s central allegations is that agents are forcing the seller to pay the buyer’s agent. But who is really paying the buyer’s agent? When a seller looks at a settlement statement, they usually see a line item for the buyer’s agent’s commission. However, that is a mere accounting convenience. By the way, there are usually other accounting conveniences relating to the commission, such as the netting of the earnest money against the commission (so that the agents do not have to bring deposit funds to the closing.) In reality, the seller has a contractual agreement to pay the seller’s broker, for example, six percent of the sales price of the property. That commission is completely payable to the seller’s agent. This coincidentally is the reason why a broker will be entitled to keep 100% of the commission if they procure the buyer without assistance from a cooperating buyer’s broker.
The listing agreement typically states that the listing broker intends to offer a certain percentage or amount to other cooperating brokers who procure a buyer. Since procurement of a buyer is an essential half of the sale it usually follows that the amount is one-half of the total compensation paid as commission. From a legal perspective, there is no contractual privity between the buyer’s broker and the seller. The seller did not hire the buyer’s broker. The only contract entitling the buyer’s broker to compensation is the contract that is made via the MLS system. This was the reason the MLS was developed in the first place – to share listings between and among brokers. I have heard of “old school brokers” who, when they are the listing broker, they require receipt of 100% of the commission at closing. Then, after the closing they will pay the buyer’s broker via a separate check from their brokerage account. This is also why some seller’s brokerages require a W-9 tax form from the buyer’s brokerage. Going back to this model might save some confusion and even lawsuits, but it would be inefficient.
Are Buyer Broker Commissions Inflated?
The complaint argues that buyer agent commissions are too high. Buyers are looking online to find homes these days they argue. The buyer agent’s role has diminished, it argues. My personal experience is that even with FSBO listings, the seller is willing to pay a buyer’s agent at least 2.5% of the purchase price. Why would a seller do that if buyer broker commissions were artificially inflated? Some buyers will find a property right away or after looking at only 3 or 4 homes. However, many a buyer’s agent will attest to enduring a grueling months or even years-long search to locate that special property, all while entering into and terminating two or more prior deals in the process. A buyer’s agent generally does not ask for more commission when the search has been especially difficult, and thus generally does not expect to be asked to accept less commission when the search is deemed to be easy. However, the property search is only a minor part of the buyer agent’s value proposition if done correctly. The skill and negotiation expertise of a qualified buyer’s agent is often worth far in excess of 3.0% of the sale price of the property.
From a legal perspective, real estate transactions are always negotiable between buyer and seller in a written listing agreement. In the Western Pennsylvania MLS, the amount offered to a Buyer’s Agent is a blank on the listing agreement that is to be signed by the seller. Careful review of the documents will disclose this amount.
One statement from the complaint is especially telling. It alleges that “sellers have no incentive to compensate a buyer broker.” Disregarding the fact that it is seller’s broker who really compensates the buyer’s broker, how could anyone think this is true? A desperate seller only wants one thing – a buyer, and they are willing to pay for one.
The “Buyer Broker Compensation Rule”
The complaint names the “Buyer Broker Compensation Rule,” as the culprit for causing allegedly inflated buyer agent commissions. This is rule which requires the compensation, when offered to the buyer’s broker via the MLS, to thereafter be “non-negotiable.” Non-negotiable?! But wait, you said it’s all supposed to be negotiable! This is where the plaintiff’s attorneys are sure to take things out of context. The offer of compensation to a buyer’s broker is only non-negotiable after it has been negotiated between the seller and the seller’s agent. The reason for this rule is common sense and based in fundamental contract law. There is a fundamental concept in contract law that says essentially that when compensation is offered and relied upon, it cannot be unilaterally withdrawn by the offering party after the other party has started performance. For example, if I hang a sign on my house that says “$1000 to anyone who paints my house” and then a painter sees the sign, gets his ladder, his paint, brushes, etc, and starts painting the house, I cannot later drop my offer to $500 after the painter relied on the $1,000. All analogies are imperfect, but this is the same concept at work when a buyer’s agent shows a property, writes an offer, and the seller then attempts to negotiate a lower commission than had been offered. This is why the MLS and many listing brokers would insist that the buyer’s agent commission would be “non-negotiable” after it is offered.
Buyer Rebates Prove that Buyer Agent Commissions Can Be Negotiated
The Complaint also alleges that buyers are not able to negotiate the commissions of their buyer’s agent. It states “the retention of a buyer broker has been severed from the setting of the broker’s commission.” This is also not true. Since buyer commission rebates are legal in most states, including Pennsylvania, buyers can select a buyer’s broker that pays the commission to the buyer as a rebate. The buyer rebate brokerage model actually disproves the theory that buyer agent commissions cannot be negotiated by the buyer. If a buyer wants to reap the rewards of having a buyer’s agent take less than 3.0% of the sale price of the property, there exists a clear option – hire a broker who provides a buyer rebate, and preferably a good one.
David M. Tkacik, Esq. is a real estate attorney (www.TkacikLawOffice.com) and real estate broker (www.InsightRealtyPittsburgh.com) offering commission rebates.