MISSOURI: THE FIRST
As you've likely seen, in a recent lawsuit against a couple real estate companies and the National Association of Realtors (NAR), a jury found the defendants had conspired to inflate commissions.
WHO WAS FOUND GUILTY?
Two of the defendants are actually umbrella-type companies, in that they own multiple real estate brands in the marketplace. They opted to settle pre-trial.
Two other companies and NAR preferred to go to court.
The inclusion and/or exclusion of certain companies in Missouri and follow-up lawsuits in other states is largely due to which companies are biggest in the area. A couple of firms are being sued in NY, for example, that don't do business in Missouri. Also, as this is a class-action suit, small firms won't be named, as they have smaller coverage and, realistically, smaller bank accounts.
WERE REALTORS SUED?
Contrary to some reports, individual agents were not part of the lawsuit. The plaintiffs' attorney, in a clever PR move, has stated that he thinks he's operating, in part, on behalf of Realtors, to get them out "from under the cartel" of the real estate industry.
Realtors pay yearly dues to NAR, but are not directly tied to the lawsuit, in part because the complaints were not at the individual level.
THE FOCUS OF THE CASE IN MISSOURI
At the center of the lawsuit is the manner in which real estate commissions have been paid. The plaintiffs were people who had used Realtors to sell their homes and felt they had to pay the commissions of the buyers' agents, a practice they said was unfair and kept the overall commission paid higher than it would be in a "competitive" market.
WHO ACTUALLY PAYS THE BUYER AGENT?
This question has come up a lot since the case went to court. The answer, in my opinion, comes in two pieces: contractual and practical. Contractually, the seller agrees to pay their agent a commission at closing, when the home changes owners and the seller receives their proceeds.
The seller's agent makes an offer - via the MLS - to buyer agents in the area: they will pay them to bring a buyer that purchases the home.
Contractually, the seller has an agreement with their agent and their agent has a separate agreement with buyer agents in that MLS.
There is no agreement or obligation between the seller and any buyer agent in the market.
To this end, it's technically the seller agent - not the seller - that owes money to the buyer agent. This gets a little confusing at closing, since the statement the seller receives from the title company shows the seller paying each agent (agent's company) directly and separately.
If the seller has no agreement with the buyer agent, then why do they pay them directly? This is done to prevent one real estate company from getting the full commission and then being responsible to pay the other, which would lead to disputes.
That's the contractual look at things.
From a practical standpoint, sellers and agents over the last decade have increasingly said that if the seller agent commission is an amount high enough to include payment for the buyer agent, then the seller is essentially paying the buyer agent themselves.
Using sample numbers, say the seller (Mr Smith) agreed to pay their agent a 5% commission. They question that figure and their agent states they need/want to set aside 2.5% for the buyer agent, and they themselves also charge 2.5%.
This statement suggests Mr Smith would only pay 2.5% if the seller agent commission did not include the buyer agent portion.
The contracts, however, don't inherently support this. That is, most agreements put before Mr Smith would not state that the commission would be different if there was no buyer agent (either the buyer self-represents or the seller agent works with both).
So....it's easy to see why, from a practical standpoint, people say the seller pays the buyer agent commission, even though the contract language does not support it.
The Oregon agreement now includes language that states how much of the seller agent commission will go to the buyer agent, but it still doesn't make the seller directly responsible to the buyer agent. This is contractual syntax, yes, but something I think that might be relevant when the case goes to appeal.
WHERE DO THINGS STAND NOW?
Both real estate companies and NAR are filing appeals. So-called copycat lawsuits have been filed in other states, mainly against other companies. NAR is typically still named.
HAS THIS IMPACTED HOW COMMISSIONS ARE BEING PAID?
Yes and no.
There is no change at this time to the rules and regulations around real estate commissions. With an appeal to verdict coming, the Missouri case will likely take 1-3 more years to be finalized.
Still some MLS are changing their terms, though in ways not notable to the public. Most MLS have required compensation be offered to buyer agents, but it's typically a minimum of $1. That amount has rarely, if ever, been seen, however.
Many MLS, including ours, now say no compensation is required to buyer agents and we've seen a few listings come up with this language included.
HOW DOES THIS IMPACT BUYERS TODAY?
The vast majority of homes for sale today have commission arrangements that look the way they did before the Missouri case.
If the seller/seller agent do not offer compensation to the buyer agent, then the buyer will have to pay that out of pocket. Given buyers already need money for down payments and closing costs, it's not clear how many can or will agree to pay for buyer agent services out of pocket.
WILL CHANGE REDUCE HOME PRICES?
Some have suggested that prices would be lower if sellers only paid their agents enough to cover seller agent services and not buyer agent services. Using our previous example with Mr Smith, if he paid only 2.5% instead of 5%, he could list his house for 2.5% less and break even.
It would take years to see if this actually played out this way. It may seem logical that it would, but most home sellers don't simply drop their price when they have a chance to save money on a cost.
That is, under the current model, if Mr Smith hires Realtor A at 4% instead of Realtor B at 6%, it's highly unlikely Mr Smith will also list or sell his price for 2% less. Naturally, he'd keep his price the same in hopes of keeping the extra funds.
Again, though, it would take years for the data to show one way or another.
COULD BUYERS INCLUDE THEIR AGENT COMMISSION IN THEIR OFFER?
This is unclear.
Included them would go against the current preferences of the Oregon Real Estate Agency (which is governmental and not part of the industry).
Currently, the Agency states that commissions aren't to be included in purchase and sale agreements between buyers and sellers; commission issues are to be handled between agents.
COULD BUYER AGENT COMMISSIONS BE TREATED AS A BUYER CLOSING COST?
This partly ties into the issue above. Also, many buyers today ask the sellers to assist with closing costs on the financing side already.
Loan programs have limits on how much a seller can contribute. If buyer agent fees are considered closing costs, buyers might have to choose between representation and their loan fees being covered.
QUESTIONS?
Believe or not, this is the short version of the conversation. It will take years for the dust to settle.
Whether the courts still find the defendants guilt on appeal, the writing is on the wall for changes to come. It's just not clear, yet what they will, or should, be.
Sellers don't have to pay enough to cover buyer agents, but there is a risk for some sellers that they could be the only home in their "competition pool" not doing it. Will that impact salability?
That remains to be seen. This Q also came up at trial.
Reach out if you have any questions, opinions or concerns.
