October 2022

Commission Transparency Should Be the Rule, Not the Exception

You may recall back in 2019 a slew of headlines frantically fear-mongering the potential end of the residentialreal estate industry as we know it. Obviously, the industry has not only survived its possible downfall, but it continuedon a trajectory of explosive sales and inflated prices that coincided with exceptionally low inventory.

Here’s what happened: A homebuyer in California filed a class action lawsuit against the National Association of Realtors (NAR) and a slew of some of the largest global real estate companies. The plaintiff alleged that NAR and its co-defendants violated the law and, essentially, conspired to gouge consumers by inflating commissions and hindering — if not eliminating — competition. The suit stated that sellers incur an inflated cost on real estate transactions because they’re primarily responsible for paying the commission to the seller’s agent and the buyer’s agent. It goes on to say that the cost to sellers would be much lower if buyers paid a commission to their own buyer’s agents.

Over the course of the lawsuit, the Department of Justice (DOJ) has asserted that NAR “put illegal restraints” on competition in the residential real estate industry by concealing commissions collected by buyers brokers, even going as far as declaring their services are free. While buyers may not pay a commission to the buyer’s broker outright, sellers typically calculate the commission into the cost of the property.

The DOJ also charged that the industry made it too easy to quash competition by filtering listings based on the amount of the commission and even limiting access to listings to certain brokers and agents. Essentially, the plaintiff’s charged that if NAR committed to full transparency, compensation for brokers and agents would go down and consumers would save a lot of money.

While this and additional similar lawsuits have seen their fair share of twists and turns, one big takeaway for professionals is that consumers were demanding more transparency.

When a buyer or seller feels like their broker is concealing the amount of their commission, or even who’s responsible for paying commission, they then question what other information is being concealed.

Williamson County Association of REALTOR 2022 President Michele Sherwood of Keller Williams Realty, doesn’t necessarily disagree with consumers’ concerns. “The challenge I see is that if someone's interested in purchasing a home, sometimes an agent will race out and show a property without actually sitting down, having a conversation and explaining how they get compensated.”

Sherwood doesn’t suggest that real estate professionals intentionally mislead clients. It’s more complicated than that. “One of the biggest challenges is that a lot of clients don't understand the compensation piece,” she said. There is an easy solution, though. A significant amount of confusion can be eliminated if agents initiate the compensation conversation as early in the transaction process as possible. “Preferably,” Sherwood suggests, “before agents show a single home.”

Talking about compensation is crucial for any professional, but that doesn’t mean it’s easy. And for some agents, it never gets any easier. But real estate professionals don't necessarily have to learn the ropes on their own.

Lots of local and statewide residential real estate organizations publish blog posts and FAQs, produce videos and infographics, and even offer continuing education (CE) classes that help agents and brokers find their voice and talk to clients about compensation.

One article by REALTOR Magazine offers straightforward tips for establishing compensation expectations with clients. The first is to use a buyer rep agreement, which details how agents get paid, how much they get paid, and by whom.

REALTORS are also strongly encouraged to fully disclose all the “extras.” For example, compensation for the buyer’s agent might be higher than the amount stated in the buyer rep agreement. It’s not unusual for something like this to happen. If a seller offers to pay a bonus upon sale of their property, buyers should be aware of it.

Every penny of the compensation agreement must be disclosed to clients and Sherwood believes it’s a conversation that should occur in person. “I think it's imperative to be open and honest with the people that you're working with,” she says. “It prevents problems down the road.” These days, a lot of brokerages won’t pay agents without that agreement in place. “I think it’s the right thing to do,” says Sherwood.

While many residential real estate professionals denounced the arguments made by the plaintiffs in the ongoing real estate commission lawsuits, some good has come out of it for consumers. A year ago, in the spirit of transparency, NAR announced that the organization would adopt a few key institutional changes.

For one, brokerages could no longer say their services are free. It’s a reference to the way that sellers, rather than buyers, fork over commission to an agent after their home sale closes. Essentially, NAR admitted that it was a rhetorical flourish since sellers typically include that commission into the cost of the home. So the buyer does pay. The organization agreed to close this loophole.

The second pro-consumer change was ensuring to disclose how much compensation buyer agents would receive. So now, part of a REALTORS’ duties includes discussing what services they provide and how they’re compensated.

NAR also committed to ending a practice that permitted listings to be excluded from search results based on the amount of compensation offered to buyer agents. In a press release, the organization said these changes were made “to ensure pro-consumer, pro-competitive marketplaces for buyers and sellers, and brokers.”