Closing the Deal: Real Estate Agents Prepare for New Sales Commission Rules

Heather Campbell, a Realtor with Weichert Realtors, The Griffin Co.: “Pricing, contingencies, terms of the contract, every bit of it is negotiable.” (Michael Woods)

The fallout from a federal class-action lawsuit in Missouri is causing uncertainty among many in the real estate industry, including in Arkansas.

In October, the National Association of Realtors, along with several real estate companies as co-defendants, lost a $1.78 billion judgment in Burnett v. NAR in the U.S. District Court for the Western District of Missouri. The plaintiffs’ suit alleged that the NAR violated antitrust laws by fixing broker compensation rates.

The NAR vowed to appeal but in March agreed to a $418 million settlement that would institute new rules that included prohibiting brokers’ compensation rates from appearing on the multiple-listing service, or MLS, and requiring buyers’ brokers to have signed agreements detailing compensation before showing prospective houses. The settlement received preliminary approval in April, and the new rules are scheduled to go into effect Aug. 17.

For real estate agents in Arkansas, the new rules are at first light more annoying than industry-changing.

“The negative side of this is it is going to add so much confusion between agents and buyers and sellers and between agent to agent who don’t understand everything about it,” said Mike Parker, the owner of Prime Real Estate & Development in Fayetteville. “It is going to cost us 30 minutes to an hour a day explaining something that’s not even relevant. It’s a pain in the you-know-what because it is going to take so much time to explain something.”

The plaintiffs had argued that brokers’ compensations were set and nonnegotiable, making it more expensive for sellers to sell their homes because they couldn’t haggle for lower rates. Arkansas real estate agents said compensation rates were always negotiable and have no effect on the price of homes.

President Joe Biden, in a speech in March in Las Vegas, hailed the settlement, saying the NAR “agreed for the first time that Americans can negotiate lower commissions when they buy or sell their home.” Biden said lower commissions could reduce home prices by as much as $10,000.

“There’s nothing our president could have said that was more wrong than that,” said Heather Campbell, a Realtor with Weichert Realtors, The Griffin Co. in Bentonville. “Pricing, contingencies, terms of the contract, every bit of it is negotiable.”

Commissions at Issue

The plaintiffs argued against the standard 6% broker commission — usually with 3.6% to the seller’s agent and 2.4% to the buyer’s agent and paid by the seller — saying that in a free market, the rates could be lowered to save home sellers money.

Shortly after the verdict, NAR interim CEO Nyklia Wright posted a video — that has since been taken down — rebutting the plaintiffs’ claims of price-fixing by real estate agents.

“The real estate profession has been vilified by certain plaintiff lawyers, sensationalized by a few reporters, and misrepresented by people who know little about his business,” Wright said. “First, the notion that the National Association of Realtors controls what real estate professionals get paid is wholly untrue. NAR does not set commissions. It never has, and it never will. Period, end of story.”

Campbell, one of the most successful real estate agents in northwest Arkansas, has sold more than 1,000 homes in her 17-year career. She said her company already uses compensation agreements with clients so that’s not going to be an issue moving forward.

Not having commission percentages listed on the MLS, a database of homes for sale used by real estate agents, will be a bother. If an agent has an agreement, for example for a 2.4% buyer’s commission from his or her client, he or she can no longer visit the MLS to see what the seller has agreed to.

“The compensation not being on MLS is not really a solution,” Campbell said. “We can go ask the seller to pay that money. How do you facilitate that? Some may; some may not. Now there is an easy way to see that because it is on the MLS, but that part is going to be taken away.

“The ease of facilitation is what is being taken away, and that’s where us as real estate agents aren’t quite sure how to manage that.”

The idea that sellers will save money by lowering what they pay to buyers’ agents may be true, but there also may be unintended consequences. Some sellers may find it harder to sell their home if they lower the buyer’s agent commission, state real estate agents said.

“The other problem we’re going to have is the misconception from sellers is that, ‘Oh, now I don’t have to pay a buyer’s agency fee through the purchase price,’” Campbell said. “If you’re not going to do that, then there are going to be a lot of people who can’t purchase your home. They don’t have [the money] for a down payment, closing costs and broker fees.”

‘Not an Easy Transaction’

Jon Underhill has been in the real estate business for 50 years as the founder of Jon Underhill Real Estate in Little Rock.

He said the idea that sellers will now be able to negotiate drastically lower broker commission fees is erroneous. Underhill recalled a seller who thought his Little Rock home was so marketable that he listed it with just a 1% buyer’s agent commission.

The home went unsold, pretty much unlooked at, Underhill said. The seller eventually changed the commission listing and the home soon sold.

“I tell my agents, if you agree to negotiate the commission for one client, then you have overcharged every other client that you have,” Underhill said. “If you do it for one and you don’t do it for all, you’re putting that seller at a big disadvantage. In my office, before an agent can negotiate their commission, they have to get it approved by the principal or executive broker. If one person is willing to represent a buyer for 1%, where does it leave the other 26 agents?”

Underhill said buyers’ agents earn their 2.4% commission because homebuying is a complicated transaction process. Yes, the internet has made shopping for homes much easier, but purchasing a house isn’t like buying a product off of a shopping website.

“Buyers are picking houses; often buyers are finding the houses first [on the internet] that we are showing to them,” Campbell said. “They have all the tools to find them and need agents to facilitate the process. The process is not an easy transaction.”

Wright, the NAR’s interim CEO, said as much in her since-deleted video statement.

“Finally, let me make one thing abundantly clear,” Wright said. “The internet can be a tool, but it is not a replacement for the essential services agents who are Realtors provide. A real estate transaction is not a simple click-and-purchase like buying a plane ticket online.”

‘Cheaper to Settle’

The proposed settlement is scheduled for final judicial approval in November.

The settlement, in which NAR denies any wrongdoing, covers and absolves the national association as well as state and local NARs and multiple-listing services. Several brokerage firms that were co-defendants settled with the plaintiffs either before or after the trial for more than $200 million combined.

“There’s never been any wrongdoing the way it had been done forever,” Parker said. “The settlement was [because] it was cheaper to settle than to battle it in courts for years. It’s cheaper to settle than to fight for what is right. I don’t agree with that, but I don’t have any say in this matter.

“Some attorneys have gotten hundreds of millions of dollars for this. That is the bottom line.”

One argument that has come up in the aftermath of the lawsuit was the idea that some buyers’ agents might be tempted to steer their clients to homes that offer the best commission packages for the agents. Parker and other real estate agents said that is covered by the NAR’s code of ethics, and the ultimate buying decision is always made by the client.

“Agents aren’t doing this,” Campbell said. “Buyers aren’t picking houses because the agent is saying this is the house you have to pick because it’s the one I’m making the most money on. That’s not what happens.”

Underhill said most Realtors, who are members of the National Association of Realtors, and real estate agents work on referrals. One happy client leads to more clients, so steering clients for selfish reasons is not a smart business play.

And, echoing what Campbell said about low buyer’s agent compensation, Underhill and Parker said the buyer’s broker will need to be paid by someone. Lower commissions will mean fewer sales because buyers can’t afford the extra expense.

“If I’m a seller and I really want to sell a property and get a lot of participation, I’ll offer a higher commission than normal,” Parker said. “As Realtors, we can’t discuss what’s normal between ourselves because that would be price-fixing, and there are laws against that. It hurts your seller to have this reduced commission because you don’t get as much participation.”