On March 15, the National Association of Realtors announced a proposed settlement to November’s class-action lawsuit against the organization.
Two new rules will be rolled out in mid-July:
1) Listing agents will be prohibited from offering a cooperating commission to a buyer’s agent through the MLS.
2) Mandatory use of a so-called Buyer Representation Agreement for all showings.
These rules intend to reshape how real estate commissions are handled. However, despite what is being said in the media, I don’t think it will have much of an impact on commissions.
I grew up in a real estate family and started selling homes in Los Angeles 20 years ago. When sellers would hire a real estate company to list their property they usually paid a percentage of the sales price, and it would be split evenly between their agent and the agent representing the buyer.
With that being said, commissions have always been negotiable, and I’ve seen a myriad of commission structures over the 16 years I’ve been running Nourmand & Associates. My company has represented sellers in transactions where our agent got paid less than the buyer’s agent, where our agent got paid more than the buyer’s agent, where the commission was reduced if our agent represented the buyer and seller, and an occasional tiered commission structure based on the sales price.
‘Guilty of making the process look too easy’
Selling a property is a highly complex, infrequent transaction that the outside world wants to commoditize. In many ways, I’d argue that we are guilty of making the process look too easy, and the reality TV shows that have glamorized the success of a few agents have only made the perception worse. I’d like to point out that there have been brokerages with alternative commission models for decades; the consumer has always had options if they wanted to seek that out.
I’d like to point out that there have been brokerages with alternative commission models for decades; the consumer has always had options if they wanted to seek that out.
For example, Purple Bricks disrupted the brokerage model abroad, and they entered our market several years ago. They started by offering a flat upfront fee to sell your property. When this did not work, they charged a larger flat fee upon successful close of escrow.
I believe they exited our market because it’s more competitive, nuanced and the service offerings are more extensive. A real estate agent spends countless hours prepping a home for sale as part of their value proposition. Other brokerage models have discounted listing fees and rebated some of the buy-side fees. However, the consumer usually chooses a full-service brokerage to handle the sale of one of their largest assets.
In the California Association of Realtors listing agreement, Item 3 states the following in bold – “The amount or rate of real estate commissions is not fixed by law. They are set by each Broker individually and may be negotiable between Seller and Broker (real estate commissions include all compensation and fees to Broker).”
There is an option to pay commission based on a percentage of the sales price or a flat fee. And there is a space where the seller can offer a fee to the cooperating broker (buyer’s agent), so it is very clear how much compensation is going to the buyer’s agent.
Los Angeles is a sophisticated market with well-informed buyers and sellers. When I started, there were a few pockets where a 6% fee was frequently charged, but that is no longer the case. A 5% fee became the most common fee for the past 15-plus years. The commission charged has gone up and down based on market conditions such as inventory, how long it takes to sell a house, competition, agent experience/track record and how much of the market is distressed. I believe market conditions have and will continue to dictate commissions paid.
Upcoming rules changes
In regards to the two procedural changes that will go into effect in mid-July:
Rule Number 1: Listing agents will be prohibited from offering a cooperating commission to a buyer’s agent through The MLS.
However, listing agents can communicate the buyer’s agent fee via marketing materials, email, text and phone calls. Furthermore, sellers have the right to pay the buyer’s agent and this trend has continued even after the National Association of Realtors verdict back in October of last year. In fact, when I ran my hotsheet last week, there were 73 new listings, and every one of them paid a fee to the buyer’s agent.
I believe sellers will continue to pay real estate agents for the following reasons:
1. Affordability: A buyer that is getting a loan may not have extra funds to write a check to their real estate broker, satisfy the lender’s reserve requirements and/or buy furniture.
2. Limit their buyer pool: The more exposure a listing gets usually leads to a higher sales price. Compensating buyer’s agents will increase exposure.
3. Two negotiations rather than one: The buyer and seller should only have to negotiate price. Commission should not be another variable that needs to be figured out since deals are more likely to close when there are fewer variables.
Rule Number 2: Mandatory use of a Buyer Representation Agreement for all showings.
The consumer should know the services they are going to receive, and it’s another opportunity to explain compensation. I’m in favor of a formal written agreement where the client relationship is spelled out. I believe the buyer will be the insurance policy for commissions in the rare scenarios where the seller does not pay a buyer’s agent or pays a lower fee.
To sum things up, I think housing prices will stay strong. Commissions and the number of agents in the industry will continue to be determined by factors such as competition, interest rates and the number of deals in our market, rather than the NAR settlement.
Brokerages and agents that are well trained on the new rules and can substantiate their value proposition will be the winners. Buyers and sellers should continue to make sure they hire savvy agents who understand these nuances.
Michael Nourmand is the president of Nourmand & Associates, one of L.A.’s oldest family-run brokerages.
