A recent antitrust lawsuit against the National Association of REALTORs has been getting some media attention, so although I reviewed this issue briefly in a prior column, I thought I’d dedicate a little more attention to it. I’ll be commenting on the Minnesota case, not the copycat cases that are starting to follow, because the Minnesota case is most of the way through the legal system.
The case centers around who pays the brokerage fee in the sale of a property. In years past, real estate agents might say to a client interested in buying a home, “You don’t pay any broker fees. My services are free because the seller pays the fee.” The recent lawsuit contested this, agreeing with the plaintiff that since the buyer is the one bringing money to the transaction, it is actually the buyer who is ultimately paying the sales commissions.
For the record, I disagree. The seller chooses which broker to list with. The seller sets the listing price and ultimately, negotiates the sale price. The seller also negotiates other services like marketing of the property. Although the buyer brings money to the transaction, the seller holds much of the decision-making power.
Regardless of my opinion, the upshot of this whole lawsuit is that real estate agents must have a contractual relationship with their buyer-clients prior to writing an offer on a property, a contract that clearly states how much the agent will be paid and by whom.
The contract not only makes things more transparent, but it also prevents buyers from working with a local REALTOR and then asking someone else to write up the offer. This happens more often than you’d think. A local REALTOR can show the property, arrange inspections, coordinate the appraisal, and offer advice on how to structure an offer, only to find out that the client then calls an out-of-town brother-in-law who hasn’t even seen the property to write up the offer and get the commission.
To be clear, these buyer-broker contracts do not prevent sellers from paying the buyer’s commission fee out of the seller’s proceeds. The buyer-broker contract simply stipulates where the money is coming from. Obviously, the seller would have to agree to pay the commission, and details to this effect must be incorporated into the purchase agreement.
There’s been a lot of hoopla in the media about how this buyer-broker contract will reduce commissions to REALTORs and therefore reduce the price of real estate. I don’t believe either will happen. REALTORs earn their fees and brokerage commissions have always been negotiable, going back long before any of us were born. Sometimes, unscrupulous agents have implied that commissions are not negotiable, that they are fixed by law. That’s never been the case. Every real estate brokerage can determine its own fees.
A positive outcome from this legal settlement is the requirement that REALTORs who work with buyers must have a contract that clearly details the services to be performed and the payment for those services. More transparency is always better.
Sadly, this lawsuit may negatively impact some buyers. A buyer who purchases property with a Federal Housing Authority loan may have limited cash to cover the down payment and closing costs, leaving no funds for the brokerage fee. Clearly, REALTORs are not required to work for free. When the REALTOR signs a buyer-broker contract with this client, they will have to specify their fee and that the seller will need to pay it. If the seller refuses and the buyer doesn’t have the funds, the transaction will not happen. Similarly, there are limitations on Veterans Administration loans (although, the VA has temporarily suspended the prohibition against veterans paying buyer broker fees).
As with so many legal settlements, it’s not all bad or all good. I applaud the increased transparency. I like that REALTORs representing buyers will now have some legal protection preventing clients from jumping ship at the last minute and paying an agent who hasn’t done any work.
I don’t think real estate commissions will change much, if at all, based on this lawsuit. If fees do go down a tiny bit, it really won’t affect the housing market. This whole thing feels a little like a tempest in a teapot, but if you are concerned and would like to discuss the matter further, please contact me at rselzer@selzerrealty.com or call (707) 462-4000.
If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery.