The full story on real estate agent commissions.

Brooks Lawson

21 Oct 2024 • 7 min read

There has been a lot of confusion in recent months regarding a recent class-action real estate lawsuit commonly-known known as Sitzer-Burnett vs. NAR (the full name is Joshua Sitzer and Amy Winger, Scott and Rhonda Burnett, and Ryan Hendrickson v. The National Association of Realtors, Realogy Holdings Corp., Homeservices of America, Inc., BHH Affiliates, LLC, HSF Affiliates, LLC, The Long & Foster Companies, Inc., Re/Max, LLC, and Keller Williams Realty, Inc.) and how this is affecting or how it will affect real estate commissions. Today I aim to clear this up.

First of all: when this lawsuit was ruled on, many different mainstream news outlets reported irresponsible and factually-inaccurate statements, along the lines of "The 6% commission on buying or selling a home is gone" (see links below). To be perfectly clear, there is not and has never been a fixed industry commission. Commissions are and have always been negotiable. But media integrity and clickbait is a topic for another day.

How Real Estate Agency Fees work

In a typical real estate transaction, a seller signs a contract with the listing agent. This contract stipulates agent fees. Typically the entirety of the fees are paid to the listing broker (the agent represents the broker), with the associated agreement of how much of those fees are to be shared with a "selling broker" (buyer's broker/agent).

The listing agent will disclose that agreed buyer agent payment amount in the MLS. This offer is a legally binding agreement between 2 agents who are members of the National Association of Realtors (NAR). This offer is commonly known as "cooperative compensation".

Who pays buyer agent fees?

Some people will tell you that buyers pay this fee. However, it is spelled out very clearly in the listing agreement that this is paid by the seller, with the broker as a proxy. It will also show up on the settlement statement as a seller's expense. These are legal documents.

Why does it matter?

Well, it kinda doesn't. Until it does. At the end of the day, all of the funding comes from the same place; the buyer's lender (or directly from the buyer if paying cash). Regardless of who pays, the net profit to the seller is the same. The only tangible difference is which side of the settlement statement the buyer agency fee falls on.

The difference is, if it is (legally) a seller expense, that fee is deducted from the seller's proceeds at closing, allowing the buyer to roll those costs into the mortgage. If it is legally a buyer's expense (as in the seller is not offering to cover any buyer agent commissions) then that money has to come out of the pocket of the buyer at closing, it cannot be financed.

Quick Math: Realty Austin's fee for buyers is 3%. On a $500k home (current median price in Austin is ~$425k), that is an additional $15k the buyer will have to pay out of pocket at closing. I would venture a guess that the majority of buyers are not going to be able to, or not be willing to, shoulder that additional burden, and thus if the seller is not offering to cover this fee, a deal is much less likely to happen.

So you can hopefully see why it makes a lot of sense for the seller to pay this fee, and why they almost always do.

Some will argue that this will save the buyers money. If you are a cash buyer, you can save a few bucks by reducing the purchase price and paying the buyer agent directly, as many associated fees are based on the purchase price of the home, but this has also always been an option, and one I have helped my cash buyers take advantage of in the past.

So what exactly is the core issue?

The case documents for Sitzer-Burnett specifically cite the "Adversary Commission Rule".

The cornerstone of Defendants’ conspiracy is NAR’s adoption and implementation of a rule that requires all seller’s brokers to make a blanket, unilateral and effectively non-negotiable offer of buyer broker compensation (the “Adversary Commission Rule”) when listing a property on a Multiple Listing Service (“MLS”).

I have searched extensively through NAR documentation and not been able to find any 1st-party references to an "Adversary Commission Rule". I have looked through the NAR handbook where they claim it exists and not seen it. I've also looked through NAR's code of ethics. I'm not saying it doesn't exist, just that I can't find it to reference and analyze the specific verbiage to see how it may have been applied.

However, page 39, section 2-G-1 of the 2023 NAR handbook does have similar verbiage to the lawsuit:

G. Commission/Cooperative Compensation Offers

In filing property with the multiple listing service, participants make blanket unilateral offers of compensation to the other MLS participants and shall therefore specify on each listing filed with the service the compensation being offered by the listing broker to the other MLS participants. This is necessary because cooperating participants have the right to know what their compensation will be prior to commencing their efforts to sell. *(Revised 11/04)

But it does also specify that this number is negotiable in the paragraphs immediately following, and does not specify any minimum amount required to be offered, it could be $1 as far as I can tell.

The listing broker retains the right to determine the amount of compensation offered to subagents, buyer agents, or to brokers acting in other agency or nonagency capacities, which may be the same or different. (Revised 11/96)

This shall not preclude the listing broker from offering any MLS participant compensation other than the compensation indicated on his listings as published by the MLS, provided the listing broker informs the other broker in writing in advance of their submitting an offer to purchase and provided that the modification in the specified compensation is not the result of any agreement among all or any other participants in the service. Any superseding offer of compensation must be expressed as either a percentage of the gross sales price or as a flat dollar amount. (Amended 05/10)

Law vs. Settlement

It's important to note that:

A real estate agent is not necessarily a REALTOR®. A REALTOR® is a member of the National Association Of Realtors (NAR), a private, for-profit entity that creates rules for their members.
Any changes made as a result of this lawsuit are not a change in law, but a change in practice and rules, required of members of the NAR.

So what's changing?

Notably what's not changing is the "cornerstone of Defendants’ conspiracy", or the "blanket unilateral offer of compensation". But there will be 2 main changes:

Buyer agents will be required to have signed Buyer Representation Agreements that spell out buyers' obligations to their agents prior to touring any properties. Buyers will no longer be able to "shop around" their agents after touring properties. If you want to tour a property with an agent, you will have to sign an agreement that legally appoints that agent as your representative.
Any offers of buyer agent fee are no longer allowed in the MLS. You're also prohibited from linking to any other pages from the MLS where offers are listed. So now we are having to pick up the phone and call or text the listing agents to find out whether our buyers' will have additional massive closing costs at closing, and ultimately whether they can afford to actually purchase the property. It remains to be seen how this will be handled in the future. For us, BA compensation will be listed on the Compass website. However, this is no longer legally enforceable, so the listing agent could theoretically just say "nah nevermind" after we've already toured the property and brought them a contract signed by a ready, willing, and able (or at least they were) buyer.

We don't know!

I see no reason why anything should change, other than being a little more difficult for agents. However some brokers are seemingly seizing the confusion as an opportunity for change. eXp has already decided that they will unilaterally no longer offer buyer agent commissions.

Some listing agents will, instead of offering a fee that is exclusively for buyer agents, be offering a "seller concession" that can be used to pay their agent, or for any other use the buyer desires (at closing). This of course could be used to negotiate to lower the price of the home if the buyer does not need it, by simply declining the concession and asking for a lower price instead. Much like the list price, this is a negotiable item but one that the seller is declaring that they are offering (without any associated legal obligation). I think this is an excellent way to remedy the situation, and a positive for consumers, and I hope this becomes "the new normal".

Some agents and brokers I've spoken with have decided they will no longer even specify or advertise any buyer agents commissions, as it "shows their hand" and instead will insist that you "bring them an offer". Most likely these agents will pay, but you simply won't know until after you've already spent your time touring the property and assembling an offer.

Conclusion:

Overall, I don't think much is going to change. That's just my personal prediction.