Redefining Real Estate Compensation: A Procurement and Real Estate Broker’s Perspective on Transparent Commissions

The National Association of Realtors? (NAR), a few national real estate brokerages, and some multiple listing services have recently been sued over the way commissions are paid to real estate agents. The NAR has rules which state that the seller pays a fee (usually a commission), and that fee is typically split between both the seller's real estate agent and the buyer's agent. The fee, which could be zero, is usually visible to buyer’s agents, but not always shared to the buyers. In addition, sellers may not understand how much their agent is making versus the buyer’s agent. The plaintiffs allege that NAR's rules and practices surrounding commission fees are anti-competitive, ultimately leading to inflated costs for homebuyers and sellers.

Having a decade of Real Estate Brokerage experience as well as Corporate Vendor Management and Procurement experience, many people have asked me for my opinion and whether I am concerned about the future of the real estate brokerage business. My simple answer is, “No.” As a matter of fact, I think it is about time for the industry to change and become more transparent in terms of the way real estate brokers conduct business.?

Current State

Depending on whether you are buying, selling, or renting, commission has been fairly consistent since I have been in real estate:

Sale: Commission is typically a percent of the sale that can vary depending on the brokerage and location. The commission is typically split between the buyer’s broker and seller’s broker (not necessarily equally)

Rent: Commission is typically a flat amount and often based on one month’s rent. Similar to a sale, the commission is typically split between the landlord’s broker and the tenant’s broker?

To use an example, if a seller is selling a $500K home, agrees to a 5% total commission, and agrees to split the commissions equally between the buyer’s broker and seller’s broker, the payments will be as follows:

??????????? Seller’s Broker: 2.5% x $500K = $12,500 (reduced from seller proceeds)

??????????? Buyer’s Broker: 2.5% x $500K = $12,500 (reduced from seller proceeds)

??????????? Total Commission: $25,000

While this is relatively simple, it is very possible that a buyer or tenant could have been told that they don’t pay their broker, and that instead the seller or landlord pays the broker. In the past, a broker could say something like, “You don’t pay me, I represent you for free and have your best interest in mind.” However, this was never entirely true. If a buyer/tenant does not work with a broker, they could have negotiated the commission out of the purchase price. The risk, of course, is that the consumer may not get the place they want, may overpay by more than the commission that they would have paid, may skip recommended inspections, and/or enter into an unfavorable agreement. It is also conceivable that the seller’s broker could keep the entire commission, therefore the consumer hasn’t done themself any favors.??

It is also possible that a seller doesn’t realize how much their broker is charging them versus how much they are paying the buyer’s broker. It is feasible that the listing broker can keep the bulk of the commission and pay nothing (or next to nothing) to the other agent. However, shouldn’t the home seller have a say? Many times, they do, but there are certainly cases where they don’t.?

From a procurement perspective, Naseem Malik , Managing Partner at?MRA Global Sourcing , says: “When selecting a broker to buy or sell, it is most important to me that the broker knows and understand the market, is a strong negotiator, and has my best interests in mind. I don’t mind paying a 5% commission if I understand who is getting paid and what they are getting paid for.”?

Future of Real Estate Broker Commissions

Putting on my “Procurement hat,” I am very hopeful that the industry becomes more transparent and gives the consumers options as to how they pay commissions. Regardless of the outcome of the lawsuit, brokers will need to shift their operating model. Instead of relying on the traditional commission model, brokers may need to be more flexible. A few options may include:

• Commission:?Seller’s Broker: Instead of charging the client both sides of the commission, maybe charge the list side and not pay the broker representing the buyerBuyer’s Broker: Engage in a buyer brokerage agreement where the buyer pays the commission as a percentage of the sale price
• Flat Fee: Buyers and sellers negotiate a flat fee with their broker
• Success Fee: Buyer and seller come to an agreement where the broker is paid based on the profit from the seller, or paid based on how much money they save the purchaser
• Time and Expense: Buyer and seller pay their broker an hourly rate plus expenses. This could also include a retainer
• Combination of the options above

One thing that always boggles my mind is when a consumer is selling a place, they sign a listing agreement, but it is not common to sign an agreement when a consumer is working with a broker to buy a place. Similar to a listing agreement, a buyer brokerage agreement should outline what a broker will do for their client as well as how they will be compensated.? Ian Robinson , Designated Managing Broker at Baird & Warner says, “We should have always used buyer brokerage agreements, and it is encouraging that many of our local brokers have recently adopted this practice. However, it is still only a minority that have buyer brokerage agreements. A buyer brokerage agreement serves a dual purpose, not only the compensation for the broker but also the agreement on specific roles and responsibilities. Furthermore, a buyer brokerage agreement helps mitigate potential commission disputes among brokers, which frequently necessitate mediation or arbitration, ultimately inconveniencing the consumer."

Conclusion

The lawsuit involving the National Association of Realtors?, a few national brokerages, and some multiple listing services can reshape the real estate industry as we know it. According to Matthew Formeller , a partner at Formeller & Formeller , “Regardless of the outcome, consumers should understand what they are paying for and who they are paying. Transparency is the name of the game.” Real estate brokers must reconsider their value proposition while prioritizing transparency.