Have you heard of the recent landmark settlement?
In the past few months, the National Association of Realtors (NAR) reached a significant settlement following lawsuits from home sellers. These lawsuits claimed that the real estate industry maintained a system where agent commissions hovered around 5 to 6% of a home’s sale price, negatively impacting both buyers and sellers.
Despite denying any wrongdoing, NAR agreed to pay approximately $400 million in damages as part of the settlement. While this primarily affects home buyers and sellers, it also has implications for business owners, especially those looking to sell their businesses, as changes in real estate practices are expected to be prompted by these events.
So, let’s dive into this topic and explore why having a knowledgeable professional by your side during these changes is crucial.
What Really Happened?
You’ve probably heard about NAR agreeing to pay a hefty $418 million in damages due to a lawsuit filed by home sellers. But what exactly sparked this lawsuit, and are the claims made by home sellers valid?
The heart of the matter revolves around the suspicion that real estate commissions are being quietly increased, leaving homebuyers feeling pressured to pay more, thus boosting the commissions for agents and sellers.
One of the key issues is that NAR doesn’t set specific commission rates for agents. Instead, the commission fee paid by the seller is often factored into the sale price, commonly referred to as “cooperative compensation” in the industry.
However, while NAR doesn’t regulate commission rates, they do require agents to disclose the buyer’s agent’s commission on the Multiple Listing Service (MLS). MLS is a crucial database used by real estate agents to find homes for their clients, but the detailed breakdown of fees is typically only visible to agents.
The lack of transparency in this process has raised concerns among some of the plaintiffs in the lawsuit. They argue that the rates advertised on MLS sites may incentivize buyer’s agents to prioritize homes with higher fees, rather than focusing on finding the best home for their clients.
This begs the question: has this practice always been standard in the real estate industry? To shed some light on this issue, let’s discuss the typical practices of the real estate industry in the past.
How Real Estate Practices Have Evolved
Let’s begin in 1990. This was my very first year in the real estate business. I had my real estate salesperson license, and I began working and learning this business. Back then, Michigan, like most other states, only allowed a real estate licensee to represent the seller of real estate.
Agency law means that I must work on behalf of and in the best interests of the seller of the property that is listed for sale. Back then, our MLS information came in the form of thick books, where we had information regarding houses that had sold, new listings, expired listings, and withdrawn listings. All this information was “fresh” within the past two weeks. Then, another book would arrive in the next two weeks, and so the process continued.
Today, we have the MLS information all online, brought about by another technological advancement in the real estate industry. Agency law in Michigan stated that real estate licensees could only work on behalf of the seller of real estate.
Through the MLS system, a listing broker could offer a sub-agent a portion of the listing commission as compensation for bringing a ready, willing, and able buyer to that specific listing. In other words, the listing broker (all listings are legally owned by the broker), the salesperson who works in the listing broker’s office, and now the salesperson and that person’s employing broker all work for and on behalf of the seller of that real estate.
Yes, I know what you’re thinking – it all seems confusing, as the salesperson working with the buyer could inadvertently give the buyer the impression that they are working for the buyer. After all, in a real estate transaction, an agent does get to know their customer or client very well.
You learn about their goals, why and how they want to buy or sell a house, and what will and will not work for their individual situation — that’s it. As a real estate licensee, your job at the time was to follow the instructions of your principal (the seller) as their agent as long as those instructions were legal.
Buyer Agencies Came Into Play
However, in the mid to late 1990s, buyer agencies began to increase in popularity on the West Coast of the United States. The Michigan legislature changed the agency law in a couple of different ways:
- Buyer agencies were now legal in Michigan.
- Transaction coordinator is now legal in Michigan.
- An agent must disclose to their customer or client early in the transaction who they are working for.
For example, you come into my office and tell me that you want to see the house that I have listed for sale at 123 Main Street. But if I have never met you before, we have no preexisting relationship. And so, prior to the mid-1990s, we would have looked at the house, you would have written the offer, and we would have all attended closing with all real estate agents that were involved, working on behalf of the seller. You, the buyer, had no representation at all in this transaction unless you chose to have an attorney to review the documentation.
In today’s real estate scene, a buyer’s agency is a common practice. It means I can act as your representative as the buyer, and the commission listed is split between the listing broker and the buyer’s broker.
It might seem odd that the seller pays the commission to the listing broker, who then agrees to share it with the buyer’s broker or agent. It’s kind of like when you go to court; each party pays their own attorney. This setup is a bit different.
How Does the Lawsuit Affect Today’s Real Estate Practices?
Now let’s go back to the lawsuit that will continue to change the way that real estate cooperation in the Realtor community occurs. The main point of the lawsuit, and the ultimate settlement, is that in the multiple listing service, in the sharing of information and in the cooperation among the Realtor members, is the fact that the offer to compensate the agent that is working with the buyer was disclosed in the MLS.
Someone who looks through all the listed properties on the MLS on any given day would see and be privy to the offer of compensation to a buyer’s agent (or to a seller agent if the listing broker still operates that way in today’s market.)
As mentioned earlier, this is where the plaintiff attorneys in the class action lawsuit proved the manipulation and price fixing. Although NAR plans to prove this theory to be false, they decided to settle and agree to change two aspects of this discovery:
- First, any compensation offer would no longer appear in the MLS. In other words, the listing broker and the buyer’s broker would have to agree to any compensation sharing between themselves and not include anyone outside of that agreement.
- Second, all buyers who work with a Realtor member would be required to sign a buyer’s agency contract, which would spell out the options available to the buyer in compensating the agent that is working on their behalf.
Some news articles and sources say that these changes will take effect by mid-July, yet they are still subject to the court’s approval.
What This Means for You
The shifts happening in the real estate industry won’t be the last. That’s why, as a homeowner or business owner, it’s important that you stay updated on the latest developments. It’s also as essential to carefully review agency contracts, ensuring that you understand every detail.
Now, considering the upcoming changes, here’s what you can anticipate if you’re thinking about selling your business with the help of experts.
- Stricter regulations and guidelines for real estate agents and brokers may be introduced. This means that agents representing small business owners will likely have to adhere to new standards of transparency, fairness, and ethical conduct when handling the sale of businesses.
- Real estate agents may now be required to provide more detailed information to their clients, including small business owners, about the selling process, potential buyers, market trends, and any associated costs or fees. This increased transparency can empower small business owners to make more informed decisions about how to sell their businesses – which is a good thing.
- The settlement may also prompt real estate agents to be more proactive in identifying and addressing any conflicts of interest that could arise during the sale of a small business. Agents may need to disclose any relationships or agreements that could influence their representation of the small business owner, ensuring that the owner’s interests are prioritized throughout the selling process.
Though the settlement’s changes aren’t final yet, they’ll clearly lead to a fairer, more transparent process for selling businesses in the real estate market. And that, in my opinion, benefits everyone involved.
Takeaway
It’s important to note that this blog serves solely to inform you and should not be taken as legal advice. If you have any personal concerns or experiences related to the topics discussed, it’s advisable to seek guidance from qualified attorneys.
Additionally, not all real estate salespersons and brokers are members of the National Association of Realtors. Furthermore, despite advancements in technology, some salespersons and brokers may not participate in sharing information through the multiple listing service. This might reflect how real estate sales initially operated, where the responsibility to find a buyer fell solely on the listing agent.
That said, don’t be afraid to trust experts in the real estate industry. However, take your time to get to know them, understand their values, and clarify how your collaboration will unfold before committing to working together.
Remember, prevention is better than cure. Being diligent in selecting whom you work with can safeguard you from potential financial losses. Conducting thorough research and choosing the right professional will provide peace of mind, knowing that your property or business is in capable hands.
If you’re interested in learning how I can assist you further, feel free to schedule a call with me. Let’s get into everything you need to know and ensure your needs are met.
