Changes may soon be coming to the ways real estate agents are compensated. Recent legal rulings and ongoing lawsuits over commissions could produce significant changes for the housing market brokerage industry. Chris Wood, editor and publisher of BizWest, discussed the ramifications with KUNC’s Desmond O’Boyle.
First of all, some reassurance: For now, realtors will continue to receive compensation for their work. That was the message for attendees at BizWest’s annual Boulder Valley Real Estate Conference. Still, a recent ruling on October 31 in Kansas City, Missouri, called into question how real estate agents receive compensation. In the suit that prompted the ruling, home buyers sued their real estate agents and the National Association of Realtors over how commissions are determined.
Normally, when a home is sold, the buyer’s agent is paid a commission by the seller. It’s a common part of the transaction, and that process has been in place for decades. But some people aren’t fans of the fact that sellers must pay the buyer’s agent a commission.
“In Colorado, for example—and really around the country—you're going to pay 5% to 6% and commission. About half that goes to the seller's agent, and about half to the buyer's.” said Wood. “Not everyone is happy about that model, which is typical nationwide. A group of sellers in Kansas City got together and they filed a federal class action lawsuit against the National Association of Realtors and some very big brokerages, really claiming that they were price fixing, or commission fixing, (and) artificially inflating these commissions that were paid to buyer's agents.”
The jury verdict for the Kansas City suit was delivered on October 31. They found that real estate groups did in fact conspire to inflate commissions. $1.78 billion dollars were awarded to the plaintiffs.
So, the big question remains: What does this mean for consumers looking to buy or sell a home? And what does this mean for the housing market in general in Colorado?
“Well, there are a lot of predictions about this right now. And realtors all over the country are really struggling to know what this might mean. It could be the case that sellers of homes will pay less in commissions. They may just be paying their own agents' commissions, especially if they're not obligated, of course, to pay the buyer's agent,” said Wood. “But home prices could decline a bit because of that, as buyers or sellers must adjust to buyers having to pay their own agents out of pocket. So that's the big thing for buyers, they may have to come up with a fee to pay for their own agents.”
The other thing brokers will have to do is be more transparent so that commissions are negotiable. Woods explained that most people don’t know that commissions are negotiable, even though they always have been. After the recent ruling, real estate agents must now be clear with both parties regarding commission costs.
“That could be very difficult. You know, I've bought several homes here in Colorado over the years. I don't know that I could have come up with another 2%, 2.5% on top of everything else in the down payment,” said Wood. “They may not be able to roll that buyer's agent commission into a mortgage payment, which is essentially what happens today.”
Real estate agents and brokerage firms remain very concerned about the ruling in Kansas City. Most agents can represent either a buyer or seller, but industry leaders are also trying to reassure agents they will be compensated, even if the traditional model may change.
At the Boulder Valley Real Estate Conference, one panelist noted real estate agents will get paid “one way or another.” Sellers could still be encouraged to pay the buyer commission, which would remain part of the negotiating process. A buyer may not have the upfront capital, which may be a bargaining chip between buyers and sellers.
At the end of the day, Wood said, deals still need to get done, houses still need to be sold, and real estate agents will continue to be a main piece of the process moving forward.
