The Past & The Future Of Real Estate
The History of Real Estate Commissions
Let’s begin over 100 years ago. In May 1908, the National Association of Real Estate Exchanges was founded in Chicago with the objective "to unite the real estate men of America for the purpose of effectively exerting a combined influence upon matters affecting real estate interests." In 1913 the original Code of Ethics was adopted with the Golden Rule in mind. The original Code of Ethics stated that “agents should always be ready and willing to divide the regular commission equally with any member of the Association that can produce a buyer for a client.”
In the Great Depression in the 1920’s commissions were around 2.5% for both agents, and commission rates rose to 5% in the 1940’s after World War I, and have remained steady between 5-6% for the past 80 years. Between 1908-1987, the sellers controlled most of the transaction, and buyer’s agents were working as subagents in the interest of the seller. This means that during most of the past Century, home buyers did not have equal representation (or protection) during the home buying process.
In 1988, the Real Estate Buyer’s Agent Council was formed to allow buyers to have SPECIFIC REPRESENTATION. This meant that agents/brokers could be working exclusively for buyers, representing the buyers best interests and ensuring a more equal representation. However, the way they were paid did not change. It continued to be structured so that the commission for both agents was paid by the seller (through a shared commission between the brokers). Of course, the seller was able to pay the real estate commission by using the money received by the buyer for the purchase of the property.
Which brings us to 2020’s. The Department of Justice reviewed the policies of the National Association of REALTORS and found that transparency was lacking regarding commissions. Changes were made to ensure that REALTORS would educate buyers about the source of their commission, and disclosure was made to ensure buyers would be informed about how much the seller and their broker would pay to a cooperating broker who brought the buyer to the transaction. Any consumer was able to view the unilateral offer of compensation from a listing broker to a cooperating broker on major real estate site such as Realtor.com and Zillow.com.
During the past 100+ years, real estate commissions were negotiable (some great examples of this are Open Door, Redfin, REX Realty, UpNest, etc). While the lawsuit alleged (and the media wants you to believe) that commissions are set… Commissions have always been negotiable, and they will remain negotiable. This is actually one of the very first documents that the State of Texas requires Realtors to disclose to clients. The majority of real estate commissions have been between 4-6% for many years…but they were never fixed.
As we head into 2023/2024, multiple class action lawsuits were filed, first against the National Association of REALTORS, and then subsequently against various state and local Associations as well as large brokerages with perceive deep-pockets (such as Keller Williams, Coldwell Banker, Remax, and many more). In an attempt to stop the legal frenzy, the National Association of REALTORS proposed a settlement that, if approved by the courts, could change the way real estate works for both real estate professionals as well as consumers. Keep reading to find out how this affects you.
Potential Future of Real Estate Commissions
Currently, listing brokers offer a unilateral offer of compensation through the MLS to any broker who represents the buyer in a transaction. This offer of compensation is easily found in the MLS as well as on all major home search sites such as Realtor.com and Zillow.com. The 2024 proposed settlement requires the removal of the disclosure of any broker-to-broker shared commissions from the MLS (although it does not prohibit shared commissions, just the disclosure will be removed). This means that neither brokers/agents nor the consumers will know if the seller or their broker has offered a cooperating commission, and if offered how much it will be.
Potential consequences (intended or unintended)
1. Home buyers will be obligated to pay their agent directly for representation, making home affordability even tougher for some would-be home buyers. Most likely affected groups will be first-time home buyers and Veterans choosing to purchase with their VA benefits.
2. Of those home buyers, some will write their purchase offer to include funds from the seller to help off-set the buyer's closing costs, which now include the buyer’s broker fee. The real estate commission cannot currently be financed into a home buyer's mortgage, so in order to make the home buying process more affordable buyers will negotiate with sellers to pay the fee (so in effect, the seller’s would not see any relief from the current commission payment model).
3. Brokers/Agents will need to spend more time communicating directly with each other (instead of confirming in the MLS) to see if a co-op commission is offered, or how much is offered, on each individual property. Additional time required by both buyer and seller agents could increase the cost of commissions.
4. Some home buyers will opt to buy a home without equal representation (like we had from 1900-1988). This puts the seller at a distinct advantage as the law of Agency requires the listing agent to look out for the seller’s best interest as their fiduciary.
**It may still be in the best interest of the seller to continue to pay buyer agent commissions to entice more buyers to have interest in (and be able to afford) to purchase their home.
Currently Buyer Representation Agreements are RECOMMENDED, but not required in most states. The 2024 proposed settlement states that Buyer Representation Agreements will be REQUIRED before any real estate professional in America can assist a homebuyer in showing homes for sale.
Potential consequences (intended or unintended)
1. Home buyers will have 2 options to be able to view homes they are interested in.
a. Home Buyers can be unrepresented. That means the buyer must search online to find homes they like, then contact each listing agent directly to see if they can schedule an appointment to view their listings. This unrepresented buyer will likely have scheduling issues attempting to view multiple properties which will slow down their home search. Buyers may also become frustrated with trying to reach various agents to schedule these appointments over random days, evenings, and weekends. (remember, listing agents will be significantly busier if they are fielding phone calls and showing requests from every buyer instead of having buyer agents assist with this) Listing agents will be requesting pre-approval letters, so buyers should keep that information handy since they will be providing it over and over again for each showing. These same buyers will not be represented by the listing agent – who is still obligated to report any information they obtain from the buyer to the seller, which can then be used against them during negotiations. This buyer will be uninformed about comparable sales data, as well as what terms to ask for in a real estate contract (not to mention not knowing where to find contract forms or fill them in to submit to a seller). These unrepresented buyers will generally be at a disadvantage throughout the entire home buying process. The law of Agency says the listing agent’s job is to look out for the best interest of the seller.
**If you were being sued, would you just rely on the other party’s attorney to look out for your best interest? No! You would hire your own attorney. This is the same concept.
b. Home Buyers can commit to one (1) REALTOR, sign the representation agreement, and then have the ease, convenience, and protection of having their own agent. The buyer’s agent will provide a list of properties that meet the buyer’s needs and schedule blocks of showings on various listings, regardless of the listing agent. They will be able to provide comparable sales data and assist in making offers that are in the best interest of the buyer. The agent will be able to prepare the contract documents and negotiate to help offset the cost to the buyer for their commission. The agent will assist the buyer with recommendations on the purchase process including additional services needed, and will be able to ensure the closing goes as smoothly as possible.
Moving You Forward
Client Representation has, and will continue to be, one of the most valuable things a Real Estate Agent can do for a client, on either side of the transaction. The law of Agency states that real estate agents become a fiduciary for their client, which means that the agent’s job is to look out for the best interest of their client throughout the transaction. Sure, we open doors….but we do SO much more!
There have always been, and will continue to be, some real estate agents that are better than others. As we move into the future of real estate, the difference between the two will become evident. Sellers will need an agent who can market their home to both home buyers and real estate agents, advise on sales price as well as commission offerings, and help negotiate to get them the most money for their home. Buyers will need someone to represent them. Someone with experience and data to help them make the best decision. This is a value that is not easy to put a price tag on. It is significantly more than showing a few properties to a buyer. It may be a service that buyers have to pay for in the future, and it may remain that sellers will still pay commission to the buyer’s agent as part of the initial contract negotiation.
Either way, at North Texas Top Team, REALTORS - we will continue to provide detailed information and data to both our home buyers and sellers. We are highly-trained and truly understand our Agency and Fiduciary duties to our clients. Our broker helps to create contracts through her volunteer leadership on the Broker-Lawyer Committee with the Texas Real Estate Commission – and she teaches our agents (as well as many other agents in Texas) about the contracts we use when working with our clients. You deserve to be represented, and represented well by an educated REALTOR. Our clients come first, and they deserve the higher-standard that we provide. For us, it is business as usual.
About the author: Melissa Hailey is a real estate broker, trainer, coach, leader, and influencer. She has served in volunteer leadership with Collin County Area REALTORS, Texas REALTORS, the National Association of REALTORS, and the Texas Real Estate Commission. She is also the CEO of Agent Advantage Coaching & Training, where she leads real estate instructors to raise the bar in real estate.
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