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May 12, 2024 | 714-336-0394 | Scot@CampbellRealtors.com | Broker of Record – Coldwell Banker-Campbell Realtors
As one of the very few practicing real estate professionals in California who has worked through all the Agency changes in California Residential Real Estate Transactions over the last 40 years, I can effectively explain where the real estate industry has been with the rules of agency, and where it is today given the recent NAR Settlement.
In 1982, I started working in my father’s real estate office (while I was still in high school). A licensed California Real Estate Broker since 1957, E.J. Campbell is the founder of our brokerage. At that time, the standard real estate practice in California when selling a home was to hire a Seller’s Agent. That brokerage was known as the “Listing Agent”, and customarily a portion of the commission was “offered” through the Realtor MLS to a “Cooperating Brokerage” who was deemed a “Sub-Agent” of the Seller’s Listing Agent.
The fiduciary duty of the Seller’s Listing Agent and Cooperating Brokerage (Sub-Agent) was entirely to the Seller of the home. This would be just as you would expect at a car dealership… everyone you speak with is trying to sell the vehicle for the maximum profit for the dealership. There is no one looking out for the interests of the “car Buyer” at the automobile dealership, and prior to 1984 there was no one looking out for the interests of the home Buyer. The concept of “Buyer Beware” ruled the day.
Easton V. Strassburger (Buyer Agency Begins)
In 1984, there was a revolution in the rules of real estate agency. The practice of “Buyer Agency” was introduced following the Easton V. Strassburger case. It became best practices and Real Estate Law for real estate agents to be either: The Buyer’s Exclusive Agent, the Seller’s Exclusive Agent, or a Dual Agent Representing Both Buyer & Seller. However, to the dissatisfaction of many home Sellers, the law and existing practice in the industry provided that the Seller pay the commission for both the Seller’s Agent and the Buyer’s Agent.
As much as some home Sellers were dissatisfied with the concept, the policy benefited the Sellers; here are the reasons why:
- VA Buyers have zero money to pay a Buyer Agent commission. In fact, the Veterans Administration does not permit them to pay a commission. If the Seller does not pay the commission for VA transactions, these Buyers leave the pool of potential home purchasers.
- FHA Buyers have zero money to pay a Buyer Agent commission. They are scraping up 3.5% to put down on a home, it could take months or years to save enough money to pay a Buyer Agent commission. If the Seller does not pay the commission for FHA transactions, these Buyers may never join the pool of potential home purchasers.
- Most Buyers are trying to reach down payment thresholds to lower their payment and qualify for a higher loan: 5%, 10%, 15%, and 20%. Each time one of these levels is reached, there is a savings in the cost of borrowing with either a lower rate/points or the elimination of Private Mortgage Insurance (at 20% down). The higher the Buyer’s down payment as a percentage of the purchase price, the easier it is for the Buyer to qualify for the loan.
- Seller paid Buyer Agent commissions allow the Buyer’s down payment to be larger. For example: with 20% down, an increase in the Buyer’s down payment of $20,000 allows the Buyer to finance an additional $100,000. The Sellers benefit from the Buyer having more money to put down, thus pay more for the home. Example: If the Seller pays the $20,000 commission, the Buyer can pay $100,000 more for the home.
Once these facts were explained to the “dissatisfied” home Sellers (who were upset that they were paying a commission to a Buyer’s Agent), the Sellers quickly agreed to the practice. They did this not do this because they were “nice”, it was done because paying the Buyer Agent commission was in the best interest of home Sellers.
Burnett v. National Association of Realtors (Jury Decides Changes are Needed)
Fast forward to 2023. A law firm found a new group of “dissatisfied home Sellers” and filed a lawsuit against the National Association of Realtors which alleged that these Sellers had been defrauded. The contention was they were forced to pay a Buyer Agent commission and Realtors were preventing negotiations on commission rates.
The case was filed in the State of Missouri, Burnett v. National Association of Realtors (“NAR”), et al. In October 2023, it was reported that a jury (none of whom were home owners) found in favor of the disgruntled Sellers. The Missouri Jury was successfully convinced that Home Sellers felt compelled (or were explicitly told) to pay a commission to Buyer’s Agents.
The jury felt that it was implied (or stated) that Buyer Agents might refuse to show their property (if a lower commission was offered), fostering fear that their home would not sell.
They felt it was unreasonable that the commission remained the same even if the Buyer independently found the home, attended an open house without an agent, conducted an analysis of comparable properties using publicly available data, and only contacted the Buyer’s Agent for assistance with the offer paperwork.
Compounding the issue, the real estate industry enacted arguably self-serving rules (MLS Rule 9.7 and NAR Standard of Practice 1616) prohibiting licensed real estate agents from assisting Sellers in negotiating lower Buyer’s Agent commission as part of the offer/counter-offer process.
A Landmark Settlement (NAR Agrees to Rule Changes)
On March 15, 2024 the National Association of Realtors entered into a settlement in the Burnett V. NAR case which as of today’s date is awaiting approval by the court.
As part of the settlement, NAR agreed to the following MLS rule changes which will become effective in Mid-August 2024:
- Agents are required to sign a written Buyer Representation Agreement with their Buyer Clients wherein compensation to be paid by the Buyer is specified.
- Seller paid Buyer commissions will no longer be published in the Realtor MLS.
Furthermore, NAR has issued specific guidance that agents should always tell clients:
- “Compensation arrangements (including commissions) are, and have always been, negotiable and set between a broker and their respective client… “
- “Listing brokers in consultation and agreement with their Seller clients decide how much compensation to offer to serve the Seller’s best interest, and it can be $0, $1, or any other amount. NAR rules do not specify an amount for commissions. This is solely a matter that’s negotiated between brokers and their clients.”
Effect of the settlement on Coldwell Banker – Campbell Realtors policy & practices
A New Era in real estate is beginning soon. The marketing success and closing of a home sale for top dollar in this New Era will be determined by the skillset of the Listing Agent. These are the objectives we will maximize:
- The number of qualified Buyer online views, in-person viewings of the property, and Buyer Agent Showings
- The number of offers submitted by qualified Buyers (either through Listing Agent or cooperating Buyer Agent)
- The sale price, optimal terms, and net proceeds desired by the Seller
Our policies and practices as the Listing Agent will remain aligned with the home Sellers who have hired us to market their properties. Accordingly, we invite Sellers to read our New Marketing Plan to Sell your Home which is now being completely revised for the New Era in real estate which begins in Mid-August 2024.
In consultation with California Assn of Realtors attorneys, we have found elegant solutions for: VA, FHA, and Buyers with down payment threshold issues.
