Below is an excerpt of the 2023 Swanepoel Trends Report chapter: Evaluating Real Estate’s Compensation Structure and Its Future. To access the full chapter, purchase your report at t3trends.com. If you have already purchased a report, you can access it digitally here.
Disclaimer: The information presented in this chapter is not, is not intended, and should not be regarded as legal advice. Further, it is not advice for any brokerage, agent, or any other reader on business strategy, compensation structure, or fees charged to consumers.
Challenges to the Real Estate Industry’s Compensation Structure
The long-established compensation structure that undergirds the American real estate brokerage industry is facing unprecedented scrutiny from Department of Justice (DOJ) and Federal Trade Commission (FTC) investigations and challenges from several high-profile, class-action antitrust lawsuits.
The recent regulatory review and current litigation challenging the industry’s compensation structure have spurred much discussion, some action and much speculation about outcomes and impacts.
The DOJ and FTC
The recent crop of commission lawsuits emerged in 2019, a year after the FTC and DOJ held a joint workshop on competition in real estate in Washington, DC in June 2018, and a few months before the 10-year 2008 settlement between NAR and the DOJ expired.
Just a few months after the first class-action antitrust commission lawsuit emerged in 2019, news broke that the DOJ was actively investigating the commission rules of MLSs with the emergence of a civil investigative demand (CID) letter to CoreLogic regarding its Matrix MLS software.
Meanwhile, the DOJ has continued its review of NAR policies. After a year of collaborating with NAR, the DOJ filed a lawsuit against NAR and in November 2020 presented a signed proposed settlement in which NAR agreed to change several provisions related to its MLS policy related to compensation.
In July 2021, that proposed settlement fell apart.
NAR Policy Changes
NAR has made some changes to its policies related to compensation. Most, if not all, of the changes were inspired by, or were a direct result of working with, the DOJ on the now-scuttled proposed settlement first presented in November 2020.
In November 2021, NAR amended or added several policies related to broker compensation inspired by the scuttled settlement with the DOJ. They include:
- Display of Buyer-Broker Compensation: NAR now requires MLSs to publish buyer broker compensation with listings that appear on any of its public-facing websites. In addition, it requires them to provide that data in IDX and VOW feeds to participants. Participants can choose to display the compensation or not on their websites.
- Prohibited Buyer Brokers and Agents from Advertising Services as “Free”: NAR passed a policy prohibiting Realtors from advertising their services as free unless they indeed receive no commission.
- Prohibited Filtering Listings by Compensation: NAR added a policy to prohibit MLSs from providing the ability for participants to filter listings by buyer-broker compensation.
In February 2021, CRMLS and 65 other MLSs across the US passed rules allowing agent and broker subscribers to display buyer broker commissions publicly in accordance with NAR’s new policy.
A set of class-action antitrust lawsuits are currently active that challenge the industry’s compensation structure. They vary by geography and include several defendants but, generally, they all challenge key elements of the industry’s current compensation setup related to mandatory inter-broker compensation, blanket offers of compensation, alleged steering and buyers’ ability to negotiate commissions.
The various lawsuits allege the following.
- Inflated Compensation: Because buyer brokers may decide to not show properties with lower offers of compensation, sellers are encouraged to pay a higher commission rate, so more money can be offered to buyer agents to entice them to show the property
- Steering: The industry’s compensation structure results in buyer brokers steering buyers from listings that fall significantly below a market’s average buyer broker commission.
- Hampered Buyer Agent Compensation Negotiation: Plaintiffs allege that NAR’s Code of Ethics, which all NAR members agree to follow, has statements that make it difficult for buyers to understand what buyer’s agents receive, the role buyers play in paying the fee, and rules that prevent or make it difficult for them to negotiate the fee.
- Unilateral Offers of Compensation Inhibit Competition: The blanket unilateral offers of compensation listing brokers offer co-brokerages through the MLS allegedly hampers competition as buyer brokers are compensated the same regardless of quality or service level.
What Could Happen Next?
Of course, a variety of outcomes are possible. Some of the potential actions that could spark changes in the industry’s compensation structure include:
- The FTC: The FTC issues a rule prohibiting NAR from requiring that listing brokers offer compensation to buyer brokers.
- Lawsuits: Plaintiffs in any of the lawsuits prevail and the court issues an order prohibiting NAR MLS rules from requiring the sharing of compensation.
- NAR: NAR could change its MLS policy so that it no longer requires listing brokers to offer co-brokerage compensation in affiliated MLSs and also clarify guidelines for Realtors about the ability of buyers and buyers’ agents to set and negotiate compensation.
- MLSs: MLSs themselves decide to remove the requirement for offers of compensation, resulting in buyers paying their own buyer agents directly
- Government-sponsored enterprises: It’s not clear that mortgage lenders or GSEs Fannie Mae and Freddie Mac would permit buyers to finance brokerage fees they pay directly to their buyer brokers as part of their mortgage. Or they could allow buyers to request that sellers cover all or a portion of buyer broker compensation as a concession in the purchase agreement. They could adopt policies that allow one or both of these.
Based on the nature of the scrutiny, changes related to decoupling buyer broker compensation from listing broker compensation appears possible. These changes could result in an array of outcomes such as lower compensation for agents, brokerage offerings such as tiered service levels and changes in the fundamental value proposition of the MLS.
With the rise of the modern digital-enabled industry, the role of MLSs, brokerages and agents is slowly, fundamentally changing. It is not clear if or when, or to what degree, some of these changes would come into effect. Maybe they never do. But given the intense focus on them by the US government and multiple courts, some changes beyond the ones already implemented appear likely. To access the full chapter, purchase your report at t3trends.com. If you have already purchased a report, you can access it digitally here.