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Is the 5% Broker Fee About to be History?

Updated: May 10

In case you haven’t heard, the real estate industry has been under assault. After years of litigation over claims that the real estate industry conspired to fix commissions, the National Association of Realtors has entered into a settlement agreement, agreeing to pay $418m and to make changes regarding the disclosure and payment of broker fees.


The Traditional Broker Fee Model


Typically, in a real estate transaction the buyer-broker’s fee, or “co-broker fee”, is paid out of the seller agent’s commission. Most properties for sale are listed on a local database known as a multiple listing service (MLS). NAR sets the base rules for MLS, and one rule, called the Participation Rule has required that for every property listed on MLS, the listing broker must offer compensation to an agent who brings a successful buyer to the closing table.


NAR Settlement Agreement


Approximately 88% of homes are listed on MLS. Critics claim this near monopoly combined with the requirement that a seller’s agent offer a co-broker fee unfairly inflates broker fees. The NAR settlement agreement imposes several changes in broker business practices designed to increase transparency and fairness. It is expected that brokerages across the country will adopt these changes to avoid future litigation. Some of the more important rule changes include:


1. Any requirement that a seller offer a co-broker fee to list on

MLS is prohibited.

2. Any co-broker fee offered by the seller may not be disclosed on

MLS. (This information may be disclosed elsewhere, for

example on an agency website.)

3. Seller agency agreements must provide how much the seller is

willing to pay a buyer’s agent.

4. Buyers must enter into a written agency agreement prior to

touring a property with an agent.

5. A buyer’s agent may not state their services are free or available

at no cost to the buyer.

6.  Agency agreements must disclose that broker fees are not set by

law and are fully negotiable.


The rule changes are expected to take effect by mid-August.


What Next?


The court must approve the terms of the settlement agreement before the new rules are finalized, which is expected to happen. Some industry experts predict broker fees could decline by as much as 30%. Biggest declines would occur in regions where 6% is the standard broker fee, for instance the Midwest where the lawsuits were filed. Massachusetts, where a 5% fee has been more typical, will be less affected.


Tips for Sellers and Buyers


If you’re thinking about entering the market, the first question you may ask is whether to hire an agent at all. For sellers and buyers alike, it is conventional wisdom (and this author’s opinion) that hiring an agent is likely to result in a better outcome.

Most studies have shown that sellers generally achieve higher net sale prices when employing a full-service brokerage. See For Sale by Owner: Fact and Fiction. Moreover, in today’s market, Massachusetts sellers by and large are still offering to pay a buyer-broker fee, which makes it easier and more budget-friendly for buyers to be represented.


With that in mind, here are 3 things to consider as you embark on your next real estate transaction:


1. Select the right agent: Selling or buying a home is one of the

most financially consequential undertakings you will ever

make. Choose an agent based on credentials, experience, and

trust. There’s nothing wrong with hiring your neighbor or

cousin to sell your home. But don’t hire them for that reason.

Avoiding an awkward moment at the next family barbeque is no

reason to hire an agent. Interview and choose your agent as if

you were hiring a contractor to build a $200,000 addition on

your home.

 

2. Understand your agency agreement: Although agent

agreements are largely boilerplate, you should carefully read

and understand it before you sign. Ask your agent questions if

you don’t understand any of the agreement terms. Or confer

with a lawyer. I’m always happy to review an agency agreement

for a friend, family member or client. Even if it doesn’t result in

new business for me, that kind of good-will benefits everyone in

the long run.

 

3. Discuss the buyer-broker fee: If you’re a seller, discuss with

your agent the pros and cons of offering a lower co-broker fee,

or none at all. Are you reducing transaction costs or instead

putting yourself at a competitive disadvantage? What would

negotiations with the buyer look like? What happens if the

buyer is unrepresented? Are you ok with your agent

representing both you and the buyer? What would a dual agent

fee be?

 

If you’re a buyer, are you willing to pay some or all of your

broker’s fee? Can you even afford to? Unless there is a shift in

current practices, this remains a choice most buyers will not

have to make, as co-broker fees continue to be offered in the

vast majority of transactions.

 

In the meantime, stay tuned for updates if and when the new rules become final. Should you have questions regarding any real estate or legal matter call us at 781-829-2003.

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