Broker Fees: A Changing Landscape
In response to anti-trust lawsuits, the National Association of Realtors (NAR) has enforced new rules that prohibit a broker from sharing compensation or acting as a real estate agent without an agency contract.
What are the new rules?
1. Listing agreements (seller agency agreements) shall not include broker compensation sharing.
2. MLS listings shall not advertise broker compensation sharing.
3. Brokers shall not act as an agent for buyers without a written buyer agency agreement.
Why did brokers share compensation?
Compensation sharing was a practice that started prior to the formation of buyer agency. At that time, all real estate brokers and their agents worked solely for homesellers. Both the agent who was hired by a seller and the agent who brought a buyer worked on behalf of the seller and had an agency and a duty only to the seller to get the highest price and best terms for the seller.
When sellers hired a broker to list and sell their home, they signed a listing agreement, which served as a seller agency agreement. The listing agreement negotiated the seller's broker compensation and agreed to allow broker compensation sharing with the cooperating broker who brough a buyer. Advertising cooperating broker compensation was a marketing tool to generate more buyers and create competition for the sole purpose of getting a higher price for the seller.
Buyers had no rights in the home buying process until the civil rights movement of the 1960's provided protections against discrimination. The federal government stepped in and prohibted real estate contracts from engaging in discrimination against a protected status. Over time, buyer rights and protections expanded and consumer advocacy laws led to the estabishment of buyer agency in the1990's, which has gradually evolved into what is today's buyer-broker agency. However, the evolution of buyer broker agency did not change how brokers were paid - until now.
In 2024, several anti-trust lawsuits against NAR and many large national and independent real estate brokerages claimed broker compensation sharing was an unfair trade practice that violated antitrust laws. The plaintiff's prevailed in their claims, and NAR agreed to prohibit compensation sharing in listing contracts and to ban any advertising of shared compensation offers in the MLS. Further, NAR prohibited its Realtor members from acting as an agent for a buyer without first entering into a written agency agreement with the buyer.
New MLS rules have resulted in additional lawsuits against NAR, which were filed by multiple real estate brokers in the State of Michigan. While these lawsuits may result in additional changes, this blog is not an attempt to argue the merits of any lawsuit or give opinions on legal questions. Rather, this blog is an attempt to provide a historical background and context to address questions on who pays for the buyer broker's compensation?
Who pays the buyer broker's compensation?
Some would argue that when a buyer broker's fee is listed as a debit to a seller's net proceeds, it is the seller who pays the buyer broker's fee. Others would argue that it is the buyer who pays ALL fees at closing since only the buyer brings cash to closing. To be clear, a seller does not bring cash or write a check at closing unless the seller owes more on a property than the sales price.
In reality, all costs and fees (including brokerage compensation) are mutually paid by both buyers and sellers when negotiated through a mutually accepted purchase agreement. Buyers negotiate for payment of all fees in the sale price they are willing to pay, and sellers negotiate for payment of all fees by negotiating for the net sale proceeds they are willing to accept.
So, what’s changing isn’t how broker fees are paid (through closing) but how broker fees are negotiated.
Listing agreements (which are sellers' agency agreements) no longer include negotiating compensation sharing with a buyer's broker and there is no compensation sharing in the MLS. Instead, buyer brokers' agency compensation is negotiated in buyer-broker agency agreements.
Many wealthy cash buyers and/or corporate buyers will continue with paying their buyer broker's compensation in cash at closing as a tool to reduce their property taxes. Keep in mind that property taxes are calculated based on the sale price, and paying these fees in cash can lower the sale price and, in turn, reduce property taxes.
However, most buyers do not have extra cash on hand, and/or they prefer to use limited cash reserves for other purposes. Accordingly, buyer-broker agency agreements must clearly state whether the buyer has the cash funds available to pay a buyer broker's compensation directly (bringing case to closing) and/or whether the buyer elects to have their buyer broker's compensation negotiated as a seller-paid cost. When a buyer's offer price includes a request for seller payment toward buyer broker's compensation, it is called a seller concession. If seller agrees to a concession, the buyer broker's compensation will listed as a debit to seller's net proceeds.
What if a seller refuses to accept a concession to pay buyer broker's compensation?
Nothing has changed how buyers and sellers may engage in contract negotiations. Escrow will not open until both parties are satisfied with a mutually accepted purchase agreement. If an agreement is not achieved, buyers will continue their search for another property and sellers will continue their search for another buyer.
What about buyers who are not yet ready to hire an agent to represent them?
Brokers/agents may not act as an agent - such a showing property for sale - without first having a written buyer's broker agency agreement with the buyer. However, unrepresented buyers who are not yet ready to hire a buyer broker may view a property for sale at a public open house.
NAR's proposed settlement is not yet approved and many new lawsuits continue in the courts. Therefore, more changes may come as buyer agency continues to evolve. Stay tuned and reach out with questions and/or to schedule your own Real Estate Consultation.
See Buyer Agency: Consumer Protection