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Further, the “modest” changes proposed by RE/MAX and Anywhere (formerly Realogy) on Friday won’t make a meaningful difference for consumers, a researcher at the group told Inman.

“However, if NAR and MLSs accepted meaningful separation of listing and buyer agent compensation, that change could open the door to real competition on brokerage fees,” Consumer Federation of America (CFA) Senior Fellow Stephen Brobeck said in an email.

The CFA shared the short- and long-term steps it said should be taken to provide transparency around real estate commissions. The changes would slowly increase price competition and, eventually, save consumers between 20 percent and 30 percent in commissions, according to the report.

The CFA report comes at a time when commissions are already being scrutinized on multiple fronts and as the issue is coming to a head in the courts.

A pair of bombshell class action lawsuits, known as Sitzer/Burnett and Moehrl, have forced real estate franchisors to examine their policies around commission splits and offer eight-figure settlements. Sitzer/Burnett is set to go to jury trial next week. The suit also names the National Association of Realtors, Keller Williams, HomeServices of America, and HomeServices subsidiaries BHH Affiliates and HSF Affiliates as defendants.

Stephen Brobeck | Consumer Federation of America

Several steps the CFA is recommending have long been opposed by the industry, the watchdog group said, including changes to federal mortgage regulations. 

“Listing and buyer brokers would continue to resist price negotiation while seeking to preserve 5 percent to 6 percent commissions,” Brobeck wrote in the report, which was released shortly after RE/MAX and Anywhere announced they would pay $55 million and $83.5 million, respectively, to settle the lawsuits.

“Over time, though, more sellers and buyers would likely discuss commissions with their agents, often seeking to negotiate lower levels,” Brobeck continued.

The CFA has long been critical of what it has said was a lack of transparency around commission sharing. 

“Listing agents will continue to inform sellers that it is normal practice for them to compensate buyer agents, and if sellers choose not to do so or reduce the expected rate, their listing will be less likely to be shown,” Brobeck wrote. “Buyer brokers will continue to inform their buyer clients that, typically, sellers provide their compensation with the implication that there is no cost to the buyers.” 

Agents, meanwhile, have long disputed the claims, insisting that commissions have always been negotiable and that there isn’t a typical or uniform commission on a real estate transaction. Still, CFA has conducted nationwide studies finding commissions are very commonly uniform at between 2.5 percent and 3 percent.

The ‘easiest’ way to decouple commissions

The CFA has said that the easiest and most effective way to decouple commissions is by changing federal mortgage regulations to allow buyers to finance the commissions they pay their agents.

It’s widely believed that commissions are already added to the final sales price, CFA said, so the regulatory change wouldn’t increase mortgage loan amounts.

Buyers would then be given the power to negotiate the commission they pay to their agent.

“The industry, however, has strongly opposed this measure in an effort to preserve seller payment of buyer agent commissions,” Brobeck wrote.

Brobeck told Inman the industry has opposed that regulatory reform because if sellers were aware buyers could easily finance buyer commissions, they’d be less willing to pay them. 

“Consequently, buyers would be more likely to ask agents about and try to negotiate this compensation before hiring them,” Brobeck added. 

In the near term, buyers and their agents should sign agreements on agent compensation before making an offer, he told Inman. NAR or state rules could be changed to require agents to give prospective clients a buyer representation agreement and agency disclosure upon first contact and then make sure it’s signed before an offer is made.

Sellers should then not be able to pay buyer brokers more than what buyers have agreed to pay their agents, CFA said.

“Without this prohibition, after negotiating their compensation with clients, buyer brokers could seek additional compensation from sellers,” Brobeck wrote. “In a buyer’s market, sellers would be under some pressure to provide this compensation.”

Sellers and listing agents should also no longer offer compensation to buyer agents, CFA wrote. Instead, sellers could offer concessions to buyers who then pay their agents based on their agent compensation agreement.

Mantill Williams | National Association of Realtors

In response to the CFA report, an NAR spokesman said that listing brokers paying buyer brokers helped first-time, minority and low- and middle-income buyers better representation.

Mantill Williams, vice president of communications for NAR, said the practice also ensured transparency and market-driven pricing options for buyers and sellers.

“We understand the desire to try to do something like include buyer broker compensation in the home mortgage,” Williams said. “But there has yet to be a solution that wouldn’t make consumers worse off.”

NAR’s response

Williams said the CFA proposals could harm buyers, adding that the report was full of “oversimplifications and assumptions.”

Some of those assumptions included that buyer broker commissions are included in the price of a home and that sellers would lower their sales price if the listing broker wasn’t offering a commission to the buyer broker.

He also said it wasn’t a given that lenders would want to finance those services, that Congress would make the changes to allow for that to happen, or that the mortgage and banking industry would adapt “without negatively impacting consumers.”

“The CFA also doesn’t account for how financing those expenses could dramatically increase the interest rate on the mortgage, adding to the already dizzying rates hovering near 7.5 percent,” Williams said. “Alternatively, home buyers could face larger mortgage balances and have to purchase more private mortgage insurance, adding even more costs.”

Brobeck said the CFA believes commission decline would take time to emerge as listing and buyer brokers resist price negotiation.

Over time, though, Brobeck said that sellers and buyers would be more likely to talk about commissions with their agents, seeking to push them lower.

“Discounters listing properties would be under less pressure to offer buyer brokers today’s expected commission rates while buyer brokers could lower their commissions without having to provide rebates, which are still illegal in nine states,” he wrote. “Effective consumer education would speed the process.”

Once price competition increased, buyer agent rates would start differentiating.

“New and marginal agents would find it more difficult to charge the same rates as competent full-time agents with many years of experience,” Brobeck added, aligning price and quality.

As for the barriers that Williams said made CFA’s proposals unlikely to work, Brobeck told Inman that NAR was too quick to dismiss reform.

“NAR exaggerates the barriers preventing this solution yet they are substantial, most importantly, because the industry strongly opposes this financing,” Brobeck said.

If sellers were to take advantage of a tight market by not offering to compensate buyer brokers, Brobeck said, the payment would have to come from somewhere.

“Buyer financing of broker commissions not only is reasonable and fair but would help preserve buyer brokerage,” he said. “Because there is a broad consensus that this compensation is added to the sale price, if it were financed and the laws of economics work, the amount financed would not change and would be even lower if buyers negotiated the commissions.”

‘Ineffective restructuring’

Brobeck’s paper included research into policy changes made in recent years by the Northwest MLS, which serves most of Washington and is independent of NAR.

The changes the NWMLS adopted were what the CFA considers an “ineffective restructuring,” with measures that the industry is willing to accept, but which won’t lead to widespread change.

The CFA conducted a survey of offered rates on 733 listings in seven communities served by the Northwest MLS and found that all but two included offers of compensation that were virtually the same as they were before the MLS changed its policies around commissions. 

Among the 733 listings, 84.2 percent included commission offers of 2.5 percent or 3 percent, CFA said. 

In Seattle, rate uniformity actually rose after the policy change, according to a CFA survey of listings before the change compared with the survey of 733 listings conducted after.

Brobeck pointed out what he called deficiencies with the Northwest MLS updated commission policy that wouldn’t lead to much change in commissions or market competition.

One missing piece, he wrote, is that buyer brokers using the MLS should be required to reach an agreement with their clients about compensation before making an offer, a change that will be required by a new state law taking effect on Jan. 1.

“How these changes are characterized by agents in their communications with clients will have a strong influence over price competition,” Brobeck wrote.

“If buyers and sellers don’t believe they have real agent options and can negotiate rates, the industry will likely be able to preserve existing 5 percent to 6 percent rates,” he added. “And even if they do believe, real price competition is not assured. The industry is very determined to preserve 5 percent to 6 percent rates.”

Northwest MLS questioned the paper’s findings, saying that its multiple policy changes in recent years decoupled listing agent and buyer agent commissions.

Justin Haag | Northwest MLS

For the past three years, NWMLS members have been able to publish offers of compensation to consumers and the MLS eliminated the requirement that sellers offer compensation, NWMLS General Counsel Justin Haag told Inman in a written response to questions.

“Northwest MLS members have input hundreds of thousands of listings of diverse property types and diverse geographic areas through vastly differing market conditions,” Haag said. “It is unclear what data the CFA has analyzed.”

Haag also noted that an October 2022 change added transparency and flexibility for consumers and brokers.

Specifically, he said the compensation sellers offer to buyer brokers is displayed on the first page of the purchase and sale agreement. Those offers can be accepted or negotiated by the buyer and the buyer’s broker.

“Broker compensation was ‘de-coupled,’” Haag said. “The compensation the seller offers to the buyer broker is a direct offer determined and paid by the seller — not the listing broker.”

Still, Brobeck told Inman in response to Haag’s comments, CFA research shows the changes have yet to make an impact on the size of commissions.

“We and other researchers have shown that all these rule changes have not materially benefited consumers to date,” Brobeck said. “All sellers continue to offer compensation to buyer agents in their listings and this compensation is highly uniform and hasn’t changed in the past several years.”

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• Source: https://www.inman.com/2023/10/11/modest-commission-proposals-are-insufficient-says-watchdog/