First and foremost, commission compression is coming. The ultimate reason for the NAR lawsuit was a consensus among the plaintiffs that the commission they agreed to pay their agents’ brokerages to sell their homes was too high.
They either did not understand or were not aware that all commissions are negotiable. Unfortunately, I don’t think we have done as good a job as we could have at explaining how agents get paid and where the money comes from.
I also think we failed to articulate our value as professionals. In my opinion, the fact that the buyer-agent function has been deemed overvalued is proof of that.
However, it’s not completely our fault. COVID and the housing market frenzy it produced led to an overreliance on email, text, and dotloop communication.
In short, many of the sellers had little need to talk to us when a sign in the yard was producing multiple offers within hours.
Yes, commission dollars have gone up as home values have gone up, but commissions as a percentage of selling prices have remained constant. Conversely, some markets have dropped – especially at higher price points.
How Do Realtors Get Paid Around the World?
You may wonder what the outlook will look like following the NAR ruling; I think it’s important to consider how real estate operates in other parts of the world to get a grasp of the bigger picture – and what’s possible here in the United States.
While commission-based compensation is prevalent in many regions, there are also variations in the commission rates, splitting arrangements, and additional compensation options.
Great Britain is similar to the United States. The commission rate typically ranges from 2% to 6% of the property’s final selling price, with the exact rate varying depending on the agent’s experience, the location of the property, and the type of property. In some cases, a flat fee or a combination of commission and flat fee may be used.
In Australia, commission-based compensation is also the norm for residential real estate agents. The commission rate typically ranges from 1.5% to 3% of the property’s final selling price, with the exact rate varying depending on the factors mentioned above. Additionally, some agents may receive a salary or bonuses, but these are typically only offered to experienced agents with a proven track record of success.
In Canada, the commission structure for residential real estate agents is similar to that in the United States and Australia. The commission rate typically ranges from 1.5% to 6% of the property’s final selling price, with the exact rate varying depending on the province, the agent’s experience, and the type of property.
In China, the compensation structure for residential real estate agents is more diverse. While commission-based compensation is still common, there is a growing trend towards fixed fees and salaried positions. This is due to increased government oversight and regulations in the real estate industry.
In Japan, the compensation structure for residential real estate agents is primarily based on a fixed fee system. This means that agents are paid a predetermined fee for each successful sale, regardless of the property’s value. This system is designed to promote fairness and transparency in the real estate market.
In Singapore, the compensation structure for residential real estate agents is a hybrid of commission-based and fixed fee systems. Agents typically receive a commission on the sale of a property, but the commission rate is capped at a certain percentage. This system is designed to balance the interests of agents and consumers.
In Germany, the compensation structure for residential real estate agents is primarily based on a fixed fee system. Agents are typically paid a percentage of the property’s value, but the percentage is relatively low, typically around 2% to 3%. This system is designed to ensure that agents are not incentivized to overprice properties.
The American Real Estate Agent’s Compensation Structure is Influenced by Zillow
Zillow has become a symbol of everything right and everything wrong about the real estate industry in the United States. Zillow’s broad market strength is essentially limited to the United States and Canada. They have not expanded into Europe or elsewhere in the world.
One reason is the European real estate market is fragmented and diverse, with different regulations, customs, and consumer preferences in each country. There are already many well-established regional real estate portals in Europe.
Europe also has stricter data privacy regulations than the United States, which could pose challenges for Zillow’s data-driven business model.
Zillow may be the biggest contributor to the status quo in this country with an influence beyond even NAR – and certainly larger than any single mega brokerage.
Zillow’s business model is a money-making machine. They get our listings for free and then sell them back to us at a profit. Their dominant market share was solidified during the pandemic. They will fight to the death to keep things as they are.
Let’s face it, Zillow and Zestimate are as ubiquitous as Kleenex or Xerox. When people ask me how I came up with the name ROOST, I always reply, “Zillow was taken!”
To one degree or another, we are all working for Zillow now – and that makes me nervous.
How to Tweak the Cooperative Compensation Model
One way our current compensation structure may essentially be preserved is to make a distinction between an offer of compensation versus offering a referral fee.
In the real estate industry, the terms “offer of compensation” and “referral fee” are often used interchangeably, but there is a subtle distinction between the two.
Offer of compensation is a broader term that encompasses any form of payment that a listing brokerage offers to a buyer brokerage in exchange for bringing a buyer to the property. This could include a percentage of the sales price, a flat fee, or a combination of both.
Referral fee is a more specific term that refers to a fixed fee that is paid to a buyer brokerage for referring a client to the listing brokerage. This fee is typically paid regardless of whether the transaction closes.
In other words, all referral fees are offers of compensation, but not all offers of compensation are referral fees. A referral fee is simply one type of offer of compensation.
This could allow us to avoid the decoupling outcome where increased transparency and competition in the industry will make buyers and sellers hire and pay their agents separately.
Exclusive Buyer Agency Agreements
Regardless of whether the near-term changes are ‘tweaks’ to the existing model or a completely new model based on decoupling, the one thing that is clear to me is that exclusive buyer agency agreements are going to be adopted across the board.
I have resisted buyer agency agreements my entire career. Truthfully, it was easy; they were not common where I practiced in Ohio.
I was always an advocate of NAR’s Clear Cooperation Policy and structured my practice and my brokerage to reflect that.
The fact is, if we want to contract with buyers directly, we need to get comfortable with being able to articulate our value as buyer agents just as we have successfully (for decades) been able to articulate our value to sellers with the use of these exclusive right to sell agreements.
What’s the upside?
- State agency laws will be aligned with compensation.
- Sellers will pay less in commission and pocket the cash.
- More people of limited means will no longer have representation and will continue to rent.
All of this forces us to articulate and justify our value as buyer agents. In my opinion, it’s not that hard. To be honest, I think it is the listing side of the transaction that is ripe for commission compression.
The new real estate professional will ultimately create a career based on real estate consultancy, causing the distinction between listing agents and buyer agents to blur.
I am excited to explore this idea in the months and years ahead – and I hope you are, too.
What’s the downside? Many buyers will not be able to afford representation.
However, if decoupling does happen, I think we will see new regulations, allowing new types of buyer closing costs to be included as allowed, like seller-paid closing costs, and even rolled into mortgages – especially for first-time buyers.
The thing to remember is that every commission and every referral fee is negotiable. We get in trouble when we lose sight of that fact. Now, this doesn’t mean we work for free but it does mean we work for those who pay us. After all, we are professionals.
The real estate industry must guard against a return to the old days of caveat emptor; a return to the bad old days could cause more and more people to forego homeownership altogether.
The USA has always promoted homeownership as a path to wealth, and we don’t want to mess with that. Many of the Die Hards, Disillusioned, and Deal Makers among us will be unable or unwilling to make the shift and will leave the business.
An exclusive buyer agency agreement can be set up to pay all of the agreed fees, or it could be set up to make up the difference between the agreed fee and whatever the seller is offering either in terms of an offer of compensation or a referral fee.
Potential Changes in State Licensing Laws
What changes could we potentially see in state licensing laws? There are a few main areas to consider.
- States could force changes in MLS rules that would make it easier for non-NAR licensees to list properties on the MLS.
- State antitrust laws related to the real estate industry will be revised, leading to changes that will limit the power of NAR.
- We will likely see new consumer protection laws established at the state level. For example, states could require real estate brokers to disclose more information about their fees and commissions to consumers.
- There will be changes in pre-licensing and continuing education classes to ensure that brokers are well-versed in antitrust laws and consumer protection regulations.
- Licensees may also be required to disclose their membership in NAR and other real estate trade organizations especially if NAR loses on appeal.
What New Business Opportunities Could Arise?
Not everything is doom and gloom. Sure, the industry is changing – but with changes come additional and interesting opportunities. Here’s what I see.
With the increased scrutiny of traditional commission-based pricing, real estate brokers and owners could explore alternative pricing models that are more transparent and competitive. This could include flat-fee listings, tiered pricing plans, or performance-based compensation.
We will see new brokerage models that are not bound by traditional NAR rules. This could include independent brokerages that offer more flexibility and choice to both agents and clients.
With the increasing importance of technology in the real estate industry, brokers and owners who embrace technological advancements can gain a significant advantage. This could include using virtual reality tours, data analytics tools, and artificial intelligence-powered marketing platforms.
Real estate brokers and owners can differentiate themselves by specializing in specific areas of expertise or geographic regions. This could include specializing in luxury properties, investment properties, or international real estate.
One outcome we might see is fewer generalists and more specialists by market segment.
We may shift toward an emphasis on local expertise and focus. The real estate industry can then serve one target market at a time.
With increased competition, real estate brokers and owners need to prioritize customer satisfaction to attract and retain clients. This could involve providing personalized service, responding promptly to inquiries, and going above and beyond expectations.
Think about how you can earn a five-star review from every client… every time.
Real estate brokers and owners can expand their reach and expertise by collaborating with new entrants in the real estate market, such as online real estate platforms or homeownership counseling organizations, most likely mortgage lenders who believe educated buyers are less likely to default than those who go it alone.
Consolidation within the real estate industry could create opportunities for brokers and owners to expand their businesses by merging or acquiring other firms.
One way or another, this industry has to get more productive. For me, that means units closed per agent – but it also means focusing on metrics like return on relationship.
The most dangerous agents in the world are those that close a deal or two a year; that is where our liability lies.
Consolidation will accelerate in 2024, so we need more real estate professionals and a lot fewer real estate executives.
The brokers that remain will finally get tired of taking on the legal liability for little to no compensation. They will close, change, or consolidate. Brokers will remember the basic fact that every listing contract and every buyer agency agreement is with the brokerage – not the individual agent.
Real estate brokers and owners can use their expertise and influence to advocate for regulations that promote fair competition, transparency, and consumer protection in the real estate market. We have to step up and do what we have allowed NAR to do for us all these years.
Final Thoughts: 6 Areas to Focus On (Starting Now)
There’s still time to develop a game plan to approach whatever the future of real estate throws at us. However, don’t take too much time. If you’re ready to get your head in the game and make big, bold moves that will aid your future business, focus on these six areas.
- If you have not already, get familiar with Exclusive Buyer Representation Agreements. This is the way. I have resisted these but it is time to get on board.
- Show your value. Be able to articulate exactly what you bring to the table. It’s going to be a lot easier to get a signature on a buyer representation contract if you show your potential client why should not go it alone.
- Educate the public. Teach customers as well as clients how we get paid.
- Don’t prefill your listing agreement with a cooperative percentage. All commissions are negotiable. Pre-fill clouds that reality.
- Never insinuate to a seller that failure to agree to co-op X% will result in fewer Realtors® showing their property. It is contrary to our fiduciary duty to not show a property that would fit the needs of a buyer due to the co-op commission offered.
- Be transparent. This might seem like a no-brainer, but clear, effective communication is an asset in any industry.
Change is inevitable. We might not always like it, but change is one thing we can always depend on – and there’s nothing we can do to stop the world from turning. However, you don’t have to be scared of the future in a post-NAR world. The mega brokerages had their day, and now agents who work by referral may get ours. Stay tuned.