Most brokerage leaders know about the multiple challenges facing the real estate industry, not the least of which are the major class-action lawsuits. A major consequence of these cases is the potential scrapping of guaranteed shared compensation.
It seems a small share of the agent population even knows about this issue, and even fewer can loosely tell you what the potential outcomes are. Compound that with the many sexual harassment and incompetency claims recently leveled against the National Association of Realtors (NAR), and the confusion is understandable.
It’s perceived as negative drama, so many have tuned it out. Fine. But you do so at your own risk. My stance is that anything like this with the potential to disrupt our livelihoods so drastically demands our attention.
Potential outcomes of the commission lawsuits
The specific details of the lawsuits, the tying agreements, the anti-competitiveness of clear cooperation and the arguments surrounding potential steering and inflated compensation have been written about extensively.
What hasn’t been discussed are the practical impacts of the potential (dare I say probable?) outcomes of these cases. Most importantly, how to prepare for them.
Membership in NAR
The first critical potential outcome is the elimination of the tying agreement that exists in many areas whereby practitioners must be a member of NAR to have access to the Multiple Listing Service (MLS).
Even now, numerous areas have already adjudicated this and struck the rule down. And in most broker-owned MLSs, it was never a rule in the first place. If you find yourself in that scenario, you are fortunate.
Were it not for this requirement, the plethora of local, grossly redundant Realtor associations would have ceased to exist long ago because they could never survive without the fat annual dividend check from the MLS.
Redfin just announced they are giving up their board seat (a mere one of over 1,000 board seats) and pulling out of NAR completely.
This is a dramatic and peculiar stance, given that same company a couple of years ago launched a $1 million annual advertising campaign touting a 1% listing fee, but only if the seller turned into a buyer for them. Meaning, they were counting on buyer agent compensation to pay their bills. This falls into the category of “things that make you go hmmm.”
Guaranteed shared compensation goes away
Regardless, in the absence of the NAR membership requirement, the NAR rule of guaranteed shared compensation also disappears. This means the lazy real estate agents who provide very little value to their client can no longer just show up and know they will automatically get paid a percentage of the sales price just for writing a contract.
The need to evidence value suddenly becomes the only pathway to earning a commission. Clearly, this will weed out those who fail to articulate their value proposition.
Already, many MLSs are revising the verbiage of their rules to move the focus away from financial cooperation to simple cooperation by eliminating any stated dollar amount of offered cooperation.
With many MLSs, the guidelines previously stated the definition of cooperation meant the listing broker had to offer at least $1.00 in compensation; most have taken that to $0.00. This places the focus on sharing information instead of sharing money.
How, then, will a buyer agent get paid? Well, like most of the rest of the world, whoever hires the agent will need to pay the commission. As a result, I see two critical points of change in the future:
Buyer agents must be willing and able to articulate their value to the buyer so that they get paid, even if the listing agent does not offer shared compensation.
Listing agents will see more buyers showing up unrepresented and must be knowledgeable and prepared to deal with it.
Buyer agents need to articulate their value
With guaranteed shared compensation on the chopping block, buyer agents will need to institute the proper use of a buyer agency agreement, which isn’t always employed correctly.
As with every state where buyer agency laws exist, the licensee’s native status is as a transaction broker or facilitator unless and until a separate, bilateral agency agreement is executed.
This means all those agents who say they have homebuyer clients but who haven’t executed a bilateral agreement are, in fact, engaging in unlawful misrepresentation of their status.
Sadly, the understanding of the difference between a client and a customer is pitifully poor in our industry. Even though the form, the law and the standard has been around for many years, few engage with it simply out of fear. In our Tennessee form, that clause boils down to paragraph 3.E. which reads, in part:
“If a fee is not offered or paid to Broker, as could occur, for example, in the purchase of an unlisted property, Client agrees to pay Broker a total of $_____ or __% compensation based on the total sale price.”
These are the words which strike terror in the hearts of men (and women), causing many to either avoid the document altogether, procrastinate completing it until after an offer has been accepted (and they know they are getting paid) or, worse, execute it at the beginning of the relationship but still avoid the hard talk by inserting a zero in each blank.
The zero inserted in the blank could very well end up being the total pay that licensee receives should the buyer decide they want a listing that offers nothing for shared compensation. Not fun.
The key to success for the licensee here is a willingness to brutally confront this fear and have a clear, up-front conversation about how you’ll be paid. That means being able to convincingly articulate the value of your services through a formal buyer presentation. The outcome, which is the same for listing presentations, is to show how you’ll successfully represent the client’s best interests.
Listing agents must prepare for influx of unrepresented buyers
Addressing the second point of critical change requires only a basic understanding of how agency law works. If guaranteed shared compensation goes away, there will be an increase in unrepresented buyers coming to your listings directly.
However, it’s critically important to understand that, as the listing agent, an unrepresented buyer has zero impact on your role or on how much you get paid. Those details are clearly established in the listing agreement between your brokerage and the seller.
Understand this clearly: the total compensation agreed to by the seller is not dependent on whether or not the buyer has representation.
Read your brokerage‘s listing agreement. Nowhere in it is language that automatically changes how much you are paid if an unrepresented buyer shows up unless you specifically insert it.
That said, the listing agent is still obligated to the duties owed to all parties, including an unrepresented buyer. The listing agent can, and should, help write an offer if the buyer wishes assistance. The listing agent can even offer some advice to the buyer.
However, the listing agent should never do anything that violates the specific duties owed to the client (the seller). Barring extenuating circumstances such as a previous relationship with this unrepresented buyer, there is rarely a need to revert to facilitator or transaction broker. In fact, it is extremely dangerous to do so.
The listing agent already possesses confidential information about one party in the transaction. Suddenly disavowing that knowledge (as you are effectively doing by changing status) doesn’t make it true.
Sadly, the only reason we ever hear from an agent wishing to revert to facilitator is usually following by words such as “…so I can get the entire commission.” Oh, how dangerous a pattern we tread sometimes. This attitude shows a lack of understanding of agency law and the relationships involved, which usually points back to a lack of training.
In the end, it all boils down to awareness and training. Frankly, all we can do as brokers is just that: train, coach, counsel and then train some more.
Admittedly, this is challenging within an independent-contractor environment. This is especially more difficult with all the noise going on in an agent’s world. All we can do, though, is keep hammering on it in the belief that eventually some of what we preach will filter through.
Brokers, if you remain unaware and unprepared, your agents will remain so, as well. How you run your business is, well, your business. But keep in mind that the professional practitioners out here will indeed embrace this knowledge and consequently enlarge their share of the market. And probably to your detriment.
Those who fail to prepare are preparing to fail. We are facing a time of winnowing out those who lack business acumen and a true desire for success. For the rest of us, it represents the opportunity of a lifetime.
Phillip Cantrell is the CEO of Benchmark Realty LLC based in Franklin, Tennessee and the executive vice president of Strategy for United Real Estate.