By Don DeBat

9-Sep-24 – Real estate brokers in Chicago and across the nation are scrambling to decipher a new playbook for earning brokerage commissions, following a multi-million-dollar settlement.

Resolving claims over broker commissions, the Chicago-based National Association of Realtors (NAR) has agreed to pay a fine of $418 million over four years and implement rules that ensure agents’ commissions are negotiable. In the settlement, NAR did not admit wrongdoing.

The settlement ends litigation in Missouri that last year brought a staggering $1.8 billion verdict against NAR that could have been tripled under U.S. antitrust laws.

Plaintiffs in the Missouri case alleged NAR’s rules for placing homes on various multiple listing service (MLS) platforms, in effect, fixed commissions at high rates, and discouraged sellers from seeking better terms.

Broker commissions are typically paid by home sellers. Commissions are often in the range of 5 to 6 percent. That’s $20,000 or more on the sale of a $400,000 home. When a buyer is represented by his or her own real estate agent, the seller’s agent usually agrees to split a portion of the commission with the buyer’s agent.

Historically, compensation offers have been listed on the MLS, but the settlement will forbid this practice, which Realtors have used since the 1920s or earlier. For example, in 1923, the chair of the National Association of Real Estate Boards (NAR’s precursor) Committee on Commissions claimed that the Chicago broker’s association had used a commission schedule for more than 40 years.

Critics say individual sellers often feel powerless to negotiate a better deal for themselves because of the risk that offering lower commissions may cause brokers to steer buyers to other properties offering higher rates of compensation.

Long-term effect could be lower commissions

Considering NAR is the biggest Congressional lobbyist group in the nation, the court action truly is a landmark.

Stephen Brobeck, Senior Fellow at the Consumer Federation of America, predicted that the NAR court action would eventually lower agent commissions and help align compensation with services rendered.

“Increasingly, compensation will reflect agent competence, experience, and the effect they make on a sale,” said Brobeck (left), who noted that the impact of the court action may take years to be felt.

“This agent commission change is long overdue,” said Gold Coast buyer broker Sara Benson, CRB, ABR, and president of Chicago-based Benson Stanley Realty. “Personally, I find the practice of a listing agent dictating the buyer agent’s compensation disconcerting at best – and indefensible at worst.”

In response to an invitation to participate in a recent NAR discussion on the settlement, Benson, one of the first exclusive buyer brokers in Illinois, told the group via email: “I’ve been waiting 30 years for this change. As an exclusive buyer’s broker, these changes are thrilling. Finally, buyer agents will no longer be enslaved to the listing agent’s ‘offer of compensation.’”

For decades, Benson noted that listing agents have been incessantly “chiseling” the offer of buyer broker compensation.

“Rarely is the commission split 50/50 between brokers,” said Benson (right). “In many parts of Wisconsin, buyer’s agents frequently receive a mere 35 percent of the total commission, with the seller’s agent taking the lion’s share of the meat. Many home sellers are completely unaware of the inequalities in brokerage compensation.”

In Chicago, Benson noted that prior to the settlement, some listing agents were “offering” only 33 percent – or less – to buyer’s agents, and publishing that commission in the MLS.

For the buyer’s agent to meddle with the commission structure would have generally been considered contract interference and prohibited by NAR.

“Under the NAR settlement, buyer agents finally will be empowered to set their own rates and get paid what they are worth,” Benson said.

Check out experience and designations when selecting a buyer agent

So, how does a home buyer find a good buyer’s agent, who may be worth even more than their commission? First, check out the buyer broker’s education, usually outlined in the professional designations earned, along with years of service and experience.

Is the broker a Certified Real Estate Brokerage Manager (CRB), the highest level of professional achievement in real estate brokerage?

Ask if the broker is a designated Accredited Buyers Representative (ABR), a Graduate of the Realtor Institute (GRI), or a Certified Real Estate Specialist (CRS).

“Some successful realty agents boast about their top-ranked annual sales volume,” Benson said. “However, these agents can be the most risky for the consumer because they may often have the lowest ethical standards.”

According to Benson, while the seller’s agent may photograph the property, list the home in the MLS, and host open houses, the buyer’s agent is responsible for most of the home-buying expenses, pre-buying research, and field work, outlined below:

Pre-buying activities. In addition to boundless hours of consultation, buyer brokers secure pre-approval letters, conduct limitless property research and market analysis, and check real estate tax records.

Detective work in condominium buying often involves research on a building’s finances and the risk of a potential special assessment, which could cost an unwary buyer $10,000 to $50,000 or more in the first few years of ownership.

Field work outside the office. Once the property is targeted, the buyer broker schedules and sets up showings, gases-up their car, and takes the buyer on what could be dozens of property showings.

Property targeting. When a suitable property is targeted, the buyer broker develops negotiation strategies, sets up and attends inspections, and gathers repair estimates.

Contract stage. The buyer broker also prepares the purchase contract, presents the offer, conducts negotiations, attends the final walk-throughs, and at post-closing does buyer handholding, especially if there are additional questions or concerns.

“The sheer worth of a good buyer broker’s networks is invaluable,” Benson noted. “Agents often have private access to properties not even publicly listed on the internet. Despite all of this, the listing agent dictates their compensation? I applaud the decoupling of commissions.”

A study for a major telephone carrier of 232 corporate relocations over one year found exclusive buyer brokers secured homes at 91 percent of the asking price, compared with 96.5 percent of the asking price secured by traditional brokers.

“That’s a full 5.5 percent spread – or a buyer savings of $22,000 on a $400,000 home,” said Benson.

According to Benson, the fall-through rate of “For-Sale-By-Owner” contracts – without a professional broker’s guidance – is a whopping 80 percent. And first-time buyers who think their real estate attorney will provide the services and expertise of an experienced buyer’s agent, she says, are sadly mistaken.

“Attorneys never even set foot on the property. They aren’t familiar enough with the real estate landscape to provide a competitive market analysis because they don’t have the data or the knowledge,” said Benson. “Attorneys aren’t familiar with school districts and neighborhood boundaries. They often select title companies in which they have ‘affiliated business arrangements’ for their own profit.”

Benson hopes now that the NAR decision has been enacted, it might just get rid of the morally questionable practice of “double dipping” – acting as a “dual agent” – the dirtiest little secret in the real estate industry.

A dual agent is a broker who “represents” both the buyer and the seller in the same transaction. However, a dual agent cannot fully represent either party. It is illegal not to disclose the dual-agency relationship. There is an inherent conflict of interest because the seller wants the highest price and the buyer wants the lowest price.

Dual agency benefits the real estate agent at a high cost to the consumer. Currently, dual agency is banned in eight U.S. states. It’s the number one reason agents are sued.

“Savvy buyers who continue to seek professional buyer broker guidance will get the full and undivided representation which they pay for and deserve,” Benson noted. “And buyers should be prepared to sign an agreement to receive the full range of benefits an exclusive buyer broker can offer.”