Editor’s note: This is the first in a series of articles that will explore the effects of the landmark Sitzer/Burnett case, which was decided on Oct. 31, 2023, and has since reshaped the business practices for real estate brokerages and agents across the country.
In the year since a Missouri jury found the real estate industry liable for colluding to artificially inflate agent commissions, a lot has changed — including all of the defendants in the trial settling — but much remains the same.
One constant has been questions over agent commissions, which were at the center of the legal battle. One year has passed since the trial, but no clear answer has emerged.
Many in the real estate industry expect commissions to trend down due to the business practice changes outlined in the National Association of Realtors’ (NAR) settlement agreement.
“We’ve seen consistent survey data over the last few months that show 50% or more of agents expect buyer agent commissions to decline in the wake of the various practice changes, including roughly one-third of agents that expect the decline to be 50 bps or more,“ Ryan Tomasello, an analyst at Keefe, Bruyette & Woods, wrote in a note distributed on Aug. 17.
“Consumer awareness is the other, equally important, half of this potentially self-fulfilling prophecy. If both agents and consumers anticipate that commissions will decline, that belief could lead to reality, in our view.”
But in the two months since the business practice changes went into effect, agents and brokers have reported conflicting trends.
“I think, at some point, I am going to want to send attorney [Michael] Ketchmark a thank-you note, because my agents are getting much higher fees than when they were compensated by whatever the listing side decided was a fair fee,” Andy Smith, the broker-owner of Badger Peabody & Smith, said in September at a conference hosted by the New Hampshire Association of Realtors.
“The agents also weren’t talking to buyers before about what they are worth. Across the board, I am seeing higher buyer agency fees coming in, and buyers are happy to pay them because they see and understand the work their agent is doing for them.”
But other broker-owners, even those who operate in some of the same areas at Smith’s firm, are seeing something different.
“I’m seeing lower fees because a lot of agents who aren’t strong, in order to get a buyer to sign on with them, they are lowering their cost,” Linda O’Koniewski, the broker-owner of Leading Edge Real Estate, said in August.
On the other side of the country, Brian Huskey, the broker-owner of Montana-based ERA American Real Estate, said he saw commission compression begin even before the business practice changes went into effect in mid-August.
“Traditionally we were seeing commissions here in the 5% to 6% range, but now it is more like 4.5% to 5.5% for a total for both sides of the transaction,” Huskey said.
The data backs up Huskey’s observations. According to Redfin, a month prior to the business practice changes going into effect, the typical American home seller paid a 2.55% commission to their buyer’s broker during the four-week period ending July 14. That was down from an average of 2.62% during the four-week period ending Jan. 28.
More recent data collected by The Real Brokerage shows a similar trend. Real surveyed roughly 300 of its agents across North America between Aug. 30 and Sept. 15.
Slightly less than half of agents reported that they expect to earn commissions between 2.6% and 3%, down from 57% prior to the going into effect in August. Another 10% anticipated commissions in the range of 1.6% to 2%, up from a 3% share prior to the changes.
But the data also showed that for more than half (55%) of the firm’s agents with sellers offering buy-side compensation, the compensation was 2.5% or more. Additionally, 30% of agents reported that sellers were offering some level of compensation below that.
Data from real estate technology firm Clever Real Estate contains similar findings. The firm conducted a survey of 516 real estate agents in late August and early September. It found that listing agents hope to have their seller offer an average of 2.6% in buyer’s agent compensation, down 0.13% from the average prior to the advent of business practice changes.
On the buy side, the report found that 55% of the surveyed agents said that 2% would be the lowest rate they would accept. But buyer’s agents also said they would accept a lower-than-average commission if a homeowner has multiple properties to sell (47%), the homeowner also plans to buy with them (47%) or there is high competition for clients (44%).
Although there is some discrepancy among brokers about how much their agents are earning, most say that sellers are still willing to offer some level of buyer broker compensation.
“Our agents are telling us that the vast majority of seller are open to paying or all of the buyer broker compensation,” said Sharran Srivatsaa, the president of The Real Brokerage. “But it comes down to the offer. Now it is one more term that is being negotiated. So, as long as it works for the seller and the net (profit) they want to walk away with, then agents say they are willing to cover it for buyers.”
In addition to concerns about net price, brokers say sellers are also considering the relative strength of their housing market when thinking about buyer broker compensation offers.
“Sometimes we are seeing deals where the seller pays, sometimes it is the buyer and sometimes it a combination of both,” said Christina Pappas, the president of Florida-based brokerage The Keyes Co. “We are seeing all sorts of variations, and it really is a function of supply and demand.
“In the markets where we have high supply, we typically see more sellers offering compensation. And when you have low supply and high demand, the buyers are having to come out of pocket more.”
Across the country in San Diego, Melissa Sofia — leader of the Side-backed firm The Avenue Home Collective — agrees that the market is one of the driving factors when it comes to determining whether sellers are willing to offer a commission.
“Right now, in San Diego, it is a very clear buyer’s market,” Sofia said. “Homes are sitting. You are seeing price reductions, and things that should sell quickly and easily are, quite frankly, seeing extended market times and lower prices. So, in a market such as this, we are seeing sellers more than happy to pay compensation to pay buyer’s agents or give buyers concessions in general.”
As the industry heads into the second year after the Sitzer/Burnett verdict, agents are unsure of exactly what to expect when it comes to their commissions. But many, like Sofia, expect the strength of the market to play a significant role in their earnings.
In my two brokerages I am seeing a slight overall downtrend in commissions but nothing signicant yet. More important I believe is the fact that we are in a classic supply/demand industry. I agree with Ms. Pappas/Ms. Sofia that commissions going forward will be more based on what market we are in so we will see commissions go up/down from either side depending on demand.
Rick — That’s a really smart point on the supply/demand influence on commissions. The state of commissions today may be less driven by the outcome of the trial and more driven by the where we are in the market cycle. This will be an important and interesting metric to track in a chart in relation to supply/demand metrics.
I am also on the bandwagon to thank Michael Ketchmark. Our brokerage always used exclusive buyer representation agreements and got them signed at the time of consultation. I can’t say all of our 2,300 agents did that but the ones I trained did. With that said, since the settlement buyer’s agents are no longer at the mercy of the MLS stated guaranteed compensation, or put more approriately, whatever the listing agent decided to dole out. My buyers agents are now commanding 3.0%+ because the settlement allowed them the opportunity to redefine the expanded package of brokerage services they deliver and their correlating value proposition. Similarly, my agents when listing are commanding 3.5% because we are a full service brokerage with the best trainined agents in the greater Chicagoland market and we don’t cut corners. The only true obstacle is agents believing in themselves. Although I agree that enhanced transparency is always a good thing, the settlement ended up hurting low income and first time buyers as well as irritated many sellers who don’t want to be told how or where they can offer incentives to drive buyers to their homes. And, ultimately, the market drives demand and commissions (for the best agents) will align with an agent’s skillset and ultimately track record of results. What truly needs to be addressed in our industry has nothing to do with compensation but instead to competence. The bar to entry in our industry needs to be drastically re-examined and overhauled.