Six weeks after historic rules changed nationwide on how real estate agents are paid commission, an Orange County based broker with nearly four decades of experience sat down with Siyamak Khorrami, host of EpochTV’s California Insider, to explain the changes and how he thinks they will affect the industry for the better.
The issue comes after a landmark class-action lawsuit—filed by a handful of home sellers, and on behalf of others—against the National Association of Realtors, the largest trade association in the country. The suit—heard in U.S. District Court, Western District of Missouri—alleged the rules on how agent commissions were transacted violated antitrust laws.
The 1.5 million-member association agreed to settle the case in March, paying $418 million in damages and agreeing to historic changes in how agent commissions are transacted, the biggest change for the industry in decades.
Previously, the amount of commission a buyer’s agent would receive was advertised by the seller’s agent on what’s known as the Multiple Listing Service, along with details of the property for sale. The amount was decided by that same agent—typically 5 percent or 6 percent of the sale price of a home—which, upon closure of a deal, was split between that agent and the buyer’s agent.
But a Kansas City, Missouri, eight-member jury unanimously determined such a set-up was artificially keeping home prices high as commission fees for both agents—typically in the tens of thousands of dollars, in some cases more—were mostly baked into listing prices.
Now, since the terms of the settlement went into effect Aug. 17, the seller is off the hook for the buyer’s agent’s commission. Instead, the buyer now must negotiate with their agent on a fee cap—and sign an agreement for such—before touring a property the first time.
Michael Hickman, president and CEO of Tustin, California-based Seven Gables Real Estate, said he welcomed the new rules but has seen some pushback from buyers.
“I think some buyers are balking at it,” he said.
Some may feel it’s too much of a commitment to sign such an agreement just to see a home. And others, he said, may be cash-poor after coming up with a down payment, or unable to finance any additional fees to pay their agent.
But even with the new rules, the buyer can still ask the seller to pay their agent’s commission, just like before.
The upshot: The buyer decides under the new rules and everything is negotiable, Hickman said.
If a seller declines, the buyer could try to purchase the property without agent representation. But as one can imagine—and Hickman confirmed—that entails a steep learning curve, extensive paperwork, and strict timelines.
It’s too early to tell how the new rules will play out, but Hickman predicts ultimately they will prove beneficial to the buyer.
Now, a buyer’s agent’s fee is no longer a given. They have to earn it, he said.
“We’re hearing about things that are happening … so that we can perform better [as an industry] and do better in the consumer’s eyes,” he said.
He added that the new rules might create new payment models, such as a buyer paying their agent an hourly rate or a flat fee for services.
“It’s just easier for some people to say, this is what I am willing to pay: This much money, not a percentage,” he said.
When queried by Khorrami if he hopes the new rules shake up the industry, Hickman, who has a staff of about 500 agents across multiple offices, said he hoped so.
“You didn’t expect that answer,” he said. “But here’s why. … Buyers like it because they now know what’s going on.”
Previously, he said, everything was decided without their input or knowledge. Now, the buyer has more power and leverage.
Additionally, an agent will now have to prove what they are worth, Hickman said. Some have decades of knowledge and experience while others are new to the profession, and yet under the old rules—where commissions of 2.5 percent or 3 percent were perfunctory—no matter the skill level, they were both getting paid the same.
“In what industry does that make sense?” he said. “When you look at it from a consumer standpoint … the consumer’s the one that should win.”
He said that already the “level of professionalism has stepped up in the industry,” and predicted that those who can’t keep up with the changes or articulate their value to a client—as many as 20 percent or 30 percent of realtors in the national association today, he said—will lose business and leave.
“There’s the haves in terms of knowledge and the have-nots,” he said. “And I think the benefit of this, without a doubt, is the consumer.”
