By: Miles G. Michaud
Until the 1990s the residential real estate world ran on a sub-agency model. Sellers of real estate signed listing agreements with a single broker to advertise their property and find a buyer. The broker held open houses, placed signs, and listed the property on the Multiple Listing Service (“MLS”). Oftentimes the broker would also use agents to find a buyer. If successful, the broker paid the agent a finder’s fee, which was typically half the total commission. These middlemen were called “sub-agents”.
Today in Massachusetts commissions on residential real estate are typically four to six percent of the purchase price. Five percent is the norm. However, it’s not common for brokers to pay sub-agents finder’s fees. Since the implementation of the “Buyer-Broker Commission Rule” (“Rule”) by the National Association of Realtors (“NAR”), purchasers of real estate have regularly hired a broker of their own. The Rule requires listing brokers who post their property on online broker-affiliated MLS programs to offer compensation to buyer brokers. So, the buyer broker’s commission is paid directly by the seller. The seller’s broker no longer pays a finder’s fee to a sub-agent. Basically, a commission today now includes a fee to advise the buyer, and rates are now higher. However, the Rule was implemented to increase consumer protection.
Brokers who represent purchasers of real estate, called buyer brokers, offer protection and objective advice to their client through the purchasing process. Buyer brokers play an entirely different role from that of the sub-agent even though their job is to find a buyer for the seller. The buyer broker also serves as an independent advisor. He no longer owes a fiduciary duty to the seller. The implementation of the Rule not only encourages the brokers to look out for the best interests of both parties but greatly enhances consumer protection on the buy side. The Rule is especially important because buying a home is often the largest purchase of an individual’s life, and many people do not have prior experience in purchasing real estate.
Just this past month MLS Pin, a large organization of real estate brokers and owner of Pinergy, executed a settlement agreement with a class of Massachusetts homeowners in response to anti-trust allegations. The homeowners complained that MLS Pin and several national real estate brokerages conspired to artificially inflate broker commissions through the implementation of the Rule on Pinergy, an online MLS listing program. Pinergy requires its sellers to offer a flat commission to any buyer broker who is also a member of the service. The rate is advertised as “cooperating compensation” on the listing and visible to any broker with a Pinergy account. Yet, the amount is not observable to the customer. The homeowners primarily allege that because Pinergy requires its sellers to offer cooperating compensation, commission rates are maintained at an artificially high rate.
Inflation is readily observable when buyer brokers encourage their client’s interest towards those properties that offer higher commission rates and away from those who offer less. In the industry this practice is known as “steering”. The homeowners allege this to be the root cause of the inflation. Essentially, they allege that because Pinergy requires its sellers to offer a buyer broker commission to post on their platform, rates are higher than they would be otherwise. The most convincing of the evidence offered by the homeowners is the fact that broker commissions have remained largely unchanged despite the drastic increase in property values. However, attributing the cause to the Rule does not consider other market forces.
Today, almost all purchasers search for their prospective home on websites such as Zillow or Trulia. Buyers do not rely on brokers or sub-agents to find them properties anymore. They would much rather do it on the couch. More often than not, buyers tell their broker about properties they are interested in. Not the other way around. In fact, Zillow will regularly connect its customers with local buyer brokers when they are browsing a specific property. Although, Zillow and like websites don’t have access to customer-facing commission rate information. Thus it is not part of the equation for the residential purchaser, so steering is not common or good for business anymore.
The technologization of the market has affected commissions on the broker side as well. Widespread usage of broker sites like Pinergy has created norms. Modern brokers have access to more information than ever before, and commission rates are simply part of the access. Brokers now have access to information regarding thousands of properties whereas prior to the invention of real estate technologies, they were only familiar with their local market – let alone commission rates. Brokers know the commission rates on thousands of properties and so do their competitors. This has contributed to stabilization, not inflation. The increase of information has forced brokers to keep their rates at the market to be competitive.
It is improbable that brokers and Pinergy have conspired to keep commission rates artificially high. Standardized rates are more likely attributed to the technologization of the residential market and departure from the sub-agency model. For example, the group of homeowners recently settled with MLS Pin and almost all of the money is going to their lawyers.
Student Bio: Miles is a second-year law student at Suffolk University Law School. He is a staff writer on the Journal of High Technology Law and member of the Real Estate/Trust & Estates Association. Miles received a Bachelor of Arts from Bates College in Lewiston, Maine.
Disclaimer: The views expressed in this blog are the views of the author alone and do not represent the views of JHTL or Suffolk University Law School.
