Photo courtesy of Realty Concepts

Much has been made of the recent changes that altered the longstanding compensation model of the residential real estate industry. Some of the reporting has been sound – some less than sound. Tellingly, though, there has been alarmingly little ink or airtime given to actual real estate practitioners who are closest to the story.

There’s a reason for this: the closer you get to the actual story, the less salacious it becomes – and the less salacious it becomes, the fewer clicks and views it generates.

Here are the – rather dry and less exciting – facts:

For decades, real estate listing Brokerages – that is, the company that represents the seller of a home – have collected commissions directly from the seller. The listing Brokerage would then contract with the seller upfront to share a portion of that total commission with the Brokerage that represented the buyers of the home. More often than not, the listing Brokerage shared half of the total commission, although it wasn’t uncommon for a listing Brokerage to keep a bit more or a bit less than half. The portion of the commission that would be shared with the buyer’s Broker was published on a multiple listing service, which was the industry standard that real estate professionals used to search for homes for their clients.

Everything was negotiable, agreed to before the home was publicly marketed, and provided certainty for all four parties involved in a transaction (seller, buyer, seller’s Broker, and buyer’s Broker).

The business model faced regulatory scrutiny dating back to the early 2000s. Admittedly, it was unique – but the residential real estate industry is unique. Competing Brokerages must work together to find workable solutions for their clients so that homes can transfer from one party to another in an organized and lawful manner. Alas, regardless of the rationality of the end goal, the notion that competitors might “work together” was objectionable to the courts. In October of 2023, major industry players lost a major lawsuit, copycat lawsuits followed, and in order to settle the issue, the National Association of Realtors came to an agreement with the United States Department of Justice to institute business practice changes.

Of these changes, two stand out as being especially new and noteworthy and consumer facing:

First, Brokerages are no longer able to list a commission offered to a buyer’s Broker on the MLS.

Second, Buyers must sign a representation agreement with their Agent prior to viewing homes. The agreement must be for a predetermined length of time and it must stipulate the services that the Agent will provide and the amount of pay the Agent will receive upon the successful close of escrow.

The new system will be a bit more cumbersome and have a few more negotiation inflection points than the seamless system that existed before.

Now, prior to looking at homes, a buyer’s Agent must discuss his or her compensation and come to an agreement with the buyer prior to looking at homes. If a buyer does not have the money to pay an Agent, the buyer must tell that to the Agent upfront so that the Agent can ask for the seller to pay for his or her compensation in every offer.

When writing offers, Agents must ask – or not ask, depending on their agreement with their buyer about how the buyer’s agent is to be paid – for the seller to satisfy the terms of the buyer’s agreement to pay the Agent. Thus what was previously a non-negotiable offer of compensation through the MLS is now a part of the negotiation process between the buyer and seller.

These changes will cause some short term disruption and confusion to the way that buyers look for homes, offers are written, and Agents are compensated. In the long run, though, like every other business practice change across every industry since time immemorial, all of this newness will feel like the status quo.

I’ve often been asked in recent weeks how I think this will end up playing out in the real world. The truth is that there are countless iterations of what our business might look like moving forward. I think that what is most likely is that the vast majority of buyers will not have sufficient cash reserves to pay their Agent at a rate commensurate with the value that the Agent brings to the transaction. Since all buyers will be subject to the terms of their negotiated representation agreements, and since few buyers will have sufficient cash to satisfy those terms, sellers will likely pay buyers’ agents’ commissions, which will be negotiated through the purchase contract. In short, it will feel similar to how it has always felt, but with more negotiation between the start line and the finish line.

This is a positive for all involved, as it will allow the best Agents to thrive and it will penalize Agents who are not adding value to their clients’ transactions.

There is very little that is certain about what the real estate industry will look like moving forward. What is certain, though, is that the best real estate practitioners will continue to command reasonable pay for their loyalty, confidentiality, disclosure, obedience, care diligence, skill, expertise, and time.

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J.P. Shamshoian is the Owner and CEO of Realty Concepts, the Valley’s largest real estate firm.