Many in the real estate industry are still reeling from the changes to how commissions are expected to be paid to agents. These new guidelines set forth by the National Association of Realtors (NAR) caused a major disruption to the long-practiced standards for paying commissions, resulting in brokerages having to immediately pivot their commission practices to stay compliant.
Aside from agent compensation implications, another big change in the industry was how MLS operates and the information that they are allowed to include in each listing.
With these drastic and immediate changes, we hope to provide some clarity on what this means to the industry. In this article we’ll define MLS, discuss what to expect with these changes, who is responsible for buyer agent commissions, and the new standards for compliance.
What is MLS?
Multiple listing service (MLS) is a database that congregates all listing data of homes for sale in a given geographical region. When a property is listed for sale, a licensed real estate agent will add the home to the MLS database to facilitate the home sale by providing exposure to agents in the region.
Effectively, MLS enables listing agents to promote their listing, while streamlining the accessibility of available property inventory in a region for agents representing home buyers.
The MLS will contain all the usual property information that you would expect to find on a platform like Zillow or Redfin, however, because an MLS is a private database that is exclusively accessible to contributing brokers and agents, it will often contain listings that would otherwise not be listed on public-facing real estate sites.
What Caused the Changes to Agent Commissions?
In October of 2023, the NAR – the largest trade association in the United States for real estate professionals – went to court as a result of a federal lawsuit that alleged large brokerages were intentionally inflating realtor’s commissions.
Eventually, after months of negotiations, the NAR settled out-of-court and agreed to pay $418 million in damages as well as implement new policies for structuring how commissions are paid to both their own agent and the buyer’s agent. Though the final court date for the lawsuit isn’t expected until November, the NAR’s new policies for commissions went into effect August 17, 2024.
What to Expect from These Changes?
Prior to the lawsuit, the responsibility for paying commissions – regardless of whether it was the selling or buying agent – fell to the home seller. This allowed agent commissions to become inflated because there was less incentive to negotiate sale price, which essentially enabled agents to operate based on their own interests instead of what was in the best interest for their client.
The changes that were implemented in August of this year completely changed this. Instead of home sellers being forced to pay both the buying and selling agent commissions by default, they do not automatically assume the responsibility. Some home sellers may still opt to cover the buyer agent’s commission to increase visibility to their property or to expand their pool of buyers, but if not, it is on the buyer to cover the cost of their agent.
While the industry has always claimed that agent fees are negotiable, it has not always been common practice. This recent ruling requires that commission fees are negotiated and included in written agreements with the buyer and the buying agent before even touring a house.
Another key point from this ruling is that if a home seller chooses to cover the cost of the buying agent, the compensation amount is not allowed to be included on the MLS listing. This is to ensure that buying agents aren’t cherry picking listings purely based on the commission rate, which will prompt agents to choose listings that best fit their client’s unique priorities.
Who will Pay Buying Agent Commissions Under New Ruling?
There’s no doubt that this ruling has caused uncertainty among industry professionals. Nearly two-thirds of real estate agents have opposed this change, with 86% saying that they believe that this will cause agents to leave the industry.
While there will certainly be an adjustment period for agents and buyers alike, this does not by any means imply that buying agents will not be compensated for their efforts.
As mentioned above, there are still advantages to home sellers covering the costs of buyer agent commissions. In many situations, this will probably remain the standard because sellers will gain greater marketing for their property, a wider pool of buyers, and likely an expedited sale timeframe.
However, even if the seller of the property is not willing to cover the buying agent fees, this allows buyers more flexibility towards negotiating a lower sales cost, which allows them a bit more financial leeway to cover the cost of their agent.
Finally, if the seller does not agree to cover the cost and the buyer is unable to afford it, buyers may receive a portion of the listing agent’s commission.
How to Stay Compliant with New Ruling
We discussed what to expect as a result of these changes above, but ultimately, the biggest factors for compliance with these new standards include:
- An MLS can no longer display commission offers.
- An MLS can’t circumvent policy changes by providing compensation details through channels like an aggregator’s website.
- Agents must have a written agreement with the buyer in place before touring homes.
- An agent’s commission must be clearly defined, and the negotiability of compensation has to be properly communicated to clients.
- Agents are not allowed to filter listings based on buyer agent commissions.
- Education materials regarding these new practices must be readily available to consumers for transparency.
Implement Commission Plan Changes Easily with Core
This ruling only went into effect in August of this year, so we are still learning how much this will impact commissions going forward, but one thing is for certain: it adds a layer of complexity to administering commissions to agents.
Commissions may no longer remain a somewhat static percentage of the sale price, buyers may instead be able to negotiate a fixed rate, meaning each home sale will be a different commission structure. It will also make tracking client payments more complicated as there may be different sources or methods for paying out an agent’s commissions with each sale.
Ensuring compliance with these new standards is likely already adding to the burden of your administrative team, but the changes to how you process commissions should not. Simplify your team’s compensation with Core Commissions. Core’s flexible solution allows you to easily manage multiple different commission structures and rules at once, so you don’t have to reinvent the wheel with every sale. Additionally, payment tracking is easy with our dynamic integration options.
When making changes to your commission plan, Core’s rule versioning feature allows you to be able to update rules easily while maintaining proper linkage to reports and other output, making transitions seamless while recording a history of changes over time. Agents can also be given access to view their comprehensive pay details to help them better understand their income as these changes come into play.
Contact us or schedule a free demo to see how Core can automate commissions for your brokerage.