Even before a ruling in the first of two landmark lawsuits over residential broker commissions derailed the real estate industry this fall, Laura Ellis was preparing for a new standard.
Ellis, president of residential sales and chief strategy officer for Chicago-based brokerage Baird & Warner, said the firm was already tweaking how it manages relationships with buyers, whose agents were at the center of the court case because their commissions are often paid by sellers.
Then came the liable verdict in the Sitzer-Burnett class action lawsuit, awarding the plaintiffs, a group of Missouri home sellers, $1.8 billion, which could be trebled to more than $5 billion. The plaintiffs sued the National Association of Realtors and a group of brokerages, alleging that they colluded to keep agent commissions high. A wave of copycat lawsuits have been filed across the country since the verdict.
Changes in how commissions are paid, at Baird and brokerages across the country, are likely to be scrutinized and perhaps necessitated as the real estate business model faces legal challenges.
Ellis spoke to The Real Deal about the verdict and how consumer behavior is changing.
This interview has been edited and condensed for clarity.
It’s been over a month since the verdict. What do you think?
The industry as a whole didn’t really approach working with buyers in the same fashion that they approach working with sellers.
When we go out and list a seller’s home for sale, we do an in-depth presentation. We do a market evaluation for that seller, we get a signed contract that promises us compensation when we sell the house. The idea of working with a buyer that way is a little bit foreign.
These cases are telling me that consumer behavior is changing. And frankly, I think it’s about time.
What advice are you offering agents?
At its heart, this verdict is really about transparency.
For forever, the commission showed up as the seller’s expense, on the seller’s side of the closing statement. But the commissions are paid out of the money that the buyer brings to the table. It’s arguable who’s really paying the commission. We just have to be really clear with our buyers that they are, in fact, paying us a commission and this is how it’s funded, and what we’re doing to earn the money. That’s a very fair thing for buyers to want to know.
There’s debate right now on whether this marks the end of the buyer’s agent as a concept. And it sounds like you’re saying no. Why not?
Buyer’s agents aren’t going anywhere. I worry that some people, because they may have a bad experience with an agent, feel that agents bring no value. Then they feel that they can just go directly to the seller’s agent. They’re certainly free to do that.
Here’s the problem with that: the listing agent works for the seller, their fiduciary responsibilities are 100% to the seller’s best interests. So a buyer is welcome to go it alone but they’re not going to get the professional guidance, the negotiation skills, the ability to really do a number of things that’s going to help get a buyer safely through that transaction.
What recent changes in the Chicago market account for these new consumer preferences?
At Baird & Warner, our listing agreements have sellers agree to pay a total commission, and then we differentiate how much of that commission is going to us as the listing broker and how much we’re offering to the buyer’s agent though the MLS. The most recent change in the MLS is that zero can be offered out to the buyer’s agent. Every seller that we talk to, we say “this is what we charge for the list side, now we have to decide what you’re going to pay on the buyer side.”
How do listing brokers react when a seller considers offering no commission to the buyer’s side?
We haven’t had any sellers refuse to pay the buyer commission. Will we someday? Yeah, maybe.
We have had some sellers ask us, “Do I have to pay a buyer commission?” And of course the answer is unequivocally no. However, we then tell them why it may be in their best interest to pay the buyer commission. There may be buyers out there who don’t have the extra money to pay their buyer broker on their own, and those buyers may choose to not look at your home or not work with you.
Once the dust settles on the verdict and other litigation, do you see sellers offering to pay buyer commissions as a way to bring more attention to a listing?
Yes, to expose their home to more potential buyers. Because we didn’t know we didn’t know how the public was going to react to the verdict, we also have a significant number of our agents that are only working on the buyer representation agreements with their buyers under the promise that they’ll be compensated. And those agents are saying to the buyer that for all the services I’m going to do, all the way through closing, this is what you’re going to pay.
But in the majority of situations it’s going to be paid through the transaction. If there are properties that aren’t going to offer to pay the buyer’s agent, the agent will let the client know because then you can pay the agent or you can ask the seller to pay with a closing cost credit. We can figure that out. But the agent should keep the client informed and you can make these decisions along the way.
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