The History of Real Estate Fees

Watershed changes in Washington State Real Estate Agency Law went into effect on January 1, 2024.  Evolution Real Estate responded to these changes with a bold initiative significantly reducing client fees. What follows is a summary of the reasons behind the changes and why they’re important.

Residential Real Estate commissions and fees have made headlines recently due to the  success of the bombshell $1.8 billion+ Sitzer/Burnett class-action lawsuit. This lawsuit, filed in Kansas CIty, Missouri in 2019, is part of 14+ class-action civil lawsuits targeting the National Association of Realtors® (NAR) and large regional and national real estate firms. Less well-known but perhaps more important are the antitrust investigations by the Department of Justice (DOJ) and the Federal Trade Commission (FTC). The suits and investigations center around the 100-year-old “bundled” or “cooperative” commissions system used in the US and Canada and the restriction of commission rate competition in the real estate brokerage industry. 

The history of real estate fees and the National Association of Realtors® are inextricably linked. 

Originally called the National Association of Real Estate Exchanges, the NAR was founded in Chicago in 1908, with an aim  “to unite the real estate men of America for the purpose of effectively exerting a combined influence upon matters affecting real estate interests.” (https://www.nar.realtor/about-nar/history).   From the beginning of real-estate agency (1870s) until the mid 1990s all agents and firms represented only the seller, who paid the real estate commission.  Around the turn of the 20th century, in order to reach more buyers, different firms began grouping together into local and regional real estate exchanges. These exchanges included commission-sharing agreements whereby the commission was split between the listing firm and the firm that brought the buyer. Over the years, these commission sharing arrangements became the  “bundled” or “cooperative” commission system that is one of the targets of the lawsuits and DOJ/FTC actions.

The early 20th century real estate exchanges developed into the ubiquitous Multiple Listing Services (MLSs) we use today. MLSs are privately owned databases populated with information contributed by individual firms. Washington State is unique in that our largest MLS, the Northwest Multiple Listing Service, is not controlled by the NAR. Directly or indirectly, the NAR controls virtually all the MLSs nationwide, developing and overseeing policy at the state and national levels which is then implemented at the local level. MLSs create efficient markets and are essential to bringing buyers and sellers together. MLSs can be egalitarian. For example, the firms with the highest volume of transactions control no more than about 10% of the data in a given MLS. That is to say that MLSs are not inherently monopolistic. However, over the years there have been numerous DOJ and FTC antitrust actions against regional MLSs. For example, until the late 60s the NAR published commission rate requirements imposed on member MLSs. The type of contracts between sellers and firms were also prescribed.

In the bundled or cooperative commission system, the seller pays the listing firm a commission which in turn is split with the buyer-broker firm. The commission  rate is 5-6% regardless of location or transaction complexity. In Kitsap County, the typical seller fee is $25,000-$30,000.

The Buyer and Seller class action lawsuits focus on the following: 1. Sellers are required to compensate the broker who is advocating against their interests (for example, by trying to bring the price down for the buyer). 2. Antitrust issues arise because the NAR directly or indirectly controls the vast majority of Multiple Listing Services (MLSs). 3. Buyers allege that for decades they have been unwittingly overpaying for homes because the buyer-broker compensation is built into the price and they have no opportunity to negotiate compensation rates with their brokers.

The DOJ Antitrust Division and the FTC add these concerns:  1. The NAR promotes MLS policies which filter public internet access to listings based on the amount of buyer-broker compensation offered. (Lower commissions are filtered out.) 2.The NAR  has MLS policies which hide from the public the amount of seller-paid  buyer-broker compensation. 3. The practice of buyer brokers offering their services for “free” when in fact they are being compensated by the seller. 4. The practice of not allowing state-licensed non-MLS members to show and bring prospective buyers for homes listed on the NAR MLSs.

The Key Provision of the 2024 Washington Real Estate Law Revision

The revised statute essentially responds to each of the concerns outlined above. Previously,  real estate brokerage firms were required to enter into written agreements only with sellers. The Agency Law now requires firms to enter into a written “brokerage services agreement” with any party the firm represents, including buyers.

The service agreements must include 1.The term of the agreement; 2.The name of the broker appointed to be the buyer’s agent; 3. Whether the agency relationship is exclusive or non-exclusive; 4. Whether the buyer consents to the individual broker representing both the buyer and the seller in the same transaction (referred to as “limited dual agency”); 5. Whether the buyer consents to the broker’s designated broker/managing broker’s limited dual agency; 6. The amount the firm will be compensated and who will pay the compensation; 7. Any other agreements between the parties.

Other changes to the law provide additional consumer protections related to the duties owed by brokers to all parties in a transaction.

The Effect of the Revisions

The revisions allow real estate firms and brokers to compete on both price and service because broker compensation is now the responsibility of the buyer or seller. Both have the ability to negotiate the terms of broker compensation. The seller is not required to offer compensation to the buyer-broker firm. This is a tectonic shift in the real estate brokerage industry.  Also, the transparency resulting from  listing firms publishing the amount of buyer-broker compensation offered by sellers will help eliminate the steering of buyers and the filtering of properties. Finally, there is an opportunity and mechanism to negotiate compensation at the individual transaction level. As has always been the case, a buyer is not required to enter into an agency agreement to buy a property.

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