UPDATED: Everything You Need To Know About The Real Estate Commissions Lawsuit and San Carlos

If you are interested, confused, or just curious about the recent National Association of Realtors (NAR) settlement and what it means for real estate agent commissions on homes in San Carlos, you’ve come to the right place. There is a lot of blatantly false and sensationalized headlines floating around. None of which are remotely tethered to the reality of the settlement. The goal here is to break down the settlement in clear terms and interpret where the settlement will take us from here.

As with all of my articles, I always try and give a very balanced approach to my opinions. Some will say that I have a vested interest in a particular viewpoint on the matter, which I can certainly understand. That being said, I hope that you will see the effort in this article to truly examine all sides and see that the conclusions drawn are logical and supported by facts and principles of common sense. Finally, while this is a serious issue for our industry, I also believe agents such as myself cannot take ourselves too seriously. It is the perfect time for some introspection and to simply see how we can be better for our clients.

The NAR Settlement

NAR recently settled lawsuits filed across the country which awarded plaintiffs nearly $1.8B in damages. The genesis of these lawsuits alleged that listing agents essentially engaged in price-fixing, or keeping prices of homes artificially high by offering cooperating compensation in the amount of 2.5-3.0% via the MLS to the brokerage that represented the buyer. To break this down further, cooperating compensation is the portion of the listing commission that is split with the brokerage representing the buyer for a transaction. This amount, normally 2.5%, is offered via the MLS to indicate to buyer brokerages exactly how and what they will be paid for a successful close of escrow on the particular listing. Normally, when taking a listing in San Carlos, a listing agent will charge a 5% listing fee. 2.5% remains with the listing brokerage and 2.5% is offered as cooperating compensation.

The settlement reduced the amount owed to plaintiffs to $418M in damages, but more importantly, it also put forth two key changes to the home selling process for agents to follow:

• Agents must now have signed agreements with the buyers they are representing. Currently, only about 20% of agents have written agreements with their buyers. Further, the agreement must clearly state how much the agent will be paid and what circumstances trigger the amount due.
• Listing agents are no longer allowed to offer the cooperating compensation via the MLS. However, they can still offer it through other documentation, verbally, on their own website, or through an addendum submitted through the offer process by the buyer, which asks the seller to pay some or all of the buyer agent fees.

The Background

The cooperating compensation, or buyer-side agent commission, has been under fierce attack since the 1990s. Hundreds of companies have tried to build a discount business model that offered buyer agent services with a refund of a portion of the commission at the close of escrow. That effort was amplified over the last 15 years as the tech world put a bullseye on the residential real estate market, especially the buyer side portion of the commission. None of those companies managed to gain even a 1% market share in San Carlos after all of that time.

Back in 2003, I was an outsider to the real estate world, and I understood the thinking that the cooperating compensation seemed like it could be reduced and more efficiently put to use. At the time, I had a tremendous amount of trepidation of leaving my law practice to sell residential real estate. I saw agents as mostly nice people, but generally a little lazy, lacking in education and sophistication in many instances. I thought many were between careers and generally just looking to justify a somewhat professional existence. 20 years later, I have a vastly different opinion.

How Buyers Agents Really Work

When most buyers or outsiders look at the cooperating compensation, they envision an agent showing up to meet a buyer, writing up a contract with no contingencies, and three weeks later that agent is walking away with 2.5% of the sales price of the home. While this imagery works well for most articles you will read on the matter, the reality is something far different.

There is an old, light-hearted expression in real estate, “buyers are liars”. I am certainly not casting buyers as individuals who try to misrepresent their intentions to their agents, but for every 2.5 buyers a good agent works with, one will end up actually purchasing real estate. These are relationships that are fostered for months and sometimes years before a buyer actually makes a purchase, if at all. The hours involved for an agent on zooms, showing countless houses, losing on 5-10 offer presentations, conversations on the market, strategy, bringing in specialists for disclosures and working the oddest and most unpredictable hours imaginable are all part of the process. For all of that, you are doing well as an agent if 50% of your buyer clients actually end up purchasing a home at some point. So, when viewing the cooperating compensation within the context of a single purchase, it is understandable to view the compensation as a bit over-the-top. However, taking 1,000-foot view to see what is truly involved on these transactions yields an entirely different opinion.

Other key factors for consideration: the buyer’s agent does not keep 2.5% of the commission. That amount is subject to a split with the brokerage. Agents have assistants, transaction coordinators, MLS dues and insurance to pay before any portion of their check finds its way to them. Agents are 100% commission based. There is no salary from the brokerage. They are not eligible for any benefits or medical insurance and pay for all other expenses and taxes that come with being self-employed. Once a closing check has been passed through the gauntlet of participants, the agent is left with the remainder.

A few other facts that help round this description a bit further into form: There are roughly 22,000 agents in San Mateo County. Roughly 54% of them will not complete a single deal this year. The next 20% will complete 1-2 transactions. The top 26% will complete the remaining transactions.

The Impact of the NAR Settlement

The NAR Settlement went into effect on August 17, 2024. Now, we wait for a world of chaos and confusion. For a visual, if you have ever watched the battle scenes in Braveheart or Gladiator where there are hundreds of warriors fighting each other with swords and clubs with seemingly no real way of who is distinguishing who is actually on their side of the battle, I bring to you the second half of the 2024 San Carlos real estate market.

The good news is that the listing agent’s duties and commission structure remain largely unchanged, with a few exceptions that we will discuss below. However, buyer representations are about to be something similar to the Gunfight at the OK Corral.

The second half of 2024 will feature the following batting order of individuals and agents lining up to make offers on homes. While they are not exactly the Murderer’s Row of the 1927 Yankees, they will be at your front door, should your home be for sale:

1. Buyers represented by a traditional agent, compensated by either the buyer or the seller.
2. Buyers represented by an agent who will work for less than the traditional cooperating compensation.
3. Buyers represented by an attorney.
4. Buyers requesting the listing agent to represent them free of charge.
5. Buyers represented by a flat-fee agent of $5,000.
6. Buyers represented by a flat-fee agent of $1,000.
7. Buyers representing themselves.
8. Buyers representing themselves and wanting the cooperating compensation for themselves from the seller.
9. Buyers representing themselves and wanting the cooperating compensation for themselves, while secretly bidding on more than one property at once.

Chaos. Total chaos.

What Most Sellers Do Not Understand About an Excellent Buyer’s Agent

Anyone who has sold real estate with some success for a long period of time will tell you that a truly seasoned buyer’s agent is worth their weight in gold. While the seller may only see the offer in front of them, it is what they are not seeing that truly matters. Really good buyers’ agents have clients that are savvy, knowledgeable, informed and understand the timeline and process. Why? Because they have been expertly educated and coached on value and the process by their agent. The process has been synthesized into a tightly wrapped package which offers a very high degree of predictability. Predictability in offer situations is, outside of the offer price, the best thing a buyer could offer a seller. I would tell you that you are dealing with a success rate (transaction closing) that is between 98-99% with these types of agents.

Now, fast forward to a situation where the buyers are paying a flat fee of $5,000 to a buyer’s agent, representing themselves or being represented by an attorney. The education on the market will not be present. The knowledge of the process and what is acceptable and not acceptable will disappear and the odds of a successful closing on the house will drop dramatically. Suddenly, that 2.5% that the seller is saving will look like a drop in the bucket when compared against the market damage done by a property coming on and off the market.

I have always told my sellers to view the cooperating compensation with a good buyer’s agent as an insurance policy for their sale. In other words, is it worth 2.5% for them to adopt a success rate of 98%-99% once their home is in escrow? For homes that fall out of escrow during the escrow process, the likelihood of being able to come back on the market and recapture their same price and terms would be characterized as remote. This is exactly what is going to happen with many of the players in the batting order mentioned above. The percentage of homes falling out of escrow will skyrocket. Not only that, but buyers who are better represented also can cut down on issues that arise after the home is sold. At the very least, it is worth a detailed discussion with your listing agent.

Ramifications of the Settlement

The irony with the settlement is palpable. The very things the plaintiffs in the suit were trying to protect against, will now be worse than before in many regards. Sellers will suffer a higher rate of lawsuits from purchasers of their homes, a far greater chance of their home falling out of escrow and ultimately, noticeably lower purchase prices. Buyers will be given representation in many cases that will be less than ideal. More buyers will end up making serious errors in strategy, purchases and resale because the advice many rely upon will fall well short of the standard. In the end, everyone loses.

I am the first one to stand up and say that the real estate industry needs some serious changes. I think we have way too many agents, too many bad agents and our barrier to entry is almost non-existent. This settlement will go a long way toward weeding many agents out of the business entirely. Making changes in the real estate industry and its practices is like asking a cargo ship to turn on a dime. Changes take a long time. That being said, we are overdue. I am also the first one to say that our tools are dated. The fiduciaries we have with our clients are counterintuitive with some of the tools at our disposal, such as the MLS rules. Change is needed, but this is entirely the wrong way to go about it.

Predictions

We will experience 6-8 months of chaos. During that time, you will see the highest rate of properties falling out of escrow in San Carlos than we have seen in the history of recorded sales.

There will be heavy pressure on listing agents to double end transactions.

The MLS will struggle to hold onto the level of relevancy that it currently has because agents are no longer allowed to advertise a cooperating compensation.

Off-market property sales will skyrocket.

Agents will organize with other local agents and market properties between themselves.

You are going to get endless mailers from agents claiming to have this all figured out. Be extra cautious of mailers from agents outside of San Carlos.

Finally, at some point toward the end of next year the chaos will diminish. There will be more than enough horror stories to go around and the market will ease back into understanding the value of having very solid agents on both sides of a transaction.  Simply stated, buyers and sellers do better when both are properly represented.

In the meantime, the real estate industry has to look at itself in the mirror and simply be better. We need to have a much higher barrier to entry, rid ourselves of some archaic real estate principles and become more open-minded to modern approaches and technology.