FelixThere are currently a number of lawsuits from some real estate sellers against the National Association of Realtors, claiming that brokers and agencies have been overcharging their fees or commissions on the sales of real estate. To understand this lawsuit and what is happening, you first need to understand the laws of agency and the changes that have happened over the past 30 years in these laws and representation, and to further understand this lawsuit, we need to go back 40 to 50 years on how the laws of agency have changed.
When I got into selling real estate in Guam over 50 years ago, things were very simple. Real estate agents worked for the seller in almost all of the cases. This means that when the seller listed the property with a real estate firm, he agreed to pay a commission, which was usually a percentage of the selling price. That firm was the listing firm. The listing firm then offered other firms information on the property for sale and agreed to split the commission with the firm whose agent that brought the buyer to the transaction — the buyer’s agent. Both agents worked for the seller with the buyer's agent being the sub-agent of the seller. So things were simple — we worked for the person (usually the seller) who paid us the commission, whether we were the listing agent or the buyer’s agent.
However, since then things have changed a lot. Some buyers started getting upset that their agent was not representing them, but rather representing the seller. They could not get all the answers they wanted and could not share with their agent information in confidence, like the highest price they were willing to offer, so after a number of lawsuits and changes in agency laws, real estate agents became either a seller’s agent, a buyer’s agent or represented both based on who they were working with. Regardless, the commission was still normally paid by the seller and split in some percentage between the seller's and buyer's agent. This shift took over 30 years to happen, but that is basically how representations and agencies are now.
Today, some sellers have resented having to pay for the buyer’s agent’s fees/commissions. Thus, some of them have filed lawsuits against NAR and their real estate firms demanding they pay back the buyer's share of the commission they paid. They are claiming this system of commission "splitting" is antiquated and causes too much commission to be paid by the seller. They are also claiming that NAR (which has 1,500,000 members who are real estate agents and firms) is keeping this system going to keep their members receiving high commissions and fees.
NAR is claiming this is not so — that this system is based on current agency laws created through old lawsuits from court decisions. Furthermore, they are claiming that the commission paid is not regulated in any way and that sellers can negotiate the commission rate before even listing the property for sale with their listing agent and that the current system is good for sellers, as it allows real estate agents to share their listings with other real estate agents who belong to their local Multiple Listing Service which we have in Guam. Lastly, NAR claims that all realtors (members of NAR) must adhere to a strict Code of Ethics, which further protects buyers and sellers. In Guam, all MLS members are members of the Guam Association of Realtors and NAR.
As far as I can determine and understand, this is the lawsuit and both sides of it. Personally, I think this is a fairly silly lawsuit. If the sellers win their lawsuit, I believe this would actually hurt sellers. A seller’s goal is to get the highest and best price they can. If they win the lawsuit, this may force local MLS companies to completely change their set ups or close their companies. Ultimately for sellers, I believe that it will stop or reduce the sharing of listings between real estate agencies and prevent sellers’ properties from geting fully distributed into the market and attract the highest sale price. More so, this will also hurt buyers, as they will have to pay their share of the commission directly to their agent, which will affect their ability to finance the entire price.
For example, if a seller wants to sell their house for $500,000 and agrees to pay their agent a $28,000 commission, and through the MLS, a buyer's agent presents a full price offer ($500,000), the buyer's and seller's agents would share the commission of $28,000 between them in a pre-agreed split. The buyer would then go to the bank and be able to finance the entire purchase price. However, based on the lawsuit, the seller would agree to only pay their agent $14,000, and the buyer would have to pay their agent the other $14,000. The problem is the purchase agreement would have to say that the purchase price is only $486,000 ($500,000 less the buyer's agent fee), and when the buyer went to the bank, they could finance only the $486,000. Thus, the buyer would have to come up with their agent's fee out of their pocket in cash, and lastly, that may negatively affect the future appraised values of properties.
I am sure that things will be worked out and that buyers and sellers will continue to be well-represented and protected, but this lawsuit will force all kinds of changes and problems for a while until everything gets put back on track.
I do believe that the current agency laws and way properties are sold formulate the best system we have for now, and I don't see any good thing arising from the lawsuits. To have a successful real estate sale, you need a buyer.
— Christopher K. Felix is president and principal broker of Century 21 Realty Management Co. Inc. He can be reached at [email protected].
Editor’s Note: According to media coverage in the U.S. mainland, on Oct. 31 a Missouri jury found the NAR and some residential brokerages liable for $1.8 billion in damages and conspiring to keep commissions high. The NAR is expected to appeal.
