Photo courtesy Jim Casey.
California homeowners are just beginning to hear the grumblings of a recent class action lawsuit over real estate commissions in Missouri. Several major franchises have settled while at the same time, the National Association of Realtors (NAR) is appealing the decision.
The class-action lawsuit was filed because many sellers claimed they were not informed that the buyer’s agent was being paid by them. Some sellers asked why they were being forced to pay the other party’s agent to beat them up on price during the negotiations. It was further alleged that some brokers and Multiple Listing Services (MLS) required a minimum amount of compensation to the buyer’s agent to allow sellers access to the MLS.
I cannot speak about how commissions are paid in Missouri, and I have never seen the listing agreements used in that state. I have sold real estate in Minnesota and, more recently, in California for the past 15 years. The California Association of Realtors (CAR) standardized listing agreements include a section for how much gross commission is charged to the seller, and what percentage of the sale price will be shared with agents representing the buyers. The listing brokerage must complete this section stating both amounts. There are no commission standards in the business, and each brokerage must negotiate a rate with the seller individually.
As I am not an attorney, I cannot go into detail about the specifics of the lawsuit, but as a member of the real estate industry since 1986, I would like to shed some light on the controversy and help home sellers and home buyers better understand how the industry works and how agents get paid.
Some background
When I started in the business almost four decades ago, all real estate agents represented the seller. The seller paid the commission from the proceeds of the sale to the listing broker who then shared it with a cooperating broker that was working with the buyer. Even though the agent was working with the buyer to see multiple properties, assisting them in obtaining financing, drafting the contract, and attending to all the activities associated with the buyer side of the transaction, that agent owed his/her fiduciary duties to the seller. In most cases, the agent working with the buyer never laid eyes on the seller until the closing, if ever. It was assumed
that because the seller was paying the commission, all allegiances went to the seller.
The problem with this thinking was that the buyers thought the agent they were working with was representing them, not the seller. In most cases, the agent thought they were representing the buyer as well, especially when they were supposedly negotiating aggressively on behalf of the buyer. I say “supposedly” because, in all my years in this business, most agents are looking to make deals to get paid rather than pushing hard enough on one party’s behalf as to kill the transaction. Another problem with this “we all represent the seller” scenario was the fact that the buyer agents were acting as subagents of the listing broker and were, therefore, creating
liability for the listing broker for the actions of an agent that did not work for them. If the buyer agent was to act illegally or unethically, it could bring recourse against the listing broker.
In the late 1980s, it was decided that agents working with buyers could start officially representing them, even though they were being paid by the seller. It was decided that the real estate commission was a part of the transaction, with the buyer bringing the cash and financing to purchase, and the seller paying both agents out of proceeds at the closing. This arrangement has worked well for over 30 years. Now that the Missouri case has been settled, we can see copycat lawsuits coming to California, but for now, real estate commissions and the way agents get paid remain unchanged.
If you still have questions or would like to know more, please feel free to email me at
jim.casey@harcourtsprime.com or call me at 818-641-9050.
