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.
In my next column, I will explain how commissions are split between agents representing sellers
and agents representing buyers, as well as how much the agents actually keep from each
transaction. It’s less than you might think.
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.
