Good information helps buyers make informed decisions. Widely available information levels the playing field, so that all buyers have access to the vast majority of properties for sale.

Recent lawsuits against Multiple Listing Systems and large real estate companies threaten to harm potential home buyers by expecting them to pay for their representation as well as the seller’s commissions.

Who pays the commission?

Real estate commissions are paid at closing, from the funds the buyer brings to the closing table. Buyers are paying that commission for the life of their mortgage. Sellers feel like they are paying it, because it comes off their profit at closing. Essentially, both parties could claim to pay the commission. This seems fair when there are two agents: one supporting the best deal for the seller and the other supporting the best deal for the buyer.

The current litigation could lead to sellers having representation built into the purchase price, but buyers being burdened by paying additionally for their agents. If that happens, it’s very bad for buyers.

What is the Multiple Listing Service (MLS)?

The Multiple Listing Service (MLS) – which is being challenged in recent lawsuits – has benefits to buyers and sellers of real estate.

What is it? The MLS is a database with properties for sale. It is open to real estate professionals and shared with large real estate websites, like Zillow.

Seller’s agents aim to get the best price and terms for sellers. The best way to do that is to get as many qualified buyers to see the property and be interested in buying it. The most successful way to do that is to advertise it widely. That advertising has included inviting buyer’s agents to show the property to their clients. That invitation has included an offer of  commission to those agents.

When one company has a property for sale, the advertising sheet (called a listing sheet) is available to a broad range of agents and to the public. For the sellers, it is great advertising. For the buyers, it is one-stop shopping. Win-win.

Along with the information about how many bedrooms the place has, the yard size, and pictures of the kitchen, the MLS listing sheets publish how much the buyer’s agents will be paid, if the sale goes through. The “cooperative compensation rule” are guidelines that MLS systems use to inform agents about the commission set aside for a buyer agent. If sellers want agents working to bring buyers to their property, those agents need a way to be paid.

The MLS system is the largest, most universally available database of properties for sale. If it is broken up into smaller databases competed for attention, each database would have a subset of different property choices. That would be less helpful for sellers and buyers. Buyers would need to look on several databases to replace the MLS. Sellers would have more limited advertising or need to post on several sites.

Having separate databases could also increase housing discrimination by restricting access to some buyers. Some properties could be listed on databases that only insiders are made aware of.

Agent commissions

The MLS has been criticized for including commission rates for buyer’s agents in their model. The MLS listing sheets have been informing buyer’s agents of the level of commission offered at closing. If buyer’s agents are not paid as part of the closing price, then buyers will need to spend additional money to hire a professional buyer’s agent. This will further disadvantage buyers, who will pay the seller’s agent as part of the sale price, and then pay a buyer’s agent in addition.

The lawsuits that are questioning buyer agent fees are likely to harm buyer consumers. If buyers are forced to pay sellers agents through the funds they bring to closing, and additional fees to the agent representing them, real estate becomes more costly to buyers.

Increasing costs for buyers can have the following consequences:

  • Increased costs for buyers will reduce their buying power.
  • Increasing buyer’s costs could dampen sale prices thus harming sellers.
  • Federal programs like Veterans Administration mortgages, do not allow buyers to finance agent commissions. This will force buyers to pay their agent’s commission with cash on hand.

 

If it ain’t broke…

Buyers are better off with the Multiple Listing Service. the way it is now, because it is comprehensive and gives full access to properties for sale.

Sellers are better off too. If all REALTORS® using the Multiple Listing Service fully explained cooperative compensation with their seller-clients, the vast majority of sellers would prefer to widely advertise their properties for sale and compensate buyer’s agents who guide informed buyers through the home buying process.

This is what we expect will be the outcome of all the lawsuit hoopla you may have been reading about. The total amount of commission may go down due to market pressure. It won’t go down because the burden is passed to buyers. That will just disadvantage buyers who don’t have additional cash to pay a buyer’s agents in addition to paying the seller’s agent through the cost of the house or condo.