How Bay Area Buyer's Agents are Paid Now that the Rules Have Changed - Seb Frey, Silicon Valley + Bay Area REALTOR

After many months – even years – of angst and expectation, the new era of real estate has dawned. I can’t tell you how many Zoom calls, on-line chats, and group conversations I’ve been a part of, hashing over what the landmark commission class action lawsuit settlement will mean for the real estate market.

I wanted to wait a bit to write about this, because I needed some time to see how these changes would play out in the market. Now that we’re about six weeks in to this new way of doing business, I am ready to share with you some initial findings.

If you have somehow been blessed not to have heard the news: the way that buyer’s agents get paid has changed. For the past 40-ish years, buyer’s agents have typically been paid according to a seller’s blanket offer of compensation, made via the multiple listing service (MLS) to all agents who would bring a buyer whose offer was accepted and ultimately ended up closing.

The lawsuit had a number of aspects to it, but one key aspect was that the litigants felt (and a jury agreed) that home sellers should not be forced to pay a buyer’s agent in order to list the home for sale on the MLS.

Another key issue was that of steering: there was an accusation that buyer’s agents only showed buyers property where the agent was guaranteed at least a certain amount of money to represent the buyer.

In order to address these issues, the National Association of REALTORS hammered out a settlement which resulted in substantial changes in business practice, two of which are:

No offer of compensation from the seller to buyer’s agent may be transmitted in any way through the MLS.
Buyer’s agents are required to have a written agreement with a buyer specifying how much they would be paid to represent the buyer in the purchase of a property.

This was heralded in the media as “the end of the 6% commission,” and indeed, most people I have talked to believed that the changes would result in sellers paying less in total commissions when they go to sell their property.

Now that we’re six weeks into this new way of doing business, how is it actually playing out?

So far, it’s working out exactly how I expected it would.

One thing that is often overlooked is that while it is true that sellers were required to offer at least $1 in compensation to buyer’s agents to be listed on the MLS – and often ended up offering somewhere between 2-3% of the purchase price as compensation to a buyer’s agent – in fact, there was nothing that prevented a buyer from negotiating the compensation with their buyer’s agent.

In fact, there are many brokerages out there that would agree to rebate a significant portion of the buyer’s broker compensation to the buyer – most famous among them perhaps is Redfin. Redfin has made much hay of this over its 20+ years in business. In spite of all these rebated dollars (i.e., buying business by competing on price), they are not exactly a dominant player in the real estate brokerage business.

And some number of buyers would always rebate the commission back to the seller – for example, when a buyer was themself a real estate licensee, or perhaps they were a licensee helping a family member to buy a home.

In these cases, the buyer, buyer’s agent, seller, and listing agent would sign some form of agreement that the offer of compensation to the buyer’s agent be reduced, or waived completely…typically, in exchange for an equivalent reduction in the sale price.

So while the seller would in fact end up paying less in commission, in these cases, the seller would not typically end up netting much if anything more at closing.

Of course, in a multiple-offer scenario, the buyer might get their agent to reduce or waive their commission without any equivalent offset in offer price. This would make the buyer’s offer stronger, since the seller’s net cash at closing would be higher.

You see, the issue really is not how much the buyer’s agent gets paid. It’s always been about how much the seller walks away with at the closing table.

The seller will usually pick the offer that nets them the highest amount of money, assuming that the offer’s terms otherwise meet their needs (e.g. closing date, contingencies, down payment, loan type, etc.).

Having said all that…what’s changed with the new rules?

Well, there’s more paperwork. There’s more confusion. But there is also more transparency in exactly how much the buyer’s agent is getting paid. Buyers and sellers alike are much more aware of the fact that agent commissions are negotiable.

For now, offers are still coming in from buyers who have agents, and these offers from buyers have stipulated that the seller pay the buyer’s obligation to compensate the buyer’s agent. I have yet to see a single offer from a buyer who did not ask the seller to pay for the buyer’s agent’s services.

Likewise, when I’ve written offers, the buyers have all specified that the seller would pay my compensation as the buyer’s agent, the same as always.

It seems that buyers are still working with buyer’s agents who, anecdotally, are still being paid about the same as they were getting paid before these changes in business practice.

This does not surprise me, because in my experience, most (almost all) buyers want full-service agent representation. Limited-service agents have been around a long time, as have buyer commission rebates – but in the Bay Area, they’ve never made much of a splash.

This may change over time – but I don’t expect that it will, not much, anyway.

For what it’s worth, Wall Street seems to agree. Check out the stock price of Compass, Redfin, Anywhere (Coldwell Banker et al) and Zillow since the lawsuit settlement. If the big money is expecting broker profits to be squeezed going forward, they sure have a funny way of showing it.