Brokers Need to Prepare for Upcoming Changes to Agent Commissions. Here's How

It seems like every day, there's a new headline about real estate commissions. Several high-profile rulings and cases are putting how agents and their brokers get paid under the microscope. To those of us in the industry, it may sound shocking, but the simple truth is that consumers don't know much about how real estate transactions work, and both buyers and sellers are surprised when they learn how their agents will be paid (and that buyers generally haven't been responsible for paying any portion of the commission, at least historically).

But all of that may be on the verge of changing. Let's discuss the events that have led us to this moment and what brokers need to start doing to prepare.

What is the Burnett v. NAR decision?

Burnett v. NAR was a class-action lawsuit filed on behalf of 500,000 home sellers in Missouri who argued that the NAR rule of coupling commissions paid to buyer and seller agents in exchange for the privilege of listing the property in the multiple listing service (MLS) unfairly inflated home prices and the commissions paid to buyers' agents. In October 2023, a federal jury agreed and ordered NAR to pay damages.

Like many industry and legal experts predicted, similar complaints are starting to be filed across the country, including Grace v. NAR et al, which was recently filed in California.

What do brokers have to do in response to Burnett v. NAR?

For now, nothing… yet. The Burnett v. NAR verdict does not require brokers to make immediate changes to their commissions structures. But it has been reported that the Department of Justice may investigate the issue further, meaning it's far from being laid to rest. Brokers aren't being forced to change their practices overnight, but changes are coming—and they might involve the much-discussed unbundling of commissions.

As Constellation1 President Brant Morwald predicted in his 2024 real estate industry outlook, the unbundling (or uncoupling) of commissions could lead to lower agent commissions (and therefore lower commission income for brokerages). And while the status quo remains, smart brokers would do well to get ahead of the issue, start talking about these issues now, and begin preparing for a future with more competitive (read: lower) real estate commission income.

Shift how you think (and talk) about agent commissions

State rules and regulations can vary widely, but two key tenets ring true:

Agent commissions are (and always have been) negotiable

A lot of top agents (and their brokers) take the "industry average" or "their normal commission" for granted, some going so far as to have the amount pre-printed on their listing agreement forms.

Any broker operating this way would do well to change this practice immediately. Compliant forms do not list commissions on them and contain language that asserts the negotiability of real estate commissions. Since we know consumers don't always read the fine print, it's important that this point be a part of every client onboarding conversation, and one that brokers must train their teams to have—even if we culturally have a general discomfort around discussing money and compensation in North America.

Commissions and other compensation should be disclosed

Of course, since sellers are generally responsible for paying commissions on real estate transactions in the United States, the amount they are making is usually known to the seller, since it's coming out of their proceeds. But buyers are usually not privy to this information, often because it's not a required disclosure (or not enforced), and this is what is at the heart of many of the lawsuits that are being filed right now. Agents can also be compensated in other ways, and their clients might want to know this information, too.

These two tenets can be the guardrails brokers and their teams use moving forward to settle on acceptable, fair, and most importantly, mutually agreeable compensation structures.

How brokers need to prepare for the inevitable changes to agent commissions

Whatever happens, the new focus, interest, and scrutiny on commissions isn't going to go away. In any case, brokers can start laying the groundwork now for a landscape where commissions are different than they are today, and where competition for the best sales talent will only be getting fiercer.

Shift how you think about real estate commissions

The first major change will be to shift how you and your teams think about commissions. For a long time, sales teams have shied away from talking about money in general and commissions in particular (apart from saying, "we're going to get you the best price on your house!") because, let's face it, talking about money is uncomfortable for a lot of people. But this new landscape is forcing the question, and the more you talk about it, the easier it will get.

When real estate brokers and agents agree to represent a client in a transaction, they commit to acting as fiduciaries: they are bound by a legal obligation serve the best interests of their clients, not themselves or their businesses. This means there's an important balance to be struck between meeting your business goals (and charging a fair commission that reflects the amount of work your team does and your overhead) and ensuring fairness for your client as well.

Explain how agent commissions and broker splits work

As we stated above, before they seriously start considering buying real estate, most people have no idea how real estate agents make their money. Add in another layer of complexity: the different kinds of commission splits and how brokers make their money (read: how much of their commissions agents don't get to keep).

What might seem to a consumer like an enormous sum of money might seem less so when the agent explains everything behind it: the split with the broker, brokerage and agent overhead, the cost of tools, licensing, staging, photography, marketing, the list goes on. Most consumers also don't know that agents are independent contractors who have to pay their own taxes, save for their own retirements, pay for their own benefits, and more.

Remind consumers that agent commissions are negotiable

Don't take 6% as a given anymore. Remind consumers that the amount your agent (whether they're representing the buyer or the seller) will make is up for negotiation, and then sell them on your value proposition and why you deserve what you are asking for. More on that below. That said, having a more flexible commission (and tools to help you deliver the same great customer experience with less effort and people power) could be a valuable tactic for getting more leads in this exceptionally competitive market.

Home in on your brokerage's value proposition

Agents work hard. It's so much more than snapping a few listing photos, putting them online, and watching the offers (and money) roll in. If only it were that easy!

Being a broker is hard work, too. You're managing an entire sales and support team and often a brick-and-mortar location, maintaining your license and (if applicable) franchise agreements, working on recruitment and retention, deciding what agent benefits to provide and how to pay for them, and so much more. And most importantly of all, this work gets results: according to NAR's 2023 Profile of Home Buyers and Sellers, for sale by owner properties typically sell for less than the selling price of other homes (a median of $310,000 in 2022) versus the median of agent-assisted homes ($405,000).

A big part of your agents' work going forward will be explaining why you command a certain commission and why you deserve it. It is in your clients' best interest (remember, your fiduciary duty) to know what they're paying you for and to give them a chance to ask questions.

So, what is your value proposition? Why do your agents deserve their commissions? What value do you add? Here are a few ideas to get the conversation started.

Specific market knowledge and expertise

The undeniable fact is that, since selling real estate is your bread and butter, you know more about it and have amassed considerable expertise about how it works in terms of the rules, best practices, and market. This means you're in a position to fetch the highest price for those who list with you.

Negotiation skills

This goes back to being a fiduciary. Just as a listing agent's role is to maximize profit for the seller, the buyer's agent's responsibility is to make sure they get the fairest price for what they're buying. This means honed negotiation skills and the ability to advise their clients when they aren't getting a good deal, and why.

Proven track record

The data speaks for itself: agent-assisted sales result in higher prices for sellers than FSBOs. This is a big selling point for sellers, and helping them means helping yourself, too. Where it gets tricky in this new landscape is ensuring that they know the buyer's side commission is also negotiable and to work that into the conversation.

Additional tools

Agents don't work with rotary phones and post-its anymore (and even if they did, they'd need to pass on the cost of using those tools to their clients). Agents use pretty sophisticated tools to market their listings, nurture their clients, and ultimately help properties sell faster and for a fair price. These tools cost money, and consumers might not realize the resources your agents are investing in to ensure their success. So, tell them!

This is all, of course, on top of the role of being a trustworthy, confidential guide and advocate for the biggest purchases the average people make in their lifetimes!

Keep the commissions conversations going

This is just the beginning of what will likely prove to be a very long and evolving conversation across the entire industry. So, start now. Talk early and often with your sales team and their clients about these issues and stay abreast of more developments as they happen.

To view the original article, visit the Constellation1 blog.