Real estate practices in the U.S. changed on August 17, 2024 resulting from a court settlement between the National Association of Realtors (NAR) and plaintiffs in Missouri (and other places).  Many people thought the settlement was about "inflexible" real estate commissions and lowering fees. but it was not.   

 

Based on transparency in the process of buying and selling real estate, the court settlement resulted in two major changes -- a mandatory agency listing agreement between all agents and their buyers stating a fixed fee; and, more impactfully,  a prohibition on advertising co-op fees in MLS marketing.  

 

The Missouri case focused on transparency for buyers to understand how real estate fees worked and who might pay them. Also, it focused on how "advertising" co-op fees in MLS clouded transparency.  Plaintiffs said that buyers didn't understand or cared much about their agent's fee because "everyone knew fees would be paid by the listing agents" per MLS.  Re-enforcing plaintiff's arguments were mandatory NAR rules that listing agents MUST post their co-op fee in MLS. 

​

By prohibiting co-op fees in MLS marketing, buyers and their agents are forced to discuss fees and who pays them. Plaintiffs' arguments focused on buyers NOT knowing they would be ultimately responsible for their agent's fees if not paid by sellers.  Knowing that, buyers might negotiate for lower ones.  This decks old issue and lawsuit was primarily about buyer issues and costs and not sellers' issues.  

 

Called commissions before the settlement, they are now called compensation for all agents.

 

This article is not a discussion of the issues debated -- settled or unsettled. It is a nuts-and-bolts narrative on how buyers and sellers may enter into agency agreements to list, sell, or buy property under the new rules.  The following documents and terms are discussed:

​

• Exclusive Right-to-Buy Listing Contract (aka buyer's listing agreement with an agent)

• Exclusive Right to Sell Contract (agreement between agent and owner to sell property)

• Contract to Buy and Sell (residential contract used by buyers to purchase)

• Co-op fee (aka compensation paid to agents representing a buyer)

• Brokerage Compensation Agreement (between listing and selling brokerages about fees)

• Sub-Agency concept before buyer's agency

 

Agency: 

 

Agency is the relationship between agents and their principals. A principal relies on an agent to execute certain business or financial transactions on their behalf and to represent their interests without regard for self-interest. In many cases this is a fiduciary relationship by the agent to the principal to act only in the principal's best interests. An exception to this in real estate is "transactional agency," a topic outside of this article.  

​

There are two sides in a real estate agency transaction - the seller and buyer. Each side has a listing agreement with an agent who is compensated for success, and is paid nothing for failure. Each listing agreement outlines what agents will do for their compensation.  

​

When a seller accepts a buyer's purchase offer, the terms and conditions of that purchase offer  controls the sale to closing.  It states the buyer's agent fee but not the listing agent's. That is controlled by the seller's listing agreement. 

 

In 1999, Colorado instituted a mandatory written agency requirement for its real estate agents working with buyers. Called an Exclusive Right-to-Buy Listing Contract, it formalizes between agents and buyers what sellers and their agents have long had...a written agreement! The buyer's listing agreement with an agent describes their relationship, services, and compensation. 

​

Today, a buyer's listing agency is required for all agents in all 50 states and districts in the US. Colorado was already there. 

​​

Prohibition stating co-op fees in MLS

 

NAR now prohibits listing agents from marketing in MLS any statement or inference to paying a co-op fee to a buyer's agent. This means buyers and their agents DON’T know if a seller or listing agent will pay a co-op fee (% or $) until an offer is submitted, negotiated, or accepted. A buyer's agent may contact the listing agents to ask, but the listing agent is under no obligation to answer unless permitted by the seller.  The reasons for this vary and are outside of this article.  

 

What is an Exclusive Right-to-Buy Listing Contract: 

 

A buyer’s listing agreement includes many things (contract dates, duties, compensation), especially who is liable to pay the buyer's agent compensation.  Those rules existed before August 17, 2024, but lacked relevancy or realistic importance because MLS would state the co-op fee.  Buyer's agents knew they would be paid, by whom, and how much.  And so did the buyers -- relieved of not knowing if they would have to pay it. 

​

Before Aug 17, 2024, listing agents were required to post their co-op fee per MLS rules called "clear co-operation" to pay buyer's agents. This also led to concerns that buyer agents would  "steer" their buyers away or towards properties based on the amount of co-op fee advertised.    

​

Today, post-August 17, 2024, the buyer's agent co-op fee, if any, cannot be posted or inferred to in MLS marketing. This means buyers and their agents are guided by their Exclusive Right-to-Buy Listing contract when showing homes and writing purchase offers. The buyer is ultimately responsible for the buyer's agent fee unless the seller agrees otherwise.

​

If a seller or listing broker won't pay a co-op fee, then a buyer has two options: to pay their agent as agreed to in their buyer's listing agreement, or to find another property where the seller pays a co-op fee.  It's just that simple. 

​

This raises a question: Why haven't buyers paid their agents vs. counting on sellers to do so?  Two reasons: First, all buyers, especially first-time ones, usually have limited funds to buy a home, so paying their agent further limits buying options.  By using a seller's equity to pay the co-op fee, that was deemed in the best interests of all parties to make sales happen. And it worked. 

​

Secondly, until the late 1970s, ALL real estate agents represented ALL sellers under a concept called sub-agency.  It was based on the idea that agents owed their loyalty to whoever pays them. Since sellers through their listing agents paid co-op fees, buyer agents were legally and ethically obligated to act in the seller's best interests.

 

Sounded good in theory, but many buyers felt alone and "un-represented" in the home buying process, It was tough on agents too, because they bonded with their buyers wanting for them "to get a good deal" for future business and referrals.

 

Colorado's sub-agency rules began changing in the late 1970s and were ultimately gone by the '90s.  By 1999, mandatory agency was the law of the land in here.   ​

 

Discussion of Buyer’s Contract to Buy and Sell,

 

Its Section 29 of the buyer's Contract to Buy and Sell there are three choices about buyer's agent compensation: (1) Section 29.1 the seller pays it,; (2) Section 29.2 the buyer pays it; or (3) Section 29.3 the seller's listing brokerage pays it. 

 

(1) This option the seller pays the co-op fee directly to the buyer agent's brokerage at closing vs the listing brokerage doing it. In the seller's listing agreement, Sections 7.1.1.2 and 7.1.1.1, this option is addressed should the listing agent not have to pay it as included in Section 7.1.1.  

​

(2) The buyer pays their own agent and not the seller or seller's brokerage.  Section 7.1.1.1 of the seller's listing agreement addresses this concerning total compensations to be paid in 7.1.1.   

​

(3) The buyer requests the seller's listing brokerage to pay the co-op fee, (see Section 7.1.1.1) which requires a written Brokerage Compensation Agreement between the selling and buying brokerages. This compensation process is seldom used and is expected to be discontinued.   However, before Aug 17, 2024, this method of co-op fee compensation was the law of the land. 

Buyers and their agents cannot outline compensation scenarios in their listing agreement.  It must be specific and not a "range of compensation" or an outline of "what if scenarios." However, buyers and their agent may create new agreements replacing old ones at any time based on "wants and needs" given mutual agreement.  

​

Discussing the Seller’s Listing Contract:

 

Agents have always had a written listing agreement with sellers, unlike agents working with buyers before August 17, 2024 (except in Colorado after 1999). What’s new in the court settlement is in Section 7 of the listing agreement --Compensation to Brokerage Firm  and Buyer Brokerage Firm.  Similar to Section 29 of the buyer's purchase agreement, there are three specific selections abouts fees and payments (please reference the above discussion, Buyer's Contract to Buy and Sell). 

 

Section 7 has greater seller transparency about fees than previously done, including seller's fee payment structure and options. Furthermore, Section 28, Additional Provisions may be used to expanded on compensation and other listing issues such as:

 

(1) Compensation if the listing agent sells the property and no co-op fee paid to another agent;

 

(2) Buyer ask for a co-op fee greater than or less than what's stated in 7.1.1.1.;

 

(3) Listing agent's "base" fee if no co-op paid;

 

(4) Buyer pays buyer's agent and there is no seller's co-op compensation, so how does that affect 7.1.1 and 7.1.1.1?  A good conversation with your listing agent. ​

​

Example: In the seller's listing agreement, if Section 7.1.1's gross fee is 6%, and  Section 7.1.1.1's co-op fee is 2.8%, then the net to the listing agent would be 3.2%..