A big shift took place over the weekend in the way people buy and sell homes in the U.S. The National Association of Realtors settled a lawsuit earlier this year that changed the way real estate agents get paid. Previously, a home seller would pay for both their own real estate agent and the agent representing the buyer. The two agents would split the commission, which was typically around 5-6% of the home’s selling price.
But now, buyers either have to pay for their own representation or negotiate with the seller to pay their agent’s fee. Some agents say the new rules will mean more clarity for consumers, while others say they will drive agents out of the business.
Ashleigh Fordham is the principal broker and owner of Windermere Real Estate in Salem. She’s also the current president of Oregon Realtors. Colin Mullane is a former president of the organization and the principal broker and owner of Full Circle Real Estate in Ashland. They join us to share their perspectives on how these changes are playing out in Oregon.
The following transcript was created by a computer and edited by a volunteer:
Geoff Norcross: This is Think Out Loud on OPB. I’m Geoff Norcross. A big shift took place over the weekend in the way people buy and sell homes in the United States. The National Association of Realtors settled a lawsuit earlier this year that changed the way real estate agents get paid. Previously, a home seller would pay for both their own real estate agent and the agent representing the buyer. The two agents would then split the commission. Now, buyers either have to pay for their own representation or negotiate with the seller to pay their agent’s fee. Some agents say the new rules will mean more clarity for consumers while others say they will drive agents out of the business.
We wanted to learn more about how these changes might play out in Oregon. Ashleigh Fordham is the principal broker and owner of Windermere Real Estate in Salem. She’s also the current president of Oregon Realtors. Colin Mullane is a former president of that organization and the principal broker and owner of Full Circle Real Estate in Ashland. Ashleigh, Colin, welcome to Think Out Loud. It’s good to have you.
Ashleigh Fordham: Thank you for having us.
Colin Mullane: Yes, thank you.
Norcross: I want to ask you both this – and maybe, Ashleigh, we’ll start with you. When you first heard about this lawsuit that led to the settlement, what went through your mind?
Fordham: Oh boy, here’s a big shift in the way we practice real estate. But to be honest with you, I understand some of the consumer’s confusion about real estate compensation. This change – which we’ll get into here in just a few moments – has really created an opportunity for more clarity and transparency on both the seller side and the buyer side. I think that there were a lot of brokers who felt a little bit panicked before they really processed through the settlement and the lawsuit. And for those of us that have really been working with this since October, and then again on the settlement earlier this year, we are very, very, very comfortable with the changes and eager to explain to consumers how this process will work moving forward.
Norcross: Colin, did you go through the same mental process?
Mullane: Oh yeah, absolutely. Just breaking down what the impact of the changes, the motivation behind the changes, how we have those conversations with consumers and clients so they fully understand. Then trying to bring up the rest of the realtors around the state and the country as to the impact of those changes, and empower them to have the discussion that everyone’s going to be better informed, going forward.
Norcross: We’ll get into the changes in some of the specifics and how that can play out, but what is your understanding of the idea behind having a seller pay for a buyer’s agent? It’s a little bit unusual when you really think about it?
Mullane: It is and I don’t know if you know this or not, but I’m originally from Ireland. And like your previous guest, I actually got my citizenship two years ago. So I’m very familiar with how real estate is transacted in other parts of the world where buyer representation does not have a place in the real estate market. In the United States, it has traditionally been a part of our market for generations, for decades. It’s part of why we get to transfer real estate in the manner that we do, at the speed in which we do.
So, an average real estate transaction in the United States is about 30 to 35 days. In foreign countries, it tends to be much longer – three, four, six, eight months to close a transaction. Oftentimes, the buyer backs out and has to start right back over because they don’t have a representative that guides them through a transaction. So with that background, look at the value to a seller when a buyer is represented. When a buyer hits a roadblock, or a turn in the road in a transaction, they get a copy of a home inspection. If you haven’t seen a home inspection report in the last 10 years, they’re typically 70 to 80 pages long.
Even on new construction, oftentimes, just describing the condition of what’s being seen, to a lot of buyers, that’s a very intimidating document. And to a lot of buyers, if it’s not new construction, will look at that and say, “There’s too much going on. I need to get out of this transaction.” When a seller pays to make sure that buyer has representation, that representative will bring that buyer through the process and say, “Yes the roof needs to be replaced. Let’s go and negotiate that. Let’s see what we can do.” It doesn’t mean the deal has to end. Of course, sometimes it does end and that’s OK too.
But a buyer is more likely to get through the closing process, which benefits the seller as well, when they have representation that helps move through the difficult parts of a transaction, which is typically the largest financial purchase in any individual’s life. And so having experts guide you along through the roadblocks and over the pieces is beneficial to all. And sellers have understood that for generations.
Norcross: Since you mentioned you understand how real estate works in other parts of the world, how about the commission part? How do real estate commissions in the U.S. compare to other countries?
Mullane: It’s different. It’s entirely different. Because there’s a buyer representative there, of course, there’s an additional party to the transaction. But what I will tell you is – and this is where some of these lawsuits brought some of the examples into other countries – they just compared commissions to commissions. And because I’m not a competitor, I’m on the line with another competitor and I’m not going to talk about the levels of commissions.
Let’s say the example is that American commissions paid by a seller in the United States are higher than in foreign countries. So my mom sold her house about four years ago in Ireland – I’ll make this really quick. She listed it for a 1.5% commission. They only have a listing agent. There’s no buyer representative. They then have to, by law, work with an attorney through the transaction. And they charge a flat 1% fee. The buyer must also pay for a 1% fee to their attorney to move them through the process. There is then a 2% transfer tax called “stamp duty” in Ireland. So by the time you get to the end of the transaction, the seller is, in fact, paying more to different people for various aspects of the transaction.
That worked out to take 10 months to close, by the way, even though it was the same buyer. It took 10 months to close the transaction, versus the seller here, who will pay a similar fee to realtors because there are fewer parties involved, but be able to move at a much faster pace. So when you have context and you say, “Well, how much does the seller pay to sell their house?” You include all the parties and the entities [who] dip into the seller’s pocket in foreign countries, they’re often much better here in the United States when they’re paying realtors to represent buyers and sellers in the same transaction.
Norcross: OK, I get it. It does seem a lot simpler in this country than it does in others.
Ashleigh, could you walk through, very simply, how compensation works for real estate agents before these changes went into effect over this weekend and what is different now?
Fordham: Yeah, absolutely. That’s a good question. So to understand where we landed, I always like to look at the historical context of where we’ve been. That always gives a really good frame of understanding how things are laid out. So previously, under the MLS [Multiple Listing Service], what we would do is enter into a listing contract that allowed us the opportunity to represent the seller through their transaction, but also to enter it into the Multiple Listing Service. That’s the way that we were able to communicate information to other agents.
There was a set total commission that was agreed upon between the seller and the listing agent. And through that compensation amount, the listing agent was then breaking down that percentage and making an offer to a buyer’s agent through the Multiple Listing Service. If that buyer’s agent brought a ready, willing and able buyer to the transaction and that transaction closed.
Now, what we have done is remove that offer of compensation. And we’ve just strictly left it to the parties. So we’ve said there’s a listing contract that is executed between the listing agent and the seller that totals out the fee of representation and what the seller will be obligated to pay under that contract. And then we’ve said, “Buyers, we have a buyer broker service agreement that outlines our fiduciary responsibility and our level of service and commitment to you.” And through that, the compensation is agreed to through the buyer and the buyer’s agent.
Now, what we’ve sort of done in that bifurcation is to allow the buyer and the seller to negotiate the buyer side compensation, should the buyer instruct their agent to do so. So really, we’ve just removed the formality of an offer through the Multiple Listing Service and allowed the parties to negotiate that compensation, should they need to, through the purchase and sale agreement.
Norcross: From your perspective, is this a good thing or a bad thing, knowing that, I’m sure, you’ve represented both buyers and sellers?
Fordham: I’ve been in the business for almost 15 years. And to be honest with you, I think that this is a great opportunity for consumers to really have participation, and an understanding of the clarity and transparency associated with the compensation. I think it’s a great thing for consumers, I think it’s a great thing for our industry, and I’m not intimidated by the changes. I really welcome the conversation about representation and the ways that I can assist a buyer or a seller through the transaction. Because to Colin’s point, this is the largest investment that a buyer or seller is going to make in their financial future. So it needs to be a conversation at the front end of the transaction. And it’s a great opportunity for all parties to just go into an agency relationship and really understand what’s being provided and what those fees will be.
Norcross: Colin, one of the complaints, or one of the objections I’ve heard, is that this is going to put an extra burden on first-time home buyers who may not understand the system very well and may not be buying a lot of house. It’ll be just one more expense that they have to negotiate with their agent, one more layer that they have to work through in what is, as you have mentioned, a very big purchase and a very complicated thing in their life. What do you say to that?
Mullane: I think you touched on something really important there, Geoff. That is simply that we’ve made the argument the whole time through the process of the lawsuit that, unfortunately, the result of this change may disproportionately impact the first-time home buyers and minorities who need the guidance of a professional in a transaction, oftentimes, more than the more sophisticated seller or buyer might.
So we saw that specifically with the VA early on when VA loans traditionally banned any form of payment from a buyer toward a home expense. And we felt that that was going to be a big drawback for veterans. And very, very quickly the Veterans Affairs Department, in cooperation with the National Association of Realtors, made a generational change by saying, “You know what? If a buyer, who is a veteran, chooses to pay their realtor for professional services, we will not disallow that in the home purchase process.” So it was great that we were able to get in front of that very early and make sure that a large and important part of our population wasn’t disparately affected by the changes.
That said, buyers do have to enter a contract. But part of that contract can be, as we look at these properties, the buyer agreeing to view properties where the seller has agreed to pay a buyer commission. And so if the fee that the broker working with the buyer is larger than the buyer has available, they’re giving permission to that broker and asking them, in fact, to write an offer that includes that fee. So there’s nothing about the settlement that precludes a seller from paying buyer broker commission as part of the offer and sale process.
The real change is we can no longer advertise that on the Multiple Listing Service and assure a client right out of the gate, “This is already covered.” And so those conversations will be on a case by case basis and I’m sure some sellers will refuse to make that payment and will eliminate some buyers from a transaction because of that. But many will continue to see the value of offering that compensation and making sure that seller gets the greatest number of buyers through the home and hopefully attracts the best offer for them.
Norcross: I think I hear you saying that the traditional way of doing this, where there’s a 5-6% commission paid by the buyer, was a traditional thing. But it wasn’t set in stone and there was always some room for negotiation. And there still is?
Mullane: Absolutely. And there’s no doubt that the consumer was confused about that, over the years, because we don’t openly talk about commissions because of conversations about antitrust. You’ve found neither Ashleigh nor I have mentioned any percentages whatsoever. So we’re conditioned to not do that, simply because as soon as we mention percentages, we know that we’re getting into antitrust territory, so we don’t. But to the consumer that probably feels like, “Well, you’re not talking about it at all.” But in actual fact, forever, these have been negotiable.
There are lots of different business models in Oregon and around the country where brokerages offer different levels of services for different levels of fees. And consumers have been free to make those choices. Indeed some consumers, sellers particularly, have done for-sale-by-owner. Some buyers have chosen to be unrepresented in a transaction. That’s not unusual. That won’t change. But I do think there will be a greater and more transparent conversation around compensation and commissions going forward. And I do think that that’s good.
Norcross: Ashleigh Fordham, Colin Mullane, I really appreciate you coming in and talking to me about this. It’s very complicated and I’m sure people have questions. But I appreciate you shining some light on this. So, thank you so much.
Fordham: Yeah, absolutely.
Mullane: Thank you.
Norcross: Ashleigh Fordham is the principal broker and owner of Windermere Real Estate in Salem. And Colin Mullane is the principal broker and owner of Full Circle Real Estate in Ashland.
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