The way real estate agents are compensated differs from that of any other industry, thanks to the creation of the Multi-List System or MLS, the essence of which is “cooperation and compensation.” Imagine going back to the days before the MLS when a real estate broker could only sell his own listings. The only way to have brokers show you listings of other brokerages is if each brokerage agrees to cooperate with sales agents from other brokerages by sharing their listing commission if they produce a buyer.
Litigation against the National Association of Realtors by the Department of Justice and other plaintiffs threatens to outlaw that system, which would have huge negative consequences not only for the industry but for buyers and sellers.
I like to contrast how we are compensated with how car salesmen are compensated. Imagine if you were in the market for a car and went to a Ford dealership and spoke with a sales person who listened to your desired features and told you that a Chevrolet or Toyota would suit you best. On his computer, he finds a dealer who has that model or models. He takes you to the other dealer’s lot, find the vehicle, get the key out of a window lockbox and take you for a test-drive. He or she could then write a purchase contract for that vehicle and earn the same commission from that dealership as from his own.
But it doesn’t work that way. The sales person at each dealership can only sell that dealership’s cars.
As an aside, there are auto brokers who are hired by car buyers. These brokers can find a dealer with the car you’re looking for and get compensated by the car dealer and not by the buyer. I used an auto broker myself in 2012 to buy a Chevy Volt, which was a brand new model and hard to find at any Chevy dealer. He found one that was en route to an Aurora dealership, which paid him a commission after I took delivery. But auto brokers are an exception. The car sales persons working at the typical car dealership cannot broker your purchase from another dealer the way I can broker your purchase of a real estate listing from any real estate brokerage.
This system of enabling any real estate broker to sell any other broker’s listing and earn a “co-op” commission is at the heart of our industry’s success, but some parties are trying to convince the Department of Justice and the federal judiciary that buyers, not sellers, should compensate their brokers.
But here’s a point that is being missed in this debate — the seller is NOT paying the buyer’s agent. Yes, it’s the seller’s money that goes to the buyer’s agent, but the listing agent is the one who is paying the buyer’s agent out of the commission which the seller has agreed to pay him or her. It says right in the listing agreement (Sec. 7.1.1) that the listing brokerage “agrees to contribute from the Sale Commission to outside brokerage firm’s commission as follows: __% of the gross sales price….”
Of course, at the closing table the seller’s settlement statement shows both commissions (to listing broker and selling broker) debited to the seller, but the total equals that specified in the listing agreement.
If the courts agree with the plaintiffs and with the Department of Justice in this matter, it would be a sad and unnecessary disruption of a process which has benefited both buyers and sellers and contributed to our healthy real estate market.
The outlawing of co-op commissions would be so disruptive that, yes, the industry could adapt but it’s hard to imagine that it would be as easy to buy and sell real estate.