Relocation’s Response to the Real Estate Compensation Wars, Part I

Part I of a two-part series on the significant legal verdict against the National Association of Realtors and two other defendants and its impact on relocation management companies. 

Disclaimer: The views and opinions expressed in this article are solely those of the author and do not necessarily reflect the official policy or position of WERC.

The highly publicized Sitzer/Burnett trial verdict of 31 October 2023 found the National Association of Realtors (NAR) and two other defendants liable for $1.78 billion in damages, while two other named defendants chose to offer settlements related to the matter.

Many are saying that because the verdict is being appealed, which could take years, nothing will change in the meantime. That conclusion is inaccurate. 

As brokers adapt to the changes to ensure compliance with policy/practice changes that are occurring in different multiple listing systems, Realtor associations, and state or local laws, the real estate industry is witnessing a decoupling of the commission. 

In some areas of the country, there is already a requirement in the listing agreement for the seller to indicate compensation, if any, to the buyer’s agent. To achieve transparency, the listing broker must disclose in the Multiple Listing Service (MLS) if the seller is offering to pay the buyer commission in the listed price of the property. 

If the seller does not offer compensation to the buyer’s agent, the buyer must decide if and how they will compensate their buyer’s agent for their services. This is a shift from past real estate compensation practices, so, in practicality, changes are occurring today. 

Amid these changes, corporations and relocation management companies (RMCs) need to decide how compensation for buyer and listing services will be covered by the transferee and consider any potential changes to relocation policies.

Over the years, corporations have mostly eliminated service fees paid to RMCs that administer their employee relocations in favor of a model that replaces these service fees with real estate referral fees that are effectively a discount of the commission amount. These referral fees range between 30-50% of the brokerage commission on the referred side—for either the listing or the buyer.

Commissions have always been and continue to be negotiable; however, every real estate company has the right to establish their company’s minimum commission for listing and buyer services. Both sellers and buyers will now be required to establish their financial obligation upfront when they execute either the listing agreement or buyer brokerage agreement. These documents outline not only compensation but also establish the ability of the agent to represent the interest of the party, and such agreements become part of the purchase and sale contract. 

When the RMCs instruct brokers to strike through or put “zero” in the compensation clause of the buyer brokerage agreement, they are essentially asking the brokerage/agents to potentially work for free should a seller not offer compensation as part of their listing. The broker has no way of knowing if the buyer will ultimately select a property that will offer compensation. If the seller is offering any portion of the buyer compensation, it will offset the buyer’s financial obligation. For example, if the buyer has signed a buyer brokerage agreement for 3% and the seller offers 2%, then the buyer will only be responsible for the remaining 1%. If the seller offers more, that amount will be applied to the buyer’s financial obligation. It may be that even when the buyers sign the buyer brokerage agreement to pay the buyer’s commission, it may be covered in part or in full by the seller. 

Of course, the referral fees paid to the RMC by the broker are based on the amount of commission paid to the broker on the referred transaction. Striking compensation or putting zero in the buyer brokerage agreement means that the broker/agent may not be compensated and the RMC may not collect a referral fee. Clearly, neither is likely to agree to these terms and, as a result, the referral fee revenue stream that funds many of today’s relocation administration costs has changed the relocation revenue model.

Also, it is important to note that all RMCs must be licensed to accept referral fees, which means they are subject to the rules of the state that issued their license and will need to abide by the same rules as the brokers they engage for local services. 

Since the length of the appeals process is unknown, many across the industry are finding themselves in a quandary as they begin the transition process to comply with local practices or laws. Many organizations are acknowledging that existing business models will need to evolve to comply with these changes and, as a result, are developing their “Plan B” to ensure that transferee services are not diminished or eliminated.

The traditional cooperative commission system includes compensation not only for the agent who lists a property for sale (“listing agent”) but also to the agent who brings the buyer who purchases that property (“buyer agent”). 

This practice eliminates the upfront financial burden for buyers and has evolved to help sellers create an incentive that maximizes the marketing exposure of their home to potential buyers. Buyer agents were paid out of the proceeds at closing, thereby eliminating the need for buyers—who may already be struggling to make down payments and closing costs—to come up with additional cash to pay the buyer’s agent. This compensation structure is under attack. 

The plaintiff’s argument for this practice was that the system unfairly requires the seller to pay the agent who represents the buyer. Real estate practitioners argue that the buyer agent commission is actually funded through a higher purchase price that offsets that expense to the seller. 

Plaintiffs and others claim that commissions are simply too high. If one looks only at the number on a closing statement and assumes the agent earns that much, the argument may make sense. However, just as a furniture salesman is not paid the price of a sofa, neither does an agent earn the entire real estate commission. Like every product or service business, the real estate commission is divided among many parties to fund all ongoing and transaction-specific costs of doing business. First, the (example only) 6% gross commission is divided between the agents representing the seller and the buyer. The respective 3% (example only) shares are further divided in two or three ways: 

• In some cases (relocation), an off-the-top referral fee (30-50%) is paid to a source of the business (corporation/RMC, lender, affinity program, or another broker/agent who referred the client).
• The agent’s brokerage company receives its share (typically 10-30%) to fund its infrastructure and ongoing overhead, including staff salaries and rent. 
• The independent contractor agent is paid the remainder to cover their ongoing overhead (auto, insurance, technology, phone, professional fees, home office); variable costs related to the transaction (advertising, staging, marketing for listing agents and gas, lead source fees, showing lunches/dinners, settling-in miscellaneous costs, closing gifts, etc. for buyer agents); income taxes; and net earnings. When the take-home pay amount is analyzed based on work hours spent, most of which are behind the scenes and not readily observable by the client, the hourly income of most real estate agents for median-priced homes is very justifiable, not excessive. 

Buyer agents will have to articulate the value they provide and what the buyer can expect in turn for the agent’s service to the buyer. All parties will need to adapt, including sellers, buyers, their respective agents, as well as the corporations and relocation companies working with transferees.

Right or wrong, the current compensation structure is changing to eliminate any requirement of sellers to pay buyer commissions. Savvy sellers may still see the benefit of offering cooperative commission and can certainly offer to include the buyers’ commission obligation, but will they? That remains to be seen. 

Pamela O’Connor is a real estate and relocation adviser and the former president and CEO of Leading Real Estate Companies of the World. She is also a member of the WERC Hall of Leaders.