Commission Chaos in the California Real Estate Market

Part 1: The Sellers Perspective

By Kelly Mills Evers

You’ve probably heard of the recent federal jury ruling that just changed the game for real estate brokers and their agents as to the commissions they are permitted to collect. The case is known as Sitzer v. National Association of Realtors, et al., and the defendants were found guilty of conspiring to artificially inflate real estate broker commission rates. Okay, well shame on them, now what?  How is the industry changing to comply and what does that mean to you?  A brief recital of commission history is necessary as a backdrop to where we are today.

For decades, listing agreements entered into by sellers typically included language wherein the seller agreed to pay a commission as a percentage of the sales price. The commission was deducted from the proceeds paid to sellers at the close of escrow.  That commission was typically split between the sellers' broker and the buyers' broker. For example, on a $1,000,000 home with a 6% commission, 3% went to the sellers' broker and 3% went to the buyers' broker, all of which was funded by seller.  While the commission rate was often a talking point and negotiated by sellers, the fact that a portion of it was paid to the buyers' broker for the benefit of the buyer was not negotiated and that is where some ran afoul.  All real estate commissions are negotiable. They were negotiable before Sitzer, and they are negotiable after Sitzer. 

The findings in Sitzer put the lawyers to work, creating new CAR forms and disclosures for 2024 and creating quite a discussion and chaos in the industry as to the payment of the commissions.  The negotiable commission has perils from both the sellers and buyers standpoint.  

Sellers can list their property offering any percentage of commission that they want, and they decide how, if at all, the commission will be split between the buyers' broker and sellers' broker. So, let’s take a hypothetical example of Steve Seller.  Steve hates paying commissions and after negotiating with his real estate broker, Steve decided to list his property and pay 3% to his broker, the sellers broker, and 0% to the buyers broker.  Steve declined to follow his agent’s suggestion to offer compensation to the buyers' broker. He feels that the buyer needs to incur that expense.  What are the ramifications of Steve’s decision?  He has significantly limited the pool of potential buyers for his property and here is what that looks like. Cue the chaos music!

First, generally buyers cannot finance a brokerage commission through a mortgage and many homebuyers do not have cash available to pay the commission out of pocket. Many of us have felt the financial squeeze in getting into a new home. Having additional cash available as a buyer to pay your broker is not at the forefront of people’s minds and it is unlikely that earmarked funds are sitting in the bank waiting for disbursement.^[1]

Second, certain lenders such as the Veterans Administration (VA) legally prohibit its military members that are acting as buyers from paying a commission to their broker as a lending requirement.  There are no commission payments for our heroes!  The result is that the VA loan buyer would then need to represent themselves in the transaction foregoing professional representation which is not optimal for the buyer or the seller.

Third, in my opinion, not offering commission compensation to the buyers' broker likely leads to no agent representing the buyer.  Real estate agents and brokers do not work for free.  Without an agent representing the buyer, the buyer may not be able to navigate the complexities of making an offer, negotiating a sales price, attending to inspections and disclosures, obtaining financing, and dealing with title and escrow issues. As a result, the closing process may take longer, or it may not happen at all. Delays cost the seller money in the form of greater carrying costs and the disruption of the chain of events if the seller needs to sell their existing home before they can purchase a new home. Moreover, who is more likely to engage in post-close failure to disclose litigation claims? The represented or the unrepresented buyer? I’ll let you answer that question yourself.

 My recommendation is that sellers offer a reasonable commission to the buyers' broker. Making the sellers property attractive to the largest number of potential buyers is a smart move and working through a transaction with a buyer who is not represented by a licensed real estate professional is precarious at best.  You might get an offer and get into contract, but then what? You don’t want an unrepresented buyer on the other end jeopardizing your deal.

Stay tuned for Part 2 – The Buyers Perspective.  Are you interested in buying or selling home? Let’s chat! Call me at 916-826-1767 or email me at [email protected] for a confidential consultation. Kelly Mills Evers is a REALTOR with Coldwell Banker Realty, CalRE#01854628. Affiliated real estate agents are independent contractors sales associates, not employees.  Coldwell Banker Realty is owned by a subsidiary of Anywhere Advisors LLC.

[1]             The term “negative commission differential” has been bantered about to identify the amount of commission funds payable by the buyer at close in the form of cash that is not financed.