Why You Should Tell Clients How You’re Compensated

The real estate industry is facing lawsuits over how buyer’s agents are compensated, which means it remains critical that you have transparent conversations with your clients upfront about the commission structure. If you need pointers on how to have the conversation, the Real Estate Buyer’s Agent Council’s (REBAC) ABR® designation course includes a section on this as well as education on recent updates to MLS rules and the REALTOR® Code of Ethics that impact your practice. The course also covers how using a buyer’s rep agreement is essential and helps naturally facilitate these discussions.

Agents should spend time explaining to consumers how real estate commissions are paid—and always stress that commissions are negotiable, says Lynn Madison, ABR®, broker-owner of Lynn Madison, REALTOR® in Schaumburg, Ill., and owner of training company Lynn Madison Seminars. Madison helped update the ABR® course.

Background on Compensation Lawsuits

Recent class-action lawsuits filed against the National Association of REALTORS® and four large real estate franchisors allege that sellers are unfairly required to pay the buyer’s broker commission and falsely assert that sellers do not have any ability to negotiate. NAR rules and policies, however, are clear: Commissions are always negotiable.

In 2020, the Department of Justice and NAR reached a settlement, which emphasized and furthered NAR’s long-standing pro-consumer policies and practices, including making clear that real estate professionals should never characterize their real estate brokerage services as free if they are receiving compensation from any source. However, the DOJ withdrew from the settlement in 2021, publicly stating its intention to investigate the matter further. Regardless, NAR moved forward with clarifying its policies in the first quarter of 2022 and furthered what was already the spirit and intent of existing policies, including providing increased transparency for consumers by enabling brokerages to make offers of compensation public on their websites.

Further, the Code of Ethics Standard of Practice 12-1 was amended in January to state: “REALTORS® must not represent that their brokerage services to a client or customer are free or available at no cost to their clients, unless the REALTOR® will receive no financial compensation from any source for those services.”

How to Talk About Compensation With Clients

During an initial buyer consultation, the agent and client should formally establish compensation expectations. This is an opportunity for buyer’s agents to share their value and counter any notion that their compensation is determined by the seller and listing agent. Follow these tips:

1. Use a buyer rep agreement. This helps you and your buyer establish compensation from the start. The agreement provides the circumstances under which you’ll get paid, how much and by whom. There are different structures of compensation available to buyer’s representatives; your office policy likely will dictate your choice (e.g. percentage of sales price, flat fee, or retainer fee). “The buyer can pay you at closing, or they have the option to ask the seller to pay it,” Madison says. “But if you have a buyer rep agreement, you know from the outset what you can expect to be paid for your professional services.
2. Disclose any extras. Sometimes, compensation for the buyer’s agent might exceed what’s allocated in the buyer rep agreement, such as when the seller or listing office offers a bonus for the sale of a property. In that case, a buyer’s rep agreement should be written to disclose any bonus or additional percentage of commission that would be received. The ABR® course also provides examples of how this issue can be addressed, such as reflecting a range of buyer’s rep compensation in the agreement to account for these situations.
3. Stay updated on changes. Check out competition.realtor , an NAR website offering infographics, articles and FAQs to help REALTORS® have conversations with consumers about commissions and the services they provide, as well as how local broker marketplaces, or MLSs, are pro-consumer and provide home buyers and home sellers the most up-to-date, accurate property information and unprecedented access for all. Here, you can also find the latest information about the pending lawsuits. REALTORS® are encouraged to use the information and resources provided to facilitate these important conversations between real estate professionals and home buyers and sellers.