Real estate commissions have been under a microscope over the last few years. As a real estate agent, it’s crucial that you stay updated on the laws and regulations related to commissions. However, this topic is complex since each state has its own rules regarding how real estate agents are paid.
Here’s some help understanding the legal and ethical considerations of real estate commissions, as well as an explanation of the National Association of REALTORS’ new buyer-broker commission rule.
The Importance of Legal and Ethical Considerations in Real Estate Transactions
Real estate transactions are governed by numerous laws at the federal, state, and local levels. Compliance with these laws ensures that all parties’ rights are protected.
However, it’s also crucial that real estate agents act ethically. Ethical behavior builds trust between real estate agents and their community. Clients rely on their agents for guidance and advice. Honesty, integrity, and transparency are crucial to establishing long-term relationships and a positive reputation in the industry.
Real estate professionals who are members of the National Association of REALTORS (NAR) must sign a code of ethics that promotes fair treatment, confidentiality, and professional competence.
While the NAR made no changes to the Code of Ethics in 2024, the organization has new regulations involving buyer-broker commissions, which we will outline in the next section.
Understanding the NAR Buyer Broker Commission Rule
Before we explain the 2024 NAR buyer broker commission rules, it’s important to note that real estate agents who represent buyers will continue to be paid. In fact, they may still receive a commission based on the property’s sale price, which has been the standard for years.
- However, as a settlement to a 2023 lawsuit, the NAR has proposed new rules regarding buyer-broker compensation.
- Compensation offers for buyer’s agents can no longer be communicated via the Multiple Listing Service (MLS). MLS participants working with buyers must enter into written agreements with those clients before touring a home.
You’ll notice that the new rules do not change how much buyer’s agents will be paid.
Legal Framework for Real Estate Commission
News outlets declared that the new rules from the NAR may keep buyer’s agents from getting paid or will reduce their commissions. This isn’t true. Instead, the new rules ensure that everyone involved in a real estate transaction understands how agents and brokers are compensated for their services.
Here’s the legal framework for real estate commissions.
1. Listing agreements and buyer representation agreements
Listing agreements between sellers and real estate agents specify the commission rate the seller will pay when the transaction is complete. Similar to listing agreements, a buyer’s agreement is a contract outlining the commission the buyer’s agent will receive. Agents must disclose their commission rates upfront and ensure clients understand how these fees are calculated and paid.
2. State real estate commissions
Each state has a regulatory body that oversees the licensing and conduct of real estate professionals. These commissions establish rules and regulations regarding how commissions are structured and paid.
3. Antitrust considerations
Real estate professionals must avoid any behavior that could be construed as price-fixing or collusion on commission rates. Such practices are illegal. Instead, agents and brokers are encouraged to compete freely on commission rates and services offered, promoting a healthy and competitive marketplace.
Disclosure Requirements and Transparency
What must real estate agents disclose to their clients concerning their commission? This question is difficult to answer, as each state has specific laws and regulations requiring disclosure of commission rates and terms.
However, here are some situations that agents may be required to disclose.
- Commission rates: Agents must disclose the commission rate they charge in the listing agreement or buyer representation agreement.
- Commission splits: If the commission is divided between the buyer’s and seller’s agents, this split should be disclosed. This includes agreements on how the commission will be divided between the brokerage and the individual agent.
- Dual agency: In cases where an agent represents both the buyer and the seller, the agent must disclose this dual agency relationship and obtain written consent from both parties. The agent must also explain how the commission will be handled in this scenario. (It’s worth noting that dual agency is not allowed in some states.)
- Disclosure of relationships: If an agent has business relationships or affiliations that could influence their commission, they must be disclosed to the client.
- Referral fees: Any referral fees an agent receives from recommending a service provider must be disclosed to the client, ensuring that clients know of potential conflicts of interest.
- Marketing materials: Agents should ensure they do not mislead clients about their commission structure. Any advertised commission rates should be accurate and reflect what is stated in the agreement.
Real estate agents are responsible for staying updated on their state’s regulations regarding real estate commissions and changes occurring at a national level. Stay informed by taking continuing education courses with Colibri Real Estate School. Our courses are taught by local experts who understand the legal and ethical aspects of real estate commissions. Learn more by contacting a licensing advisor in your state.
Key Takeaways
- Various federal, state, and local laws govern real estate transactions. Compliance with these laws and adhering to ethical standards ensures fairness and builds trust between agents and clients.
- New regulations from the National Association of Realtors (NAR) require that compensation offers for buyer’s agents be excluded from the MLS and mandate written agreements with buyers before touring homes. These rules clarify compensation without changing the amount paid to buyer’s agents.
- Agents must disclose commission rates, splits, dual agency relationships, and referral fees. Clear communication and written agreements are essential for maintaining transparency and avoiding conflicts of interest.
- Each state has specific laws and regulatory bodies overseeing real estate commissions. Agents must stay informed about their state’s regulations and take continuing education courses to ensure compliance and professional competence.
