Legal fights over commissions may upend Florida’s real estate business

The decades-long practice of property owners paying real estate commissions is being seriously challenged in courts nationwide and the legal fallout could dramatically change how much money buyers and sellers of homes pay real estate agents in the future.

The repercussions will be especially pronounced in Florida, which has more real estate agents than any other state in the nation.

Miami realtors’ board recently changed its long-standing policy of requiring listing agents to offer at least 1 cent commission to a buyer’s agent. Now, that listed cooperative commission can be zero. If an agent working with a buyer is involved in a deal with a cooperative commission of zero, that agent would not get paid the way residential real estate commissions have been structured for years.

The difference between 1 cent and zero may be financially trivial, but it could symbolize the beginning of the end for how real estate commissions historically have been paid for decades.

Before the change, a South Florida real estate agent who listed a property for sale on the Miami Board of Realtors’ Multiple Listing Service was required to put some dollar figure as “cooperative commission.” It was a sign that the agent bringing in the eventual buyer would be paid a percentage of the sales price.

That mandatory minimum had been one penny, according to the board’s rules. “As close to zero as you can get,” it said in November.

In practice, the actual commission wasn’t a penny. Common practice is for a 5%-6% sales commission. Usually, it is evenly split between the agent working with the seller and the agent working with the buyer (though most agents do not represent the seller or buyer. More on that later.) Sometimes agents would agree to a slightly lower commission in order to get a deal closed.

The small monetary difference between one penny and zero belies the possible upheaval in how some real estate agents are paid, including in Florida. At stake, pending the outcome of courtroom battles across the country, are billions of dollars exchanged with the purchases of millions of properties.

Coupling commissions

The home at 296 Buttonwood Shores Drive in Key Largo includes three bedrooms, a newly renovated open-concept kitchen, a 29-foot dock with a boat lift and a footbridge with views of Florida Bay. It is a wood home that has a metal roof, impact windows and doors, and the property even stretches under part of the bay to a mangrove island.

The sale of the home also includes a 2.75% commission to a real estate agent who brings in a buyer, if that agent is a member of the Keys Multiple Listing Service. If the agent belongs to another service, they’ll make two percent of the sale price.

That commission is specified in the home’s sales information that appears on the Multiple Listing Service — the clearinghouse of homes and condominiums for sale. MLS is a cooperative database of real estate brokerages listing their properties for sale. The brokerages and agents agree to certain rules to gain access.

One of those rules is how agents working with buyers get paid. Traditionally, a listing would include information on how much an agent would earn if they bring in a buyer. It is listed in the part of the database agents see, followed by a percent — usually between 2.5 and 3.

That means the agent working with a buyer will be paid that percentage of what the eventual selling price of the property.

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The sellers of 296 Buttonwood Shores Drive are asking $2.7 million. If they get that, the total commission would be 5.75% — about $155,000. Karen Prince, as the listing agent, would get 3 percent — $81,000 — based on her percentage. The local agent who brought in the buyers would get the rest.

This is how real estate commissions have worked for decades. An agent selling the house offers a commission to an agent who works with the eventual buyer. That commission had been — and for some boards of realtors remains — mandatory in order to list a property for sale on a multiple listing service.

“I feel that it’s an advantage to the seller to continue to offer the buy-side commission because we’re going to get more buyers (and) agents who look at their property,” said Prince.

But some have been complaining about having the commission of the buyer’s agent come out of the selling price.

“We believe that the commissions are too high and they’re uniform, which means that they’ve basically been set by the industry,” said Steve Brobeck, executive director of Consumer Federation of America. “Consumers are overpaying for brokerage services.”

In 2019, Brobeck spoke with 200 real estate agents in the biggest cities, including agents in Florida. Almost three out of every four said they would not negotiate their commission. Most charged six percent, split with the agent who brings in the buyer.

Sellers have been suing in courts across the country over that coupled commission.

There are a handful of lawsuits in federal court, including one involving some listing services in Florida. The suits challenge this long-held practice of how real estate commissions work. The judge hearing the case involving Florida expects the trial to start late this year.

“Sellers are pushing back. They’re saying, ‘Why should I be paying the buyer’s commission?’” said FIU Real Estate Professor Suzanne Hollander.

One case already has gone to a jury, which determined that linking the selling and buying agents’ commissions was anti-competitive. Several real estate brokerages and the industry’s main trade organization were sued by home sellers in federal court in Kansas City, Missouri. Two firms, RE/MAX and Anywhere Real Estate, which owns brands such as Coldwell Banker and Century 21, settled before the jury got the case.

The panel decided the National Association of Realtors, Keller Williams, and HomeServices of America conspired by forcing home sellers to use a system that splits payment of a commission between sellers and buyers. The jury ordered the brokerages to pay $1.8 billion in damages. An appeal is expected.

“The reason we are in this situation is because it wasn’t transparent to buyers and sellers how commissions were shared,” said Brian Schmitt, owner of Coldwell Banker Schmitt Real Estate in the Keys. He has been selling homes in the Keys for 40 years. “There was no requirement for agents to share that information. It wasn’t hidden purposefully from anyone, but because people didn’t understand how agents got paid, it was pretty much left up to agents to determine how that happened.”

Big real estate brokerages and the industry’s trade association are facing potentially billions of dollars in damages for how agent commissions have been structured for decades.

Back in Key Largo, Schmitt and Prince aren’t worried.

“I don’t think, just as a consequence of this, that commissions are going to be subject to significant decreases across the board, that buyers are going to somehow come in and buy properties without paying buyers’ brokers,” said Schmitt.

Prince agreed. She thinks that is especially true in the Keys with its complex environmental and building regulations.

“Someone’s going to have to pay (the commission). The buyers are going to need our expertise to navigate through the complicated process of buying a home here in the Florida Keys,” she said while standing just inside the front door of the house on Buttonwood Shores Drive.

Outside, it was overcast. Florida Bay and nearby marina were quiet from the second floor deck. A landscaping crew was at a neighborhood’s home crowding out the sounds of the bay breeze and birds.

“I still believe that based on how this industry has operated for 100 years, sellers are going to see that there is a benefit to offering a commission to a buyer-broker. It will make their property more marketable. More buyers’ agents will show a property where they know they’re being paid by the seller, than where they have to rely on the buyer to pay their commission,” Schmitt said.

The day the verdict was announced in Kansas City, the winning attorneys filed a nationwide lawsuit against the National Association of Realtors and seven brokerages. The suit aims to include everyone who sold a home in the U.S. who used a listing broker affiliated with the named brokerages and listed it for sale on a multiple listing service over the past four years.

About a week after the conspiracy verdict by the Missouri jury the Miami realtors association changed its rules to allow agents to enter any amount for a coupled commission — including zero.

WLRN requested interviews with the Miami Association of Realtors’ chairman and chief legal counsel. They turned down the invitations and sent the association’s explanation for the change that was posted on its website in early November. That statement said it made the change “to reinforce (real estate agents’) ability to engage in transparent negotiations with customers and prospective buyers.”

The Missouri case may be 1,400 miles away from South Florida but the Sunshine State is not immune to these legal challenges. The Florida Association of Realtors and more than a dozen brokers were sued last month, accused of conspiring over agent commissions, the same accusation that was in front of the jury in Missouri.

“We can’t put that toothpaste back in the tube,” said FIU’s Hollander. “And that discussion is going to be on every single table when we’re talking about signing a listing agreement.”

“It represents the greatest threat to the price setting of the industry in the last 100 years,” said Brobeck. He figures if real estate commissions drop by two percent, it would save home buyers and sellers $20 billion dollars a year.

The potential savings is enormous as it represents an enormous threat to how business is done and how agents are paid.

Not “your” agent

If you have bought or sold a home in Florida, chances are the real estate agent you worked with did not work for you.

“The public thinks that the realtors are on their team. The realtor represents the seller or the realtor represents the buyer. And in the state of Florida, we have a default to this idea. It’s called ‘transaction broker’,” said Hollander.

That means in most Florida residential real estate deals, the person you may call “your agent” does not — legally speaking — represent you. They represent the deal. Thus, a transaction broker.

“If you came to me and said, ‘Brian, I’d like to buy a house,’ and I never told you how I was going to represent you, what the law would say is that I didn’t actually represent you, that I represent the transaction,” said veteran real estate agent and brokerage owner Schmitt. “You, on the other hand, would believe that I represented you.”

Schmidt’s agency is not a transactional firm. It is a single agent company representing either the buyer or the seller and has to disclose its responsibilities. His agents, like Karen Prince, are considered independent contractors

“We represent people. We represent sellers,” said Schmitt.

Critics like Steve Brobeck of the Consumer Federation of America think the default relationship in Florida supports the argument that transaction brokers should be paid less because they have fewer obligations.

“Transactional brokers are basically facilitators with less liability than a fiduciary agent and they should not collect as much in compensation as a fiduciary agent,” Brobeck said. “They cannot, for example, say anything to one party that harms the interests of the other party. They are truly facilitators. And when there’s only one facilitator in the sale, we don’t really see any reason that they are to collect any more than 3%, especially on high priced homes.”

“For a lot of things, the more you unbundle services, the better you are because then people can pick what they want,” said University of Miami Herbert Business School Finance Professor Andrea Heusen. “I think people who are good will stay and adapt. The ones who are not so good will not be able to react and, you know, figure out a successful way to navigate this disruption.”

A glut of agents

Florida has a lot at stake with how real estate agents are paid.

There are about as many full-time real estate agents in South Florida as there are middle school teachers and slightly more than there are bartenders.

“They say that more people in Florida have real estate licenses than driver’s licenses,” said Hollander. “I looked it up. It’s not that’s not true. More people have driver’s licenses in the state of Florida.”

Still, Florida has more real estate agents than any other state. And South Florida has more real estate agents than any other major region. Add part-time agents selling real estate as a side hustle and there are tens of thousands of people whose paychecks could be impacted by any changes to how commissions are paid.

“This is a very part-time industry,” said Brobeck. “A very small minority are responsible for most of the sales.” A recent study from his organization found almost half of agents in diverse urban areas, including Orlando, sold one or no homes in the past year.

With so many people working part-time, or even just once in a while, that has implications for the industry in a market saturated with agents like South Florida.

“It means that very few agents can make a living selling real estate there. There are just too many agents for too few sales,” said Brobeck.

The Miami Association of Realtors claims to have about 60,000 members from Miami-Dade north to St. Lucie County. In October, there were fewer than 7,000 closed sales of homes and condos across the region. The average pay for a Florida real estate agent is about $54,000 a year, according to the latest data from the Bureau of Labor Statistics.

“I think you’re going to weed out a lot of those folks who are in that marginal category of agents. They’re going to have a harder time sustaining their business throughout this change,” said Schmitt.

Many agents were attracted to the industry because of the pay and flexibility. That’s why Karen Prince, who is the listing agent for the home on ButtonWood Shores Drive in Key Largo, became one. She was raising her two children and needed a career that would allow her to be at home when they needed her.

She had sold seven homes so far in 2023 when she spoke with WLRN in late November. She called it an average year. That pace would put her in the top 30% of agents, according to the study from the Consumer Federation of America.

“It has been very lucrative for me to stay in the case and send my two kids to college,” said Prince.

This year may be anything but average for the industry with several lawsuits pending over real estate agent commissions.