This is the second in a two-part interview with California Regional MLS General Counsel Ed Zorn on the impending changes to the commission structure and how it will impact agents. Read the first part HERE, and check out his sessions live at Inman Connect Las Vegas July 30-Aug. 1, 2024. Join us.
Real estate broker and attorney Edward Zorn is nothing if not generous with his thoughts when real estate and the law intersect.
When it comes to adapting to business practice changes associated with a proposed nationwide settlement between the National Association of Realtors and homeseller plaintiffs in multiple antitrust lawsuits, Zorn has plenty to share and will do so at two sessions at Inman Connect Las Vegas later this month.
The NAR settlement includes rule changes set to go into effect on August 17, including a prohibition on listing brokers making offers of compensation to buyer brokers on multiple listing services and a requirement that brokers and agents sign contracts with buyers they’re working with before touring a home.
READ PART ONE OF INMAN’S INTERVIEW WITH ED ZORN
In a two-part interview, Inman caught up with the vice president and general counsel of the California Regional MLS to get his take on buyer agreements, seller concessions, steering and commission-sharing between brokers.
Part 1 tackled what Zorn will be talking about at ICLV, how listing agents’ jobs will change after August 17, whether seller concession fields will replace offers of compensation in the MLS and why mandatory buyer agreements are consumers’ big win from the NAR settlement.
With Part 2, Zorn dives into the nuances of offering a dollar amount or a percentage of the purchase price as a seller concession, the settlement’s potential impacts on steering, how buyer agents’ jobs will change after August 17, and the No. 1 thing people in the industry should be doing to stay out of antitrust trouble in the future.
This interview has been edited for length and clarity.
You were saying you’re a big believer in having either a dollar amount or a percentage listed when a seller is offering concessions.
On the appropriate property. If you had a home that was subject to FHA lending … I would encourage you to consider offering concessions. If you were doing a $1 million home or a $900,000 home in Corona I would tell you, “Don’t offer concessions.” I would tell you, “Mark the box that says ‘We’ll consider a concession'” and don’t commit to any kind of number whatsoever.
I think you’re going to see [concessions] clump around the entry-level market because that’s the specific buyer that needs the comfort of how this process works, and that this particular home I’m going to put an offer in will work for my situation.
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I think mid-priced homes to higher-priced homes will not have concessions. I’m not saying I would put concessions on every property. I would say it depends on what my seller needs.
If my seller is one of those looky-looing, “Hey, I don’t really have to move. I can take three, six months. Doesn’t really matter,” I probably don’t recommend he does concessions. Concessions are a particular marketing strategy to drive a quicker, faster sale and to help a certain segment of people, make it easier for them to buy this home.
I understand that distinction you’re making, but this is a change that’s being made across the board. You have this philosophy determined by the type of property and whether it’s subject to FHA lending, but there are many thousands of agents that will be using these fields that may not have that particular philosophy on concessions and may decide to treat this field as just a replacement for the compensation field. The implementation of it is across the board, so why not just have a Yes or No, and then the FHA buyer can just ask for what they want?
Again, if you’ve ever dealt with an FHA buyer, it’s an easy thing to say, a hard thing to get them to do.
Wouldn’t that be their agent’s job, though, to tell them “This listing is offering concessions”?
Sure. Let me give you shock of all shocks: Buyers don’t listen to me. This is why [the concept of] steering, for those of us who are in the field, is such a laughable idea. You kidding me? You think I could convince you to buy a house if you hated the kitchen? Agents don’t have that power.
But you can say as a buyer’s agent, “Oh, I’ve heard the foundations in this development aren’t good.”
Correct. I can scare people away from homes all day, sure. But my point is, if there’s a home that is good for somebody … and they’re a first-time homeowner, maybe the first in their family to ever buy a house, and it’s at a price that they can afford, but they don’t have the cash, convincing them to put an offer in and just ask for it on the [idea that] maybe you’ll get it, that’s a giant emotional event for somebody. People cry when they don’t get a house. It’s devastating to them.
If it’s a first-time buyer who’s really trying to secure the American dream and get a property, to be told “No” could end their decision to buy a house. That absolutely happens.
I think we’re making some really good quality changes. We’re getting rid of offers of compensation. We’re getting them out of the forms, which I think is super important. It’s one hundred times more important than the concession issue, to make sure that the forms don’t encourage continued commission-sharing.
That has way more impact on what the risk is of potential steering or using fear of steering, which is really the issue on the seller side, than concessions are.
People have this opinion that concessions will replace offers of compensation. I have actual experience. I have data that suggests that that’s not going to happen, both historical and right now. I agree, people can just put nothing and let the buyer make an offer. I agree that that is something that can happen.
But again, go talk to the heads of, like [the National Association of Hispanic Real Estate Professionals] or any of the fair housing, first-time homeowner groups. They’re petrified about the commissions coming out of the MLS because they know that their body of people are going to be too scared to buy houses. The reason CRMLS is so behind keeping some level of concessions viable to help that group is important.
We can’t throw the baby out the bathwater. That’s what we’re doing if you’re going to attack concessions. At least let’s see what happens.
When you have your listing presentation, you tell the seller you don’t have to commit to anything regarding the buyer agent or concessions. But how do you have that conversation when you do want to offer a dollar amount or a percentage, if it is an FHA property?
It would be part of my explanation going through the comparative market analysis. Let’s say I’m selling a condo in Corona and it’s a 150-unit project and they have a three-bedroom two-bath. We look at the other three-bedroom two-baths that have sold in the neighborhood. Let’s say they’ve sold at $450,000. Three of them sold in the last two months. I’m going to look at what are the concessions that the seller paid to help a buyer get into the home.
I’m going to have that conversation with my client when we’re setting the list price. I’m going to explain to them that there is a set of potential buyers that may have a challenge in buying your property because they don’t have enough cash on hand. So do we want to address that or not?
We don’t have to. The other strategy we can go to is let’s go with the lowest price. Strip out the concessions and compensation … and let’s drop the price, make it lower. But we’re gonna have to rely on good buyer agents to be able to explain that and we’re not going to control that, so there’s a risk there.
This is part of my skill in communicating to a seller: what kind of marketing strategy do we want to go to market with? A lower price, no concessions? Or do we want to push a little bit of a higher price, but offer concessions?
Here’s what you’re going to get when you do the lower price: It will go to an investor, an all-cash guy who’s going to rent the house out because he’s going to see a nice, low price, and going to offer all-cash. Is that what we want? I’d rather have the VA guy or the FHA person in that house, personally.
Do you know of which MLSs are just doing the Yes/No in the concession field?
I don’t. I don’t know who else is going to be comfortable enough to do it because there’s so much fear around it that I think any MLS that’s going to take the tack of “We don’t want to talk to the [Department of Justice]. We don’t want to have any issue at all,” I think they’re going to either do no concessions, or they’re going to do only a Yes/No field and then kind of see how does it work.
How is the buyer’s agent’s work going to change after August 17?
The biggest thing that’s going to change with the buyer’s agent is going to be the need, No. 1, to be properly trained and skilled in communicating about transactions and understanding value, in addition to the things we buyer agents always do, which is emotional support, marriage counselor, friend, confidant.
Here’s the thing that’s going to change a lot and that is you’re going to have to get a buyer representation agreement signed. You’re going to have to be able to demonstrate your value, and you’re going to have to be able to then set your pricing of what you charge consistent with what value you bring to the transaction.
You’re going to need to be able to explain to your buyer how the current process has changed and how they can expect to include your fee in an offer so that the seller continues to pay your fee, just like historically it has been done for decades. You’re going to have to develop those skills. You’re going to have a presentation, you’re going to have to have data.
Realize you’re going to be in competition. You don’t get to just say, “Well, on my last X number of transactions, either this is what I made, or this is what everybody’s offering, so that’s what I’ll put down.” That’s not going to cut it.
If that’s what you do here in Knoxville and you want 3 percent, what are you going to do? Because if you want to move to Knoxville, I charge 2 percent. That’s my rate. So if you charge 3 percent, what are you going to do when I come along — a 30-year lawyer, 20-year Realtor, I’ve done thousands of transactions. Who’s the buyer going to use?
So they need to realize they’re going to be subject to price competition. Make sure that you’re setting the fee that you’re charging consistent with what your skill level is, your value proposition, the services you’re going to provide, and don’t be concerned about what other people charge or what’s being offered.
Then the next thing you need to realize right away as a buyer’s agent is you don’t need any help from the listing agent to decide on what’s being offered or anything like that. Go show every single property, open every door your buyer wants to see that he’s qualified for or she’s qualified for, and make an offer on every single property.
It doesn’t matter if the seller has offered concessions or not. Doesn’t matter. Make the offer and then be ready to negotiate the price against the offer you made. This is where the skills of valuation, understanding how to do a proper CMA, how to make appropriate adjustments for differences between comparable properties and a subject property, including other financial contributions from the seller, how it interacts with that as you start to justify your offer price.
In every offer that I make from this day forward, it’s going to say, “Seller shall pay Ed Zorn Realty X percent, in my case, 2 percent, of the purchase price of closing.” That’s going to be in every offer, and then we’ll negotiate from there.
So I’m not concerned ever about getting paid. It will be part of the transaction, just like it is today. The difference is that my buyer and I negotiated the buy-side fee, instead of the seller and the listing agent deciding on the buy-side fee. That’s a huge difference.
What are you being asked about the most in your work as a lawyer?
When agents are saying “what’s going to change?” what they really need to see are the [transaction] forms. The way you change agent behavior is MLS input and the forms. So it’s those two things together that can be used to change behavior.
With the terms of the settlement agreement and MLSs signing on, the MLS has done their job. We’re removing the commission fields. We’re changing our rules to mandate this buyer representation agreement. The MLSs are doing what they can, rule-wise and technology-wise, to drive those changes.
The other part of that now is going to be the forms. I think [the California Association of Realtors] did a good job by getting rid of commission-sharing. Just get rid of it. Eliminate it. We don’t need it. There’s no purpose in it. Off MLS, there’s no purpose in sharing commission.
Now that the [listing agreement] form is gone about sharing commissions, then the other form that matters is the purchase agreement, making sure that purchase agreement forms have a sentence or a process where the buyer can include in this offer on the purchase agreement the request for the payment of the buyer agency, as well as any other potential costs. Therefore, it is subject to negotiation between the buyer and the seller.
But I think what you’re going to find is, by the time you get to January, people are going to look backwards and go, “That really wasn’t that big of a deal.” A lot of hoopla, lots of hand wringing, lots of “Oh my god, what are we going to do?” but once you see the forms and if the forms are crafted properly, the system will naturally flow because people will use the forms to help educate and inform their consumer and that will drive the practice.
I fully expect 90 to 95 percent of all offers will have a request for the seller to pay the buyer’s agent.
Is there anything that people in the industry should be doing to keep themselves out of antitrust trouble in the future?
The No. 1 thing the industry should be doing to stay out of trouble is get rid of anything that supports commission-sharing. That means at a state association level or a local association level that is creating standardized forms, those listing agreement forms should not accommodate or facilitate the sharing of commissions between brokerage firms, between the listing broker and the buyer’s broker.
They should be focused instead on only the commission discussion being between the listing agent and the seller.
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