I saw a post recently where a real estate agent posted that they would work for free for any buyer that wanted to work with them. And the question is: is that honest? There was a lot of kerfuffle and a lot of debate about this on the realtor social medias. But there’s a long history behind why a real estate agent would make that claim.

It has happened many times over the last 25 years, and it’s all due to the way that the market has been structured. There are a lot of big changes happening lately that kind of mix this up. But let me give you a little bit of history, a little bit of background.

How Realtors Would Work For “Free”

Back in the late 90s and the early 2000s, the real estate market had a shift where they had this idea to have a seller agent negotiate a single commission that they would charge to their seller, and from that commission, if a buyer agent brought a buyer, they would split that commission with the buyer agent, and they would each get half, for example. And that was a way that they could bring buyers and sellers to the table and that they could work together to sell homes.

Now, there was a big advantage to that, which was that buyers on their own rarely have a lot of cash set aside to pay for an expert representation to help them with this big transaction. And so, buyers didn’t have a lot of money to pay an agent out of pocket, and that was a big problem. Another issue is from a buyer’s side you can’t really finance a real estate agent’s commission.

If you are a buyer and you’re looking to buy a home, you can’t go to the mortgage lender and say, “Give me a little bit extra to pay for my agent,” because they’re only going to loan based on the value of the house. They’re not going to loan above that. So, a buyer, not having cash, and not being able to finance it, couldn’t get a buyer agent.

And so, this is one of the solutions they came up with. And this lasted for a long time, 25 years. In fact, it’s still happening today, but just a little bit different based on some new developments discussed later.

So, a buyer based on this system could hire a buyer agent and they would negotiate a price. And then when they went to buy a house from a seller, assuming they were both members of the same association, the Association of Realtors, the seller agent would agree to split their commission with the buyer agent. That way the buyer didn’t have to pay out of pocket and the total price that was spent would be spent from the buyer side for the home.

That way they could finance the home. And then from those total proceeds, the seller agent would get paid, the buyer agent would get paid, closing costs would be paid, a lot of things like that. There are a lot of good things about that system, but I want to point out some of the disadvantages that have been brought up over 25 years we’ve been dealing with this.

How This System Discourages Fair Representation

One of the disadvantages was because the seller agent negotiated this commission rate in advance, if there was no buyer agent then the seller agent would just keep this whole commission, which could be a sizable amount. And that unfortunately created a big conflict of interest where a seller agent would want to have a buyer that’s not represented, or a seller agent would want to find their own buyer. This made a situation where the seller agent had this big conflict of interest, so they wouldn’t always do what was in the best interest of their client.

For example, if I was a real estate agent and I saw a buyer asking if they should get an agent to buy a home, I would say, “Heck yeah! You need an expert to help you navigate the contracts, all the inspections, who would understand all of these big problems that could happen on a home purchase.”

On the other hand, it might be different if I was representing the seller and I had this commission structure written so I have to essentially give up half of my commission to a buyer agent, then the buyer comes and asks if they should get an agent. Normally I would say, “Yes, you need representation,” but now I have a huge financial incentive to say, “Nah, don’t get another representative, just come and buy the house from me without anybody else and I’ll take care of you.” Right? Supposedly I’ll take care of you, but who do I represent? I represent the seller. So, this created a big conflict of interest in that situation.

The Vagueness of Commission Amounts

Another problem was that the commission amounts became hidden. They became kind of obscured. Technically, they were in the contracts. The buyer agent would sign a contract to pay a certain amount of commission to their buyer agent.

But then, when they went to buy a home, a lot of times because the commission was being paid from the seller side, the buyer agent would be willing to waive any extra fees, or they would negotiate with the seller and say, “I’m only collecting this much from the buyer, so you need to change your fees.” And it sort of made the buyer and seller agents need to negotiate between each other on a transaction that should be between a buyer and a seller, pulling more people into the transaction. Now that problem is not going to go away. But it was definitely exacerbated by this problem.

And so, if a buyer agent agreed to receive $10,000 from their buyer, but then they go to a home and the seller agent was only offering, say, $7000. A lot of times the buyer agent would just say, “That’s fine, I’ll just take $7000.” But then how much is the buyer paying? Why did they agree to $10,000 if they’re willing to accept $7000?

And same thing on the seller side, if they’re willing to share $10,000 with the other side, why would they ask for that from the seller upfront in the first place? This whole nature of value is sort of put into flux. What is the buyer agent getting paid? What is the seller agent getting paid? It depends on if there is a buyer agent or a seller agent. And they’re all incentivized to do things in a way that would benefit themselves as opposed to a way that would benefit their clients.

Accidental Encouragement of Price Fixing

So, that was a really big problem. And also, there was a situation on the multiple listing services where sometimes the seller agent, because they’re sharing commission with the buyer, would all post how much commission they were willing to share with the buyer.

And by posting all those prices publicly, it sort of became a marketplace where everyone was sharing their prices with each other and sort of implicitly agreeing to use similar prices as each other. Now, most of the time there wasn’t any explicit agreement for that. That’s what would be called price fixing, when companies agree to set a price together, and that rarely happened explicitly. But because of all the realtors belonging to a club and joining a software and all sharing how much they were charging, it created environment where it was very commonly implicit that they should conform to these pricing standards.

It’s really hard to figure out the right way to handle that, because everyone should be able to set their own prices. But if the whole group is posting these prices and publicly shaming each other if they don’t share that same amount of commission, or if they don’t charge these certain prices, it really makes it difficult for consumers to shop around because all of the real estate agents are all in the same club, and they’re all charging the same amount. Not explicitly, but yes, implicitly.

So that’s a big problem with this situation as well. And so, how can a buyer or a seller negotiate their commission when all of the agents are participating in this implicit agreement?

The Code of Ethics on Sharing Commissions

And I should point out that the National Association of Realtors, in their code of ethics, they have a segment that says that they are required to cooperate with other real estate professionals in order to make transactions complete. But it does specify that they’re not required to share commissions. So they did carve that out in the Realtor code of ethics. I would have to look back and see when that was specifically added, but as of the last ten years or more, that sentence is in there that that the code of ethics does not require them to share commissions.

They’re trying to make sure that they’re not price fixing. That they’re not setting prices with each other. But implicitly, culturally, that’s definitely what was happening, and it’s still happening today. But sometimes that happens in the regular market, so it’s a really complicated knot to unwind, but having those prices posted right there in the MLS definitely contributed to this implicit peer pressure agreement.

Trying to Fix the Problem

So that’s what a lot of the problems were in this marketplace. It created situations primarily where agents would do things that were not in the best interests of their client. So fast forward to today. There have been a few big lawsuits against the Association of Realtors and big brokerages addressing some of these topics. But like I’ve talked about, it’s not an easy thing to unwind.

It’s hard sometimes to draw a line where what counts as a free-market decision and what counts as collusion or agreement to charge a certain price. So, it’s really complicated. But one of the lawsuits was settled, and as part of the settlement agreement in 2024, National Association of Realtors agreed to a couple of things. Now I’m doing most of these from memory, so forgive me if I get some of the details wrong, but this is pretty close to what they did.

Removing Commission Amounts from MLS

One of the things they agreed on is that they would no longer list the commission amounts on the Multiple Listing Service, so they’re not sharing that information. And sharing that information is pretty obviously a way that people might fix prices without actually saying, “We’re agreeing to fix prices,” right?

So they agreed to not put those commission sharing amounts on the MLS anymore, and they agreed to require their members to get a buyer agreement before they show a buyer any homes. That’s good, because that allows you to know exactly what your relationship is with the buyer.

It used to be common, at least in where I am in Utah and probably in other states, that a buyer agent would show a buyer several homes before they make them sign any agreement trying to court them as a client. Trying to woo them to use their services. But that left kind of an uncertain idea of where do we stand? Are you my agent? Are you not my agent?

So, having them sign an agreement before they show any homes is a clear way to spell out what I represent you in, what my responsibilities are as an agent, what your responsibilities are as a buyer. That’s probably a good way to clarify some of these situations.

Decoupling of Commissions

Another thing they did is they agreed that they would separate the commission in the contract. It used to be that the seller agent would agree to a certain commission and then agree to share it with the buyer.

Now they don’t do a single commission that they share, now they say, “Here’s the seller agent commission, and here’s an amount that their seller is willing to offer to a buyer agent.” At least that’s how it’s written in Utah. They call that decoupling of commissions. So now, it’s not a single commission that they share which created these conflicts of interest. Now there are separate commissions that are offered.

That solved some of these issues that we’ve been dealing with for 25 years. Some ethical issues, some conflict-of-interest issues around those commissions that have potentially artificially inflated the amount that the commissions should be and were obscuring how much people were paying.

I think this is a step in the right direction. It’s probably not perfect, we’ll probably have to see some new revisions as time goes on, but as the market has been adjusting to this, we have seen a lot more clarity in how much a buyer agent is paid and how much a seller agent is paid. We have also seen a lot clearer agreements between buyer agents and their buyers even before they purchase a property.

The Issue of Paying Buyer Agents

So, in that regard, there’s some positive things that have come out of these changes to the industry, but there are still some remaining issues that we need to deal with. One of them we talked about from the very beginning. A lender is not going to loan extra money for a mortgage and in addition to that pay for a buyer agent.

That’s still an issue that we that they tried to solve 25 years ago, but created some additional problems, so we still have that issue. How does a buyer agent get paid when a buyer doesn’t have a lot of cash on hand? And how does a buyer get expert advice and representation if they don’t have cash to pay for that service?

That’s something we’re still trying to figure out. As of right now a lot of that is still being done in a similar way, where the total price of the home kind of covers that cost, and then the seller pays back the buyer agent. But it’s clearer now in either the purchase contract or a separate agreement where the seller is paying the buyer agent or the seller agent is sharing commission with the buyer. It’s transparent to the buyer and seller in a way that wasn’t always clear before.

The Growing Problem of Cash Up Front

Another big problem right now is the need for cash up front has been exacerbated immensely by the current market conditions. In the last 3 or 4 years, home prices have inflated significantly, as much as 100% in some places. Utah is one of the worst for that, home prices have increased so much. It is very difficult to afford property now in Utah and a lot of other states across the country.

Loans usually charge a percent, real estate agents usually charge a percent, and those amounts obviously go up with the price while the percentage stays the same. And so that need for an extra dollar to pay for a buyer agent is even worse now that the home itself is so much more expensive. So, that’s a separate market issue, which may or may not be related to this whole thing, but it’s definitely something we are having trouble with right now.

Cultural Shaming in the Association

The Association of Realtors has done a lot of good. I am a member of the association and I have helped with a lot of the good things that they’ve done. But one of the possible downsides of this organization, where all of the real estate agents are part of the same group, is that there still is a culture of prices needing to be the same, or us needing to cooperate even over money.

I mentioned this before and I’ll say it again, the Realtor code of ethics does explicitly ask us to cooperate with each other, but also explicitly says that we don’t have to share commissions. So that is in the code of ethics, but culturally, people do get shamed. I’ve seen personally that agents shame each other if they don’t offer enough sharing percentage of a commission, or if they don’t negotiate enough between the buyer and seller agent, if they’re not paid the same. There’s a lot of cultural peer pressure to keep prices the way they are, to keep prices up, to charge a certain amount.

Working Toward a Solution

And so trying to figure out how much a real estate agent should be paid, trying to make sure that a buyer gets good representation, trying to make sure that an advertisement that says, “I’m a buyer agent and I work for free,” which is essentially dishonest because they are planning to get paid from the seller agent or from the seller side.

They’re not. That’s another thing from that settlement. Also, from a different settlement from around 5 years go, they’re not allowed to say that the buyer agent commissions are free. That is part of a settlement where agents are no longer allowed to say that their services are free.

So, a couple of big problems there, a couple of solutions. The industry is moving in a good direction. But let’s keep reiterating, let’s keep looking for where we might be creating a problem of a conflict of interest or an ethical dilemma. And let’s make sure we figure out the right answers and do what’s in the best interest of our clients, in the interests of our customers. Getting a real estate sales agent license is a good way to show you are competent, but there’s more needed to improve things.

We want this industry to be a positive for everyone involved. We want everyone to benefit and be able to buy their own home, so you can live in your own property and find happiness in any way that you see that you can. So hopefully we can work toward those ends together and hopefully we can do it in an honest way where we’re not deceiving our clients with hidden commissions, with advertisements that don’t say what’s real, and that together we can all be on the same team.