This is the first 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. Check back for the final installment tomorrow, and check out his sessions live at Inman Connect Las Vegas July 30-Aug. 1, 2024. Join us.
The real estate industry is gearing up for potentially huge changes in its commission structure a month from now and many are looking for a guide to tell them what those changes could mean for agents and consumers on the ground.
Edward John Zorn may be the most uniquely-suited to the task. Zorn is not only the vice president and general counsel of the nation’s largest multiple listing service, California Regional MLS, he is also president of real estate investment firm ZEC Investments, a mediator and arbitrator of real estate disputes, and a former adjunct professor of real estate at California Baptist University.
Moreover, he held a California broker license for many years until it expired in 2022, and has held a broker affiliate license under eXp Realty in Tennessee since 2019. Just in his capacity as a buyer’s agent, Zorn says he’s closed 40 deals in the last three years.
So when Zorn graces the Inman Connect Las Vegas stage at the end of July, it will be as someone who both lives the life of an agent and has the legal chops to understand the upcoming business practice changes associated with a proposed nationwide settlement between the National Association of Realtors and homeseller plaintiffs in multiple antitrust lawsuits.
The NAR settlement includes several 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 are working with before a buyer tours a home.
In this two-part interview, Inman caught up with Zorn to get his take on buyer contracts, seller concessions, steering and commission-sharing between brokers. Part 1 tackles 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.
Part 2 will dive 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.
Inman: Do you know yet what you’ll be talking about at ICLV?
Ed Zorn: How to transact in a consumer-centric commission model. [Inman] originally had me on for 20 minutes. I said, “No one in the world wants to listen to some lawyer talk for 20 minutes.” That is a bad idea. So I said knock me down to 10 and donate 10 of my minutes to the other thing that I’ll be doing, which will be with James Dwiggins, Kendall Bonner and Cassie Walker Johnson.
We’re going to be doing some live role playing: buyer and seller objections post-August 17. James is going to moderate and the three of us are going to give examples of “This is what my listing presentation would look like.” “This is how I would communicate things with a buyer.” James will hit us with questions: How would you overcome this objection? Or, what if a seller says, “I don’t want to pay anything?” How do you handle that?”
A lot of people, especially just agents trying to do their job, they want to know how their work is going to change.
Exactly. That’s very much what that program is designed to [address]. Like, “I get all the legal mumbo jumbo crap. Well, that’s cute. I don’t care. What do I got to do on August 18?”
Is there anything you can offer us now about how their work is going to change after that date?
The change is going to be much more in form than in substance. What they’re going to find is if they already have good skills in communicating, negotiating and understanding how to properly value a property, then they’re going to be fine in this new system. If they lack those skills, now’s the time to go get them.
What do you mean by form versus substance?
As a listing agent in the consumer-centric model now, a listing presentation is actually going to be easier, simpler and more straightforward. What I’m going to do when it comes to the issue of commissions with a seller is I’m going to simply talk about my services, what I do and my skill, and we’re going to talk only about my fee, the fee that Ed Zorn Realty is going to charge for providing services to you as the seller.
Then I’m going to explain that under the new system, a buyer is going to have to sign a buyer representation agreement before he sees this property with his own agent and the buyer and the buyer’s agent are going to be the ones who are going to decide what fee the buyer is going to pay for those services.
We don’t know what that number is, so we don’t need to commit to any kind of number today, but you, seller, should be prepared to understand that it is very likely that the buyer is going to ask you the seller to help the buyer get his fees and other closing costs financed in the transaction. The way that the buyer gets his buyer broker fee financed in the transaction as part of the loan is he puts it into the transaction and it becomes part of the purchase price.
That is when, in my listing presentation, I’m going to unveil my comparative market analysis, my CMA, and we’re going to talk about the comparable properties and what we should list your home for. I am going to have, as an adjustment on every comparable property in the next six months, it’s going to be whatever was offered as compensation in a compensation field.
Starting in 2025, when that field will no longer be relevant because it will now start to be empty, then any type of capturing of concessions where the MLS captured any actual payments made by a seller towards buyer broker fees, or where there’s concessions [such as escrow and title fees and loan buy-downs] … would be put into my CMA.
I would explain to my seller, when you see these three sales, let’s say they were all at $1 million. Realize no seller got $1 million. They got $1 million minus what the seller participated in trying to pay towards helping the buyer buy the house. So now Mr. and Mrs. Seller, how do we want to market? We can market with the same comparable properties, the same price, the $1 million, but be ready to understand that it’s very likely that a buyer who sees these exact same comps is going to include in their offer some kind of request for you to pay some of the buyer’s costs and fees to get into the property because that’s what the other guys did.
Or, if you’d like, we can go in at, $975,000 or $980,000. We can remove those costs. Start off with a lower listing price and maybe that will drive more traffic. Then we will just tell people who want us to pay something that they should add that to their offer and increase the purchase price by whatever the buyer fees are, and we’ll consider it.
What we decide to do will be based on the marketplace. What kind of home is it? How hot is the market? Are we balanced? Is it a seller’s market? A buyer’s market? But the point here is that that you, Mr. and Mrs. Seller, you don’t have to commit to anything here in our listing presentation with regard to what’s being paid to a buyer’s agent or someone on the other side. That would be how I would handle that listing presentation.
I’m going to make the argument that agents and brokerage firms that embrace what I just described as a consumer-centric model in doing a listing pitch are going to capture market share, and they’re going to get more listings than the agent and brokerage firms that hold on desperately to the old commission-sharing, make-offers-of-compensation mechanism.
My argument for that is the group of people that want to hold on to the old way of sharing commissions, you realize the amount that they have to charge the seller is double what my fee is going to be on that piece of paper. They have convinced the seller to pay double what I am charging them. I think that is a hard sell. I think the consumer-centric model is easier to explain, more simple, and will result in more listings than trying to hold on to the old commission-sharing model.
As you’re talking, I’m thinking about the new listing concession fields that MLSs are adding. Do you have any idea how many MLSs are adding this particular field?
I really don’t. I know we are. I think Bright is. I think I’ve heard of some others that are doing just kind of like the Yes/No box where they they’re not going to be putting an amount in, but they’re going to have a statement that says “Seller is willing to consider a concession.” Like, “Do you want me as the listing agent to advertise that you’re willing to consider a concession without a number?” That was one option.
The second option was, “Would you like to offer or advertise a particular dollar amount?” but their form did not have a place for a percentage, which I thought was good. The assumption is that agents will just utilize the concession field as a replacement for the compensation field. That has a risk if you continue to share commissions. If your forms from your state still have commission-sharing in them, that would increase the risk of that problem.
In Southern California, where CRMLS is predominant, we do not have the Missouri problem, we don’t have the Atlanta problem, where all of the listings are clumped around 3 percent. My average offer of compensation across the CRMLS marketplace is something like 2.2 percent. You’ll see everything from 1.5 to 2.5 to 3. My 3 percent ZIP codes are almost exclusively in super high-end neighborhoods. It’s Newport Beach, it’s Laguna Niguel, Beverly Hills. These are the only places that even approach 3 percent, so we have a very giant, diverse offer of compensation.
In Atlanta, Georgia, it’s very common that everything’s at 3 percent. The risk for what the downside of concessions would be is different depending on where you are. It’s not the same across the country.
But here’s the benefit of it, it’s a huge benefit, and this is where CRMLS stands. We’re very much behind concessions, and we’re very much behind concessions that include a specific dollar amount or percentage specifically for the lower-end properties, the properties that would be used or are subject to potential [Federal Housing Administration] financing or [Department of Veterans Affairs] financing.
CRMLS has been collecting concession information for decades on closed listings. A lot of MLSs do because you need that for appraisals and doing CMAs and those kind of things. What we found is that, as an example, I looked at May of 2023, in Riverside County. We had 63 percent of our closed FHA deals had a concession. That’s a huge number. When I looked at the actual concessions themselves, they averaged 1.8 percent across that group of homes.
The offer of compensation over that same group of homes was just under our average. Our average is like 2.2 percent. The average of that group of homes on FHA was 2.1 percent. So I’m literally approaching a situation where sellers are almost paying as much for buyers’ costs, not going to the buyer’s broker, as they are for the buyer’s broker. That’s super important.
First-time homeowners or VA, what you note about that group of people that we work with? They’re scared. They’ve never done this. Many of them are from families that have never owned property before, so they don’t understand the process. What they need is comfort. They need certainty. They need to know when they’re going to look at a property and they’re like, “Okay, it works on my loan, I can afford this, but I don’t have enough money in cash to buy the house.” Then if we can demonstrate to them, “Oh, well, here you have a seller who is willing to contribute as a concession to pay, you know, 4 percent or 5 percent to help you get into their home so you’ll buy their home versus someone else’s home,” that’s a big sigh of relief.
I’ve heard people say, ‘Well, why don’t you just lower the list price and let people add the concessions in?” That doesn’t work. That comes from people who don’t represent first-time homeowners. It’s not about price for a first-time homeowner. It’s about how much money do I have in my pocket to pay for, not just my own agent, I’ve got to pay for a down payment, I’ve got to pay title fees, I’ve got to pay escrow fees, I have to pay discount points on my loan so that I can qualify. I have to have two or three months worth of reserves in my bank account once I close, as a condition for the bank to give me the loan.
It’s all about how much cash they have on hand, more than price. It’s important, as we take away compensation offers out of the MLS, and the consumer benefit that that derived was the certainty that buyers knew at least their agent would get paid and they kind of understood how the transaction would come together, we need to have something there to help that group of people continue to be encouraged to buy property.
Concessions are the way to do it. With the new rules, with a buyer rep agreement having to be entered into before you show a property, we’ve eliminated the offer of compensation steering problem. That’s why we’re so much behind concessions.
What we see in the actual data that we have to date is that only 50 percent of the people who use concessions will actually put in a number. The rest of them will not put in a number, but will just be an invitation. Of the people who are putting numbers … in our current [concessions-in-price] field, 40 percent of them are putting a dollar amount in, not a percentage. When someone’s doing offers of compensation, 99 percent of the time, it’s a percentage, not a dollar amount.
Oh, and by the way, 98 percent of all listings in the CRMLS system over the last 40 days that have utilized the concession-in-price field have an offer of compensation in it already, which is my proof positive that it’s not a replacement. If the CIP field was a replacement for compensation, these people would just put in zero for compensation and then put 2 percent or 2.5 percent in concession. That’s not what they’re doing. They’re offering 2% or 2.2% as offers of compensation, and then offering another 2% or 2.5 percent.
I have two dozen listings in CRMLS where their concession offer is 5 percent. Nobody’s offering a 5 percent commission. By the way, those properties are also offering commission. So I actually have data to demonstrate that the concession field has a use that is different than just an offer of comp. Now that C.A.R. has rolled their new forms out and they’ve removed offers of compensation and commission-sharing from the form, it will even be less likely to be used as a replacement because commission-sharing between brokers is not going to be happening at all.
You were talking about how it wouldn’t be a replacement, isn’t it hard to tell right now? Because right now you do have a compensation field. So for all you know, starting August 18, the amount that’s currently in concessions will double, or just be higher, because people will be adding in buyer compensation.
So what? [The commission suit plaintiffs’] argument is that real estate practitioners have all agreed and colluded … and we all say “You have to offer 2.5 percent or no one will show your property.” So what does it matter now, if on my FHA-type properties, say I have a property that I’m listing for $600,000 in Corona, California, and my seller says, “I got a new job. I’ve got to be in another state in six weeks. Get this house sold as fast as you can.” My recommendation to them is, “No problem. Let’s offer 5 percent as a concession because that way, let’s say a buyer hires an agent at 2 percent, that gives the buyer another 3 percent to use to pay for escrow, for title, and their loan costs.”
I would tell my seller, “Hey, if we do a 5% concession, you’re gonna drive lots of buyer traffic to this property.” I don’t care and the seller doesn’t care how they use that 5 percent. I don’t care if you’re using your sister as your agent and she’s charging you zero and now you use the whole 5 percent to buy down your loan points and pay escrow and title fees.
Do you see the distinction there between agents getting together and setting a number? And remember, you can’t have steering when the buyer and the buyer’s agent have agreed to the price that the buyer is going to pay the buyer’s agent before we ever show properties. How are you going to get steering?
Well, if you can still see what the listing broker is offering on listings, like on the listing broker’s website, then you, as a buyer agent, can say, “Hey, this is what they’re offering. Let’s put this in the contract.”
That’s not how that works in real life. It’s a cute theory, but in the real world, what am I going to do? Let’s say I’m going to represent you. You’re going to move to Knoxville. You’re telling me, you and I are going to enter into a separate contract for every single home I show you? I can tell you that’s not how that works.
No, but if listing brokers are continuing to offer what they offered before, whatever that is, 2.5 percent, 3 percent, and if you are in a market where that tended to cluster, like Atlanta you mentioned, then what’s to stop buyers’ agents from saying, “Well, this is what I’ve gotten paid before, and this is what is being offered on listing brokers’ websites in general, so I’ll put that in the contract”?
Other buyer agents who want to actually work. You know what has never happened on the buy side? Any kind of price competition whatsoever because no buyer even talked about it. No buyer or buyer agent ever talked about how much money the buyer’s agent was getting. It wasn’t a topic of conversation. It never happened. No buyer price-shopped one agent to another agent, and virtually no buyer had a conversation. Forty-five percent of buyers don’t even know what their agent got paid even after closing.
People keep criticizing concessions and this concept that if I see a price, we’ll all collate around it, like somehow we’re keeping every rule exactly the same. We’re not. Every single buyer, before they walk into a single house, will be forced to have a conversation about what they’re going to pay their agent. So what buyer agents are going to do is they’re going to decide how much I need to get paid to work with this buyer, and that’s what my fee is going to be. So, I’m not going to charge somebody 3 percent when other people will charge, 2 percent or 1.5 percent. That’s a conversation we’re now going to have to have before we ever open the first door.
The big consumer win is the mandatory buyer rep agreement, so that the buyers now will become price-conscious and will be participating in the payment of what fee they’re willing to pay for the services they receive.
By the way, don’t expect that necessarily that the fee goes down. It’s not a foregone conclusion.
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