Understanding Real Estate Commissions in Denver: A Deep Dive - Part 1

Feeling puzzled by the complexities of real estate commissions in Denver? You're not alone. With the real estate market evolving rapidly, it's no surprise that recent national lawsuits and debates surrounding real estate commissions have captured headlines and sparked widespread interest.

But to truly grasp what's at stake and the intricacies involved, we need to embark on a journey back in time. In this three-part series, I'll guide you through the maze of real estate commissions, demystifying the legal controversies, and exploring the potential paths forward for buyers, sellers, and Realtors in the Denver area.

Part 1 of our series takes a retrospective look at the history of real estate commissions—how they originated, evolved, and became a focal point of legal scrutiny and public debate. By understanding where we've come from, we can better navigate the current landscape and anticipate future trends in the Denver real estate market.

Stay tuned as we dive into the origins of real estate commissions, uncover the reasons behind recent lawsuits, and discuss their implications for all involved. Whether you're a seasoned investor, a first-time homebuyer, or a real estate professional, this series promises to shed light on the complexities of real estate transactions and what they mean for your property journey in Denver.

Here's historical background to the real estate roles and commissions to help understand where it all began:

• ✦Early 1960s: National Association of REALTORS (NAR) established the Multiple Listing Service (MLS) to encourage cooperation between brokerages. 
• ✦MLS allowed brokerages to share their listings with each other, replacing the previous system where each brokerage kept its listings private. 
• ✦Listings were compiled into a book (yes, an actual BOOK!), with copies physically delivered to each office, either monthly or bi-monthly in larger cities. 
• ✦Buyers benefited from not having to visit multiple offices to see available properties, while sellers gained more exposure for their listings. 
• ✦Brokerages agreed to split the commission paid by sellers, allowing agents not representing the seller to sell the property. 
• ✦These agents, who were known as sub agents, still legally represented the seller and owed fiduciary duty to them, leading to confusion among buyers. 
• ✦FTC study in 1983 revealed that 72% of buyers mistakenly believe that the agent showing them homes represents their best interests. 
• ✦Early 1990s: Introduction of buyer's agency, where agents represented the buyer's best interests, reducing confusion and potential exploitation of buyers.

You may find it interesting that the creation of a "Buyer's Agent" (the agent who represents the buyer on a transaction) was a result of demand from the public. This started in the 90's and has been a continuing practice since then. Recently, as with all technical progress, the buyers/consumers have had more direct access to the available home listings thanks to portals like Zillow, Homes.com, etc. And we are currently in an age of "self-service" approach (how many times have you self-diagnosed a symptom based on something you read on webmd?). So this leads buyers to find joy and entertainment (scrolling) in finding a house online, clicking the button that says "Connect to Agent" and typically, this lands them on the phone with the listing agent. 

A buyer's alternative option is to hire a professional "Buyer's Agent" And once the buyer and agent have agreed to work together, they will agree to a contract of working scope. At that point, the Buyer's Agent has taken on "fiduciary responsibility" for that buyer. This means the agent must treat the buyer's financial interests as if they are our own.

In simple terms, a Buyer's Agent responsibility is to help you negotiate the best terms for you and lowest price. This is opposite of what the Listing Agent does as they are responsible for highest price and best terms for the Seller.

So if calling the Listing Agent on homes is your strategy and you're thinking you'll get a better "deal"... you may not be setting yourself up for success. 

Will a Seller pay a reduced commission if a buyer doesn't bring an agent? MAYBE. Yes - only a maybe. It all depends on how the listing contract was written and what the seller agrees to. And what they prioritize. Here in Colorado we do not allow what's called "dual agency". This means that if you are an unrepresented buyer and you want the listing agent to write the contract for you, they must change their brokerage status with the seller and serve both seller and buyer as a "customer". And "customer" means basically no representation, no guidance, no involvement beyond helping both parties follow the process, completing the paperwork and shepherding through to a closing. In essence, neither party has representation of their interests - and this ultimately leaves both parties exposed. 

As a Realtor, we are trained and licensed to navigate these (sometimes rough) negotiations between a buyer and a seller. As a Realtor, I take pride in offering my experience and guidance to help keep you out of tricky situations. Having helped a few hundred people, I've seen a lot of shenanigans. And I can usually predict how situations might play out. I use this spidey-sense to set you up for success - whether you are a home buyer or a home seller in the Denver area.

This was the history and how we got here. Be sure to subscribe to this newsletter and stay tuned as we unpack: 

• Part 2 (All About the Lawsuits) and
• Part 3 (Where This May Lead)

If you're considering selling or buying, please don't hesitate to reach out for guidance. I always have an opinion and love helping. Find out more about our programs and options here.