Homeowners could see a significant drop in the cost of selling their homes after a powerful real estate trade group agreed last week to resolve antitrust litigation accusing brokerages of inflating sales commissions.
The $418 million settlement calls for the Chicago-based National Association of Realtors (NAR) to eliminate decades-old rules on commissions, and make it easier for buyers to negotiate fees with their own agents or use no agents at all, Reuters reports. The accord resolves claims against more than 1 million members, state and local realtor associations, and most smaller brokerages.
The move could mean major shifts in how buyers and sellers pay their agents – and just how much those fees cost moving forward.
What’s In The Settlement?
The March 15 settlement comes after several years of litigation, including class-action suits from home sellers and a legal battle with the U.S. Justice Department. As part of the settlement, the realtor group agreed to prohibit offers to compensate the buyer’s agent on multiple listing services (MLS), a practice that critics say reduced price competition and led to inflated commissions and home prices.
NAR will also require buyer’s agents to enter written agreements with all clients, outlining their fees and services before moving forward with any work. According to experts, the settlement will usher in sweeping change for buyers, sellers and agents alike.
“It’s hard to predict the timing of actual changes to the real estate market, but it’s clear now that change is coming, and perhaps sooner than anyone thought possible,” says Steve Nicastro, a real estate agent and content lead at Clever Real Estate in Charleston, South Carolina. “This will likely lead to lower commissions overall, and a change in how homebuyers use and pay their agent.”
What Were the NAR Lawsuits About?
It’s a little complicated, but the basis of the recent NAR lawsuits boiled down to the group’s MLS cooperative compensation rule, which was introduced in the 1990s in response to calls from consumer protection advocates for buyer representation
According to that rule, in order to list a for-sale property on an MLS – the databases agents use to share properties amongst themselves – they must offer a commission to the agent who ultimately brings in the winning buyer. Historically, this has resulted in a 5% to 6% total commission, with half going to the seller’s agent and half to the buyer’s agent.
Here’s the catch, though: The buyer doesn’t pay their agent’s fee directly. Instead, the commission is fully paid by the seller as part of their closing costs. According to the recently settled suit, as well as other litigation, this amounts to a form of antitrust, allegedly reducing competition and pushing up commissions higher than services warrant.
While NAR agreed to settle the suits against it, the group has made it clear it denies any wrongdoing in connection with its MLS or compensation rules.
“NAR has worked hard for years to resolve this litigation in a manner that benefits our members and American consumers,” said Nykia Wright, interim CEO of NAR, in a statement. “Ultimately, continuing to litigate would have hurt members and their small businesses. While there could be no perfect outcome, this agreement is the best outcome we could achieve in the circumstances.”
What It Means for Buyers and Sellers
The rule changes, which are set to go into effect in mid-July, represent a major change to the way real estate agents have operated going back to the 1990s, and could lead to homebuyers and sellers negotiating lower agent commissions.
The settlement still needs court approval, but if that comes through, things could start to change in the real estate industry – and quickly. For one, buyers will need to start negotiating with their agents from the get-go.
“If the buyer’s agent fails to negotiate their commission with the seller, they will have to contract and arrange compensation to be paid by the buyer,” says Suzanne Seini, founder of Innovate Realty in Irvine, California. “This can strain first-time homebuyers who may be exercising their max budget to buy a home in the price point and area they desire.”
It could also have benefits, though, allowing buyers more freedom to pay for the services they want – and avoid paying for those they do themselves.
“Buyers will likely desire a more flexible structure now, as they can pick and choose which services they want from a buyer’s agent,” Nicastro says. “So, I think it will be more like a pay-for-service structure versus a 2.5 to 3% flat commission rate.”
Luke Babich, CEO of Clever Real Estate in St. Louis, expects buyers to have more of a “menu” of services once the new rules go into effect.
“You could pay a small fee for an agent to do an on-demand showing for you, or you could pay 0.5% to 1% if you just want help with negotiations – and maybe that’s all provided remotely,” Babich says. “You could pay 1.5% to 2% for an agent who will commit to a certain level of availability and take you to regular showings. We’ll see a wider range in pricing for different service levels.”
All in all, the changes will likely result in reduced commission costs across the board. Prior to the settlement, a report from consulting firm Keefe, Bruyette & Woods projected an “unbundling” of agent services could potentially reduce commissions as much as 2 percentage points or more. This week, economists told The New York Times it could mean about a 30% drop, which would take commissions from about 3% per agent down to around 2% or less.
These are just initial predictions, though. It’s likely that fees and services will evolve gradually over time as the industry, agents and consumers adjust to the new normal.
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