A change to the real estate commission structure is shaking the industry — and homebuilders and consumers appear to be the winners.
This week, Compass (COMP) agreed to pay $57.5 million to settle antitrust claims related to commissions. It’s the first major brokerage to announce a settlement since the National Association of Realtors (NAR) agreed to pay $418 million as part of a lawsuit alleging the industry conspired to inflate agent fees.
Experts say the NAR settlement — which essentially decouples buyer and seller agent fees — is a win for consumers because it will create transparency around how commissions are set and paid and ultimately lower costs.
“This will reshape the housing market in the greatest fashion we’ve seen in over 50 years,” KBW analyst Ryan Tomasello told Yahoo Finance Live (video above).
US Realtor commissions have ranged from 5% to 6% since the 1950s, and are usually split between the seller’s and buyer’s agents, with the home seller footing the entire bill.
Increased transparency will make it easier for buyers to negotiate fees or bypass the use of agents entirely. Buyer agent usage in most countries is uncommon, averaging 33% compared to the US’s rate of nearly 90%.
For buyers who decide to use an agent, advocates say fee costs are likely to substantially decline. Right now, US commission rates are among the highest in the world. Commissions on a $500,000 home sold in the US would be about $25,000 to $30,000 — compared to roughly $6,500 in the UK.
As a result, the total commission pool, currently $100 billion nationally, could be slashed to $70 billion, according to KBW’s analysis.
Read more: How to sell your house without a Realtor
A ‘major boost’ for homebuilders
Changes resulting from the NAR settlement are a “major boost” for homebuilders, who typically paid the buyer agent’s commission.
In a note to clients, Evercore ISI’s Stephen Kim wrote that agent commissions have been a “significant drag” to builders’ profitability, therefore a “shift in broker fees represents a significant positive for builder margins.”
“This would disproportionately advantage large homebuilders, who have their own salespeople and robust online shopping environments; it is far easier to buy a new home without a buyer’s agent than an existing home,” wrote Kim.
Homebuilder stocks have already been on the rise as high mortgage rates continue to limit the supply of used homes for sale. A reduction in commissions could help further drive demand, National Association of Home Builders CEO Jim Tobin told Yahoo Finance Live.
“As commissions come down, I hope we will see costs to builders come down as well,” Tobin said. “That translates into lower home prices for consumers.”
Shares of Lennar (LEN), Toll Brothers (TOL), and PulteGroup (PHM) have rallied to record highs this year, powered in part by the NAR settlement but also on the prospect for Fed rate cuts. Toll Brothers is up about 25%, while Lennar and PulteGroup are up 12% and 14%, respectively.
Brokerage models ‘at risk’
While homebuilder stocks have clocked gains in the past week, investors dumped shares of Zillow (Z), Redfin (RDFN), and Compass (COMP) on fears a change to agent fees will be costly for major brokerages.
Analysts warn of downside risk ahead, arguing the shift in cost structure is only partially priced in at current levels.
In a note to clients, Morgan Stanley’s Matt Cost wrote that while there is a “credible bull case where commission levels remain stable”, shares of Zillow, RE/MAX, and Compass “could decline further to the extent the market fully prices in material downside to commission rates going forward.”
Cost emphasized Compass as the brokerage most at risk, given “substantially all of its revenue is tied to broker commissions.”
But the new changes don’t signal doom and gloom for all listing platforms. In an environment where more buyers will do the house hunting themselves, platforms that help sellers advertise their listings have room to grow.
KBW’s Tomasello thinks that CoStar Group (CSGP) is a “winner” and “key beneficiary” because it caters to seller agents — a focus he expects other platforms to pursue.
“Real estate portals that have historically relied more on the buy-side piece of this commission pool for their revenue models, [such as] companies like Zillow, Realtor.com, may need to reconsider the role that they play in the housing market and potentially shift that focus more to the sell side in terms of advertising homes,” Tomasello said.
CoStar shares rallied 8% after the NAR settlement was announced last Friday. Shares are up 12% year to date.
Seana Smith is an anchor at Yahoo Finance. Follow Smith on Twitter @SeanaNSmith. Tips on deals, mergers, activist situations, or anything else? Email seanasmith@yahooinc.com.
So long, 6% commission.
For decades, real estate commissions have been somewhat standardized, with most home sellers paying 5% to 6% commission to cover both the listing agent and the buyer’s agent.
On Friday, everything changed.
A landmark agreement from the National Assn. of Realtors paved the way for a new set of rules that will probably shake up the entire industry, affecting sellers, buyers and the agents tasked with pushing deals across the finish line.
The most pivotal rule change pertains to how buyers’ agents are paid. Traditionally, home sellers have paid for the commission of both their agent and the buyer’s agent, which critics argue stifled competition and drove up home prices.
The new rule prohibits most listings from saying how much buyers’ agents are paid, removing the assumption that sellers are on the hook for paying both agents.
The other new rule requires buyers’ agents to enter into written agreements with their clients, known as buyer brokerage agreements. These agreements outline exactly what services will be provided — and for how much.
The changes will take effect this July, pending court approval, and will have major implications on how real estate deals are done. Here’s how buyers, sellers and brokers will probably be affected.
Lower fees for sellers
The most obvious takeaway is that if buyers end up paying for their real estate agents instead of sellers, sellers are set to save a lot of money.
In February, the average Southern California home sold for $842,997. Under the old system, where sellers pay both agents 3% commission, they’d shell out $50,580. But if they only have to pay one agent 3%, they’d save $25,290.
Buyers, then, would be the ones footing the bill for their agent. The added expense might seem pricey, but Michael Copeland, a real estate agent in Palm Springs, said the final numbers might ultimately shake out the same under the new rules.
“Buyers were often told by their agents that they didn’t have to pay anything and that services were free,” Copeland said. “But that’s not necessarily true.”
Copeland said when sellers pay 6% commission to split between both agents, they pad that number into the purchase price, so buyers actually end up paying more for the home, and thus, pay for their own agent.
So under the new system, buyers may end up paying their broker 3% commission, but the price of the home might be cheaper since the seller is only paying for their own agent.
More flexibility for buyers
One of the biggest complaints about the previous system was that it left buyers out of the negotiation process. Sellers paid each agent’s brokerage 3% or so, and that was that.
Lawsuits filed against the National Assn. of Realtors alleged that the practice kept commissions artificially high and incentivized buyers’ agents to “steer” them toward properties that offered them higher commission rates.
But under the new system, more buyers will be negotiating directly with their own agents — not just how much they’ll pay them, but what services they want the agent to provide. And those expectations will be specifically outlined in the buyer brokerage agreements, which are now required.
“Some buyers may just hire an attorney and pay a fee to handle the transaction,” Copeland said. “Or they’ll want to hire an agent as a consultant. Someone they can ask questions.”
In the age of the internet, access to real estate information is at an all-time high. Buyers can know virtually anything about a home on the market: not just bedrooms, bathrooms and square footage, but how much the home previously sold for, and how much similar homes in the area are selling for.
Buyers can also receive alerts to know exactly when a house in their price range hits the market, so some savvy shoppers might opt for an agent who leaves the touring process to them, but can help them look over an inspection report and file the right paperwork in the closing stages of the deal.
If a buyer wants a robust, hands-on agent that’s available 24/7, they can offer 3% or even more. If they want an agent who can just handle the more technical elements of the deal, they could offer 1% or 2%.
Some buyers might try to handle the process themselves and not pay an agent at all.
“Good agents will be able to show their value,” said Compass agent Michael Khorshidi. “Agents who aren’t able to show their value won’t benefit from this.”
New dynamics — and roles — for agents
For many agents, representing buyers can be rewarding since they get to help someone find their dream home, but the process is often more time-intensive. Agents might spend weeks or months setting up tours for clients, and there’s no guarantee that they’ll even buy a property in the end.
For that reason, many veteran agents prefer to represent sellers. The work is often more efficient — especially in a hot market, where deals can close in days.
So if the new rules leave less guaranteed money on the table for buyers’ agents, those agents might try to switch sides and only represent sellers. Or if they’re not able to make enough money representing buyers, they might exit the industry altogether — a trend that’s already taking place in Southern California’s cold post-pandemic real estate market.
Brent Chang, a luxury agent active in San Marino and Pasadena, said the new rules could lead to agents who specialize in specific types of sales.
“Just as there are agents like me who specialize in selling landmark properties, a new group of agents will emerge who specialize in helping buyers with highly competitive properties,” Chang said.
He said agents who have a proven track record of winning properties for their clients will be able to demand higher commissions.
Or their deals can be performance based. For example, an agent could represent you for 3%, and if they get the property for you, it’s another 3%.
“Ultimately, if the ruling leads to buyers receiving better service from their agents, then it has merit,” he said. “But I suspect it’ll be a while until we understand the consequences of these changes.”
A powerful real estate trade association has agreed to pay $418 million and change its rules to settle lawsuits claiming homeowners have been unfairly forced to pay artificially inflated agent commissions when they sold their home.Under real estate rules used for decades, when a home is sold, the seller uses a portion of the proceeds, typically about 6 percent, to pay both their own real estate agent and the buyer’s agent.But in more than a dozen lawsuits across the country, sellers sued the National Association of Realtors saying it’s unfair to force them to pay agents on both sides of the deal and that doing so drives up prices.”It’s one of the only areas in our country where you’re actually paying somebody who was actually working on the opposite side of a transaction. That’s no longer going to be the case. Now when you go to sell a home, you’re not required to do that,” said Michael Ketchmark, plaintiffs’ attorney.The National Association of Realtors said Friday that its agents who list a home for sale on a Multiple Listing Service, or MLS, will no longer be allowed to use the service to offer to pay a commission to agents that represent potential homebuyers. The rule change leaves it open for individual home sellers to negotiate such offers with a buyer’s agent outside of the MLS platforms, however.Video: Massive settlement changing real estate businessSome real estate experts predict they could lead to homebuyers and sellers negotiating lower commissions, and therefore, cheaper housing. But a former president of the Massachusetts Association of Realtors predicts the impact will be limited.”I think that people have been forever involved in home purchases. The realtors are going to have to be a little more defined about the process. But I think with the proper training, everybody’s going to be just fine,” said Laurie Cadigan, Barrett Sotheby’s International Realty. NAR also agreed to create a rule that would require MLS agents or other participants working with a homebuyer to enter into written agreement with them. The move is meant to ensure that homebuyers know going in what their agent’s service will charge them for their services.The rule changes, which are set to go into effect in mid-July, represent a major change the way real estate agents operate.The NAR faced multiple lawsuits over the way agent commissions are set. In October, a federal jury in Missouri found that the NAR and several large real estate brokerages conspired to require that home sellers pay homebuyers’ agent commission in violation of federal antitrust law.The jury ordered the defendants to pay almost $1.8 billion in damages — and potentially more than $5 billion if the court ended up awarding the plaintiffs treble damages.The NAR said the settlement covers over one million of its members, its affiliated Multiple Listing Services and all brokerages with a NAR member as a principal that had a residential transaction volume in 2022 of $2 billion or less.The settlement, which is subject to court approval, does not include real estate agents affiliated with HomeServices of America and its related companies, the NAR said.Video: Mass. real estate prices starting to drop in sought-after towns
A powerful real estate trade association has agreed to pay $418 million and change its rules to settle lawsuits claiming homeowners have been unfairly forced to pay artificially inflated agent commissions when they sold their home.
Under real estate rules used for decades, when a home is sold, the seller uses a portion of the proceeds, typically about 6 percent, to pay both their own real estate agent and the buyer’s agent.
But in more than a dozen lawsuits across the country, sellers sued the National Association of Realtors saying it’s unfair to force them to pay agents on both sides of the deal and that doing so drives up prices.
“It’s one of the only areas in our country where you’re actually paying somebody who was actually working on the opposite side of a transaction. That’s no longer going to be the case. Now when you go to sell a home, you’re not required to do that,” said Michael Ketchmark, plaintiffs’ attorney.
The National Association of Realtors said Friday that its agents who list a home for sale on a Multiple Listing Service, or MLS, will no longer be allowed to use the service to offer to pay a commission to agents that represent potential homebuyers. The rule change leaves it open for individual home sellers to negotiate such offers with a buyer’s agent outside of the MLS platforms, however.
Video: Massive settlement changing real estate business
Some real estate experts predict they could lead to homebuyers and sellers negotiating lower commissions, and therefore, cheaper housing. But a former president of the Massachusetts Association of Realtors predicts the impact will be limited.
“I think that people have been forever involved in home purchases. The realtors are going to have to be a little more defined about the process. But I think with the proper training, everybody’s going to be just fine,” said Laurie Cadigan, Barrett Sotheby’s International Realty.
NAR also agreed to create a rule that would require MLS agents or other participants working with a homebuyer to enter into written agreement with them. The move is meant to ensure that homebuyers know going in what their agent’s service will charge them for their services.
The rule changes, which are set to go into effect in mid-July, represent a major change the way real estate agents operate.
The NAR faced multiple lawsuits over the way agent commissions are set. In October, a federal jury in Missouri found that the NAR and several large real estate brokerages conspired to require that home sellers pay homebuyers’ agent commission in violation of federal antitrust law.
The jury ordered the defendants to pay almost $1.8 billion in damages — and potentially more than $5 billion if the court ended up awarding the plaintiffs treble damages.
The NAR said the settlement covers over one million of its members, its affiliated Multiple Listing Services and all brokerages with a NAR member as a principal that had a residential transaction volume in 2022 of $2 billion or less.
The settlement, which is subject to court approval, does not include real estate agents affiliated with HomeServices of America and its related companies, the NAR said.
Video: Mass. real estate prices starting to drop in sought-after towns
Things are not OK in Realtorland. The US housing market is still reeling from pandemic-era shocks, home sales are stuck in a rut, and mortgage rates, while inching downward, are still near two-decade highs. It’s a bad time to be a buyer, and maybe a worse time to be a seller.
Despite all this upheaval, there’s another story brewing in which the stakes for everyone in real estate, from agents to the average consumer, are even higher. It won’t have anything to do with the debate over whether you should put your hard-earned cash toward rent or a down payment. Instead, it’ll be about court cases.
The biggest threat facing the industry is a mounting wave of class-action lawsuits that accuse the National Association of Realtors, along with some of the country’s biggest real-estate brokerages, of conspiring to rip off consumers by keeping the commissions paid to agents unfairly high. These cases are expected to reach major milestones in the next year, and the ramifications could be staggering: Tens, if not hundreds, of billions of dollars hang in the balance. Hundreds of thousands of Realtors could see their commissions slashed, which might force many out of the business. The old way of buying and selling homes could go away forever.
2024 will mark the beginning of a great experiment in real estate. The status quo won’t change overnight — there will be more courtroom showdowns before that happens — but some forward-thinking brokerages and agents, as well as a handful of startups, are already trying to figure out what comes next. Things are about to get really weird — and for American homebuyers, that could be great news.
The old way in jeopardy
If you’ve bought a home, you probably never cut a check to the agent who held your hand through the ordeal. For decades, agent commissions have been mostly out of sight and out of mind for homebuyers. But in 2024, many buyers and sellers may have to start thinking hard about just how much they’re willing to pay their real-estate agents.
When a house trades hands, the money usually works its way down a circuitous path — the buyer pays the seller, who uses a slice of that sum (usually 5% to 6% of the final sale price) to pay their agent, who then splits that money with the buyer’s agent. I’ve previously written about why the system works this way and the arguments for and against the model, but as a recap: Consumer advocates say this setup discourages market competition between agents. If you’re a buyer, you want to pay as little as possible, but your agent stands to make more if the home price goes up. Plus, it’s the seller who decides what percentage each agent will make before even listing their house. As John Kwoka, an economist and antitrust researcher at Northeastern University, told me: The incentives aren’t aligned.
There are going to be real-estate agents who are not able to articulate, let alone demonstrate, their value. Those folks will probably be out of the business very quickly.
On the other hand, the NAR argues the system is designed to get a deal closed as efficiently as possible. When an offer comes in, there’s no bickering over commissions — everyone already knows who will get paid what. And the NAR, as well as the brokerages named in the lawsuits, has maintained that commissions are always negotiable. If you’re a seller and you want the agents to split only 1% of the sale price — or even 0% — you can do that.
The first major lawsuit to put this argument to the test, Sitzer/Burnett v. NAR, went to trial in 2023 — and it wasn’t pretty for the real-estate establishment. On Halloween, jurors deliberated for just a few hours before finding the defendants liable, siding with thousands of home sellers who claimed they’d been strong-armed into paying their agents the customary 5% to 6% of the sale price and dishing out $5.3 billion in damages.
And if the case has cracked open the door to major changes to the commission model, 2024 is shaping up to be the year it’ll be knocked down. The first thing to watch for will be an official ruling from the judge in the Sitzer/Burnett case, expected sometime in the spring. While the jury has already sided with the plaintiffs, the judge still needs to decide which kinds of actions the NAR and the brokerages will need to take to remedy the situation. In this case, it’s pretty clear what the plaintiffs and their lawyers want: They argue for “decoupling,” or changing the rules to make sure that buyers and sellers pay their agents separately. At the most extreme end, buyer’s and seller’s agents might be expressly prohibited from splitting commissions. The NAR has vowed to appeal the verdict, and said it expects arguments to take place later in 2024.
In addition to a ruling on the issue of decoupling, a larger case, Moehrl v. NAR, should reach trial in the last quarter of 2024. That suit involves sellers from a broad swath of the US, including Dallas, Phoenix, Philadelphia, and Miami, and damages could stack up to more than $40 billion.
Other class-action attorneys are bringing lawsuits as well. The two big cases so far have focused on home sellers, but a new case filed in November, known as Batton 2, takes aim at brokerages such as Douglas Elliman, Compass, and Redfin on behalf of a nationwide group of buyers. It’s not yet clear how big the damages could be in this case, but the sheer size of the plaintiff class points to a much-larger figure than that of the Moehrl case.
Meanwhile, the head plaintiff in the Sitzer case has filed another nationwide class-action suit against the NAR and brokerages that weren’t included in the original case, including Compass, eXp, and Redfin. While these cases won’t reach trial anytime soon, they put increasing pressure on the industry to find ways to settle, rather than risk years of time-consuming and costly litigation.
A new age of experimentation
Some real-estate agents may wait until a ruling from the judge in the Sitzer/Burnett case before changing their practices, or hold out hope until the last appeal has worked its way through the courts. Others have read the writing on the wall and are already starting to get creative with how they get paid.
“It’s a matter of allowing alternatives to be experimented with and see what sticks,” Kwoka, the Northeastern economist, told me. “We’re about to do that, ready or not.”
Even those who think the jury got it wrong are accepting that commissions are likely going to change. That group includes Brian Boero, the CEO of 1000watt, a brand and strategy agency that advises real-estate brokerages and mortgage companies. Boero said he’s busy prepping his clients for the reality of decoupling, a scenario that he expects to arrive “sooner rather than later.” According to Boero, the key for agents is to clearly explain to buyers what they do, how they get paid, and why they may need to start getting paid differently. In many instances, those conversations have been conveniently swept under the rug for decades.
“There are going to be real-estate agents who are not able to articulate, let alone demonstrate, their value,” Boero told me. “Those folks will probably be out of the business very quickly.”
Many buyer’s agents — at least the competent ones — will be fine. After all, despite all kinds of technological advances, more people are using agents today than they were before the pandemic.
“You would be foolish to buy a home without an expert helping you,” Boero said. “But I also think that a smaller, smarter, more professional real-estate industry is going to come out of this, and I think that’s a good thing.”
Decoupling also opens the door to further experimentation with agents’ fees. Joe Stockton, an attorney who previously worked at Zillow and has spent years thinking about creative fee arrangements, described to me one possibility: a tiered system in which buyers pay more for progressively broader offerings. At the top would be the “white-glove service,” or what you might expect of a sought-after agent today — the market insights, the pavement pounding in search of the best deals, all those hours spent advising and consoling and haggling with the sellers. Something like this could command $250 an hour, like a good lawyer, but be capped at some percentage of the sale price, like 3.5%. The tier below would offer good service but wouldn’t go above and beyond, and would notably exclude all that initial legwork; the agent could step in once you’d already found your options online and would command a smaller fee, like 1.5% of the sale price. At the most basic level, an agent could charge $2,000 for just making sure that nothing goes awry — you’d get none of the hand-holding and advisory services, but you wouldn’t have to pay for them, either.
“In either situation, a one-size-fits-all compensation model and fee structure doesn’t make sense,” Stockton told me. “In this new world order, the agent and the client will have the flexibility to negotiate something that makes sense for them both.”
It’s a matter of allowing alternatives to be experimented with and see what sticks. We’re about to do that, ready or not.
Right now, agents are mostly incentivized to close a transaction quickly — a $10,000 difference in the sale price would shift the amount an agent gets paid by only about $300 on the high end. But there’s a world in which a buyer’s agent’s cut goes up if they’re able to knock $50,000 off the list price, or if they find you a deal below a certain dollar amount that meets your criteria. Similar incentives could be baked into the commission for a seller’s agent as well. Nic Johnson, the CEO of ListWise, is working on such a solution: The company proposes a model in which agents bid for listings, which effectively sets the terms for how much they want to make if they’re able to boost the price of your home. So while an agent might be guaranteed only a 0.75% commission if the home sells for a predetermined baseline price, they may stand to increase that cut by several percentage points if the price goes up by $50,000 or $100,000.
“You need to make it so that the agent’s pay meaningfully varies based on different sale prices,” Johnson told me. “To me, that’s really the important thing: making sure the agent’s incentives are aligned with the homeowner’s.”
This all sounds pretty good for regular buyers and sellers — lower fees, a clearer picture of what you’re paying for, and a greater emphasis on negotiating rather than accepting the status quo. An analysis from a senior fellow at the Consumer Federation of America estimated that American consumers could save as much as $20 billion to $30 billion every year if commission rates fell in line with those of other developed markets, such as Australia, the Netherlands, and the UK. But there may be downsides, particularly for buyers who might not have enough cash on hand to pay their agents out of pocket. There are possible solutions — industry bigwigs could push for changes to mortgage rules so that commissions would be folded into a loan, or sellers could agree to give buyers rebates so they can pay their agents after a sale closes — but they’re far from guaranteed at this point. In the absence of those kinds of fixes, some homebuyers might be forced to accept less help on their purchase or even decide to brave the market alone.
These kinds of questions won’t all be resolved in 2024, but this coming year will mark the beginning of an experiment that could alter real estate beyond the typical boom-and-bust forces of mortgage rates and home prices. It’s time to prepare for a new world that’s rapidly approaching — one in which tinkering with agents’ fees will migrate from the periphery to the mainstream.
“It’s a matter of driving out excess costs,” Kwoka, the economist, said. “But more importantly, it’s just a matter of allowing for new arrangements to see if they work.”
James Rodriguez is a senior reporter on Business Insider’s Discourse team.