Landmark Realtor Settlement Means Buying a Home Will Change

There have been several class-action lawsuits against the National Association of Realtors (NAR) in recent years. In November 2023, for example, a Missouri jury found the NAR liable for colluding to keep commissions for home sales artificially high and held them liable for almost $1.8 billion in damage. Now, the NAR has reached another settlement and agreed to make significant changes to how buyer-broker commissions work. The landmark settlement promises to significantly change how agents are compensated and how property transactions are conducted. This seismic shift could dismantle longstanding commission structures, fostering a more competitive and transparent market landscape.

Understanding the Settlement

At the heart of the settlement is the move from a fixed commission model to one that encourages negotiation and competition. Here's how the system has traditionally worked:

• Real estate transactions involved a standard 5%-6% commission divided between the seller's and buyer's agents.
• A predetermined commission was required to get a home on a multiple listing service (MLS). This is an essential database for finding homes for sale. An MLS is not available to the public, and home buyers were unable to see the commission rate for any given home.
• The buyer's agent could see both the homes for sale and the corresponding commission they would receive. For example, a home for sale at $100,000 with a 3% buyer commission would net the agent $3,000. A similar home selling for the same price with a 2.5% buyer commission rate would net them $2,500. This incentivized the buyers' agents to steer clients toward the home with the 3% commission regardless of whether the home buyer would be better off with that home or not. Critics have long argued that this model creates a potential conflict of interest for buyers' agents. The settlement effectively removes the obligation from sellers to pay commissions upfront.

Implications for Sellers

For sellers, the settlement potentially enables them to retain a larger share of their property's selling price. With the freedom to negotiate commission rates, sellers can explore cost-effective options, including engaging with online or discount realtors that operate on lower commission models.

The settlement is expected to introduce a competitive edge to the real estate industry, similar to the revolution seen in stock trading with the advent of the internet. As commission rates become negotiable, agents will vie for clients, possibly driving down costs significantly.

Impact on Buyers

The path forward for buyers is less clear and could be good or bad depending on the circumstances the home buyer is in. Buyers might now face direct out-of-pocket expenses to engage a buyer's agent, possibly through flat fees or an hourly rate. This could make it harder for budget-conscious buyers to pay these costs directly. However, percentage-based commissions are still possible. Like sellers, home buyers could see reduced commission rates. In addition, the conflict of interest for agents has been removed, which could put buyers in a better overall position to find the right home.

One concern is whether buyers can incorporate these agent fees into their mortgage financing, a question that remains unanswered. The settlement may necessitate regulatory adjustments to accommodate new payment structures, ensuring buyers are not unduly burdened.

Expected Outcomes

Experts predict a substantial reduction in commission rates, with figures potentially dropping to 1%-1.5% per agent. This adjustment would align the U.S. more closely with international practices, where real estate commissions are markedly lower.

This industry may witness the emergence of varied service models, from low-cost, minimal service options to premium, full-service offerings. This diversification will likely cater to a broader spectrum of consumer needs and preferences.

A Gradual Transition

While the settlement heralds a significant overhaul of real estate practices, the transition to a fully competitive market will not be instantaneous. Industry resistance and the time required for both buyers and sellers to adapt to new norms suggest a gradual evolution. Nonetheless, the settlement stands as a milestone in democratizing real estate transactions, potentially benefitting millions of Americans through lower costs and enhanced transparency.

Related Resources:

• Commission Impossible: Lawsuits Question Legality of Buyer-Broker Fees (FindLaw's Law and Daily Life)
• Interview With Real Estate Brokers (FindLaw's Learn About the Law)
• Buying a Home (FindLaw's Learn About the Law)