In March 2024, the National Association of Realtors (NAR) agreed to a historic $418 million settlement after losing an antitrust lawsuit initiated by a group of home sellers. This class-action settlement could potentially benefit up to 50 million people who have paid commissions on home sales in recent years, offering them a small financial return. Beyond the monetary compensation, the NAR has also committed to revising long-standing practices regarding real estate sales commissions
Background
For many years, real estate agents have often had little choice but to join the National Association of Realtors (NAR) and adhere to its regulations, particularly concerning local Multiple Listing Services (MLS). These MLS databases, utilized by the majority of brokers, provide detailed listings of properties for sale. Traditionally, listing brokers have cooperated with buyer's agents by splitting the seller-paid commission, with the specific amounts typically communicated via the MLS in fields accessible only to agents.
The plaintiffs in this case alleged that the NAR, along with brokers requiring their agents to become NAR members, conspired to artificially inflate real estate commissions. The core of the argument was that the industry-wide practice, which necessitated the seller to cover the commissions for both the buyer's and seller's agents, contributed to maintaining a nationwide commission standard of five to six percent of the sales price. This rate is considerably higher than what is common in many other countries.
Practice Changes
Starting August 17, 2024, the NAR will introduce significant changes to how real estate brokers are compensated for handling transactions :
- Commission Offers for Buyer’s Agents: These will no longer be mandatory or required to appear in the MLS, though they are still allowed. Listing agents may advertise specific commission offers on brokerage websites, or via phone, text message, or email. Home sellers and their agents will negotiate directly with buyers and their agents regarding compensation.
- Buyer’s Agent Compensation Agreements: Before touring homes, buyers will need to discuss and agree upon compensation with their agents, similar to how sellers currently negotiate with listing agents. Buyers will be required to sign written representation agreements that clearly outline the services provided by their agents (such as showing properties, negotiating offers, and managing transactions) and the associated fees. This step is intended to ensure that buyers are fully aware of the costs they may be responsible for covering.
Implications for Buyers and Sellers
These policy changes aim to foster more negotiation opportunities and increase competition, which could potentially reduce costs for sellers. Traditionally, commissions have been embedded in transaction prices, so in markets where sellers' costs decrease, home prices could potentially fall as well.
Some economists suggest that commissions could drop by as much as 30% if buyer's agents face pressure from clients to reduce their fees. However, such savings are not guaranteed, as the impact on real estate commissions will largely depend on market conditions, which can vary significantly by location. The response of sellers, buyers, and agents to these new practices will also play a crucial role in determining the outcome .
Brokerages, like other businesses, have operational costs such as rent, liability insurance, marketing, and other expenses. Most agents share their commissions with their brokers, with splits ranging from about 60/40 to 80/20, depending on the agent's productivity. A buyer's agent may invest considerable time and effort showing properties to clients, sometimes over an extended period, and may write multiple offers for deals that never materialize. Many experienced buyer's agents, who are used to receiving commissions equal to those of listing agents, may be reluctant to work for less, even if they must justify their value more regularly.
Buyer’s Commission and Payment Options
Buyers will have the discretion to set their agents' commissions, but whether this money comes directly from their pockets remains to be seen. For example, buyers might make an offer contingent on the seller paying the buyer's share of the commission or request a general credit toward closing costs to cover the buyer's agent's fee. Current lending guidelines and regulations generally prevent buyers from adding commission costs to their mortgages. However, a rule specific to VA loans, which previously prohibited borrowers from paying agent commissions, has been temporarily suspended .
In some scenarios, sellers might still opt to cover buyers' commissions, as has been the norm for many years. Given the rise in nationwide home prices by more than 50% since 2019 and the current high interest rates making mortgage payments less affordable, sellers with substantial equity are often in a better position to absorb commission costs than buyers, who may struggle to secure enough cash for a down payment. Sellers willing to cover all or part of the buyer's commission might attract more offers and secure a higher final sale price compared to those who refuse.
Navigating the Market Without an Agent
Online real estate platforms have made it easier for buyers to search for homes independently, potentially leading more buyers to venture into the market without an agent in an attempt to save on costs. However, buying a home is one of the most significant financial decisions most people will ever make, and the process often involves unexpected complications. In many situations, having a buyer's agent can be highly beneficial, particularly for those who are inexperienced or unfamiliar with the local market.
First-time homebuyers, who accounted for 31% of existing home sales in May 2024, may especially benefit from the guidance of a trusted real estate professional, which could help them make more informed decisions. However, these buyers may also need assistance from sellers to cover their agents' fees, putting them at a disadvantage compared to buyers with more readily available cash in competitive markets.
In Closing
The upcoming changes to real estate commission structures are likely to bring about significant shifts in how transactions are negotiated and executed. While these changes may promote competition and potentially lower costs, the extent of their impact will depend on various factors, including market conditions and the responses of buyers, sellers, and agents. In the short term, the market may experience some turbulence as all parties adjust to the new rules. However, these changes also present opportunities for innovation in the real estate industry, potentially leading to the development of new business models and more cost-effective services for consumers.
Sources:
The Wall Street Journal, March 15, 2024.
The New York Times, May 10, 2024.
National Association of Realtors, 2024.
