National Association of Realtors Settlement: Our Take
Is massive change coming to the real estate industry? It’s unlikely. Will sellers drop their listing price because they’re no longer responsible for paying the buyer’s side of the commission? Almost certainly not. Will it be cheaper for buyers to purchase a home? We doubt that, and it might even become more expensive.
Now that we have all that out of the way, let’s rewind the clock back to last week and the $418 million settlement in the class action lawsuit between the National Association of Realtors (NAR) and several large Realtor organizations and home sellers.
A federal jury found the National Association of Realtors and several large Realtor organizations guilty of conspiring to artificially conflate sales commissions. The $418 million Realtors settlement, to be paid out over four years, requires the National Association of Realtors to eliminate the offer of buyer’s compensation from their multiple listing service websites.
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This verdict follows on the back of the $1.8 billion verdict in the Sitzer-Burnett case, which was handed down in October, 2023. It covered the same basic ground but had an even bigger award. The National Association of Realtors has said it will appeal the verdict.
We’ve been reading with bemusement all of the articles claiming that the settlement will change the way homes are bought and sold. In particular, we’ve watched pundits claim, strangely, that home prices will fall. That buyers will pay less. That somehow over a million real estate agents will give up their full or part-time livelihoods and disappear from the business of helping people buy and sell homes.
Given the more than 30 years since Ilyce started writing this column, and the 20+ years since Sam, a real estate attorney, joined her as co-columnist, this strikes us as living in the land of magical thinking.
What will the Realtors settlement change?
Basically, local multiple listing services (MLSs) are no longer able to advertise the amount sellers will pay to the buyer broker upon the sale of their properties.
Legal platitudes aside, let’s look at how this sort of marketing plays out in the real world.
Usually, a seller hires a real estate agent to help them sell their home. The real estate agent presents the seller with a listing agreement. The listing agreement spells out what the agent will do and how much the seller will pay the listing agent at the closing. This commission is usually somewhere between 5 and 6 percent. In the thousands of closings Sam has done for his clients over the years, he has seen amounts range higher and lower.
Many people (buyers, sellers, homeowners) tend to think that the commission amount is six percent. They also believe that fee is non-negotiable.
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Let’s stipulate right here that real estate commissions have always been negotiable. It’s just that some agents refuse to work for less. So, they say, “No. The commission is 6 percent.”
At any point, a seller has the right to find another agent. But if they want to use that agent, the seller can counter and say something like, “Well, I’m willing to pay 5 percent,” or throw out another number. Then, the agent can decide if they want the business or not.
If you’re worried about commission, consider this: most transactions contain additional fees paid by the seller. Many real estate brokerage companies now add a fee on top of that commission. That fee can be as little as $100, but some brokerage houses charge upwards of $500 per transaction, on top of the commission. This fee goes by various names (think “doc prep” fee), but it’s just more cash the seller is shelling out (and it’s usually the seller who pays it).
The listing agreement also discusses how much of the commission the seller broker is willing to share with the buyer’s agent. Often, the commission is split equally between the buyers and sellers agents, but not always. In some cases, the seller’s agent keeps more than half. The seller’s agent will get 3.5 percent and the buyer’s agent might get 2.5 percent. Or, the reverse.
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In essence, the settlement of the Realtor litigation attempts to separate the fee that the seller pays the listing broker and the amount paid to the buyer’s broker. Going forward, the listing broker’s listing agreement would provide the amount that the seller agrees to pay the listing broker but may not provide any amount that the seller is willing to pay the buyer’s broker.
Now it’s time to examine what, if any, seismic changes will come to the industry. If sellers are not required to pay the buyer’s commission, some experts apparently think three things might happen: (1) buyers may decide not to use real estate agents to buy homes; (2) the commission received by the buyer’s agent would be less; (3) sellers will reduce the price of their home because they’re responsible only for the commission paid to the seller’s agent.
We disagree. We think once buyers are in the market to buy a home, they look for an agent. That agent is now required to provide a written buyer’s agency agreement that will state that the buyer will pay the broker a fee for helping the buyer purchase the home. That amount is also negotiable. Some people think it might be a flat fee. Or a percentage of the sales price. Or, nothing at all. (Yes, we’ve seen pundits who posit this sort of thinking.) Once the document is signed, buyers will be legally responsible for paying that commission.
Realtors Settlement Means Buyers Could Pay More – Not Less
Let’s say a listing agent has an agreement in force today to list a home. And, let’s say the agreement says they will receive a 5 percent commission. The agent agrees to split the fee equally with the buyer’s broker. The buyer’s broker would receive 2.5 percent of the sales price. But under the new arrangement, the buyer might agree to pay the buyer’s broker 3 percent of the sales price for any home the buyer purchases.
In this situation, the buyer could wind up paying more in this situation. There is no requirement or guarantee that the seller will lower the price to make the deal happen. This is likely especially when the U.S. is experiencing an extremely hot sellers’ market. The buyer could try to require the seller to pay the buyer broker’s commission, and if the seller refuses, the buyer could walk away. But is that hurting the seller, when we’re 4+ million homes short in this country?
Who wants to walk away when you’ve gone to all the trouble to find a house in a hot market? And, right now, it’s the strength of the seller’s market that is driving up prices, even as interest rates once again near 7 percent.
Realtors Commission Set in Listing Agreement
How will the buyer come up with the money to pay for the buyer’s agent’s commission if the seller refuses to play ball? Fannie Mae and Freddie Mac may allow buyers to finance their buyer’s agent commissions. Which means buyers will pay interest on this amount for the term of the mortgage.
So far, we’re having trouble understanding how buyers could pay less. They’re bringing all the money to the table (to pay for the house), but they could wind up paying more.
Another piece of the settlement is that multiple listing services cannot advertise how much of the commission the seller’s agent is willing to share. But, listing agents can advertise on third-party websites, like Homes.com and Zillow, or on their own personal websites. We’re willing to bet that the word will get out about who is willing to pay what. We’re also fairly sure the Realtors legal counsel is already working on drafting new listing agreement forms that allow sellers to check a box and assign a specific portion of the commission to the buyer’s agent.
Which is why we think the most likely scenario is that nothing much will change. Real estate agents will end up with a workaround solution that keeps everything much as it is today. Listing agents and buyers’ brokers will get paid at closing. They’ll share the commission, and we won’t see changes in the sales price.
We’ve already heard that real estate agencies are working with their agents. They want to make sure buyer’s agents get paid as they always have. Agents are pushing sellers to pay the listing broker’s commission as well as the buyer’s broker’s.
Sellers, remember that the commission is negotiable. And if your agent doesn’t want to work for the amount you’re offering, you can always go find someone else. That’s what the free market is supposed to be about.
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©2024 by Ilyce Glink and Samuel J. Tamkin. Distributed by Tribune Content Agency. A1630
I received this comment. The author requested to remain anonymous.
Hi Ilyce:
I don’t have a dog in this fight and won’t comment publicly but here’s a few thoughts.
First, I think you’re right that not much will change – at least as far as the price of housing and the commissions paid on the listing side goes.
The residential housing marketplace will likely become less efficient now that MLSs won’t communicate blanket offers of cooperative compensation between listing brokers and potential cooperating (buyers’) brokers.
The inefficiency of making individual offers of compensation directly between listing brokers and buyer brokers could potentially lead to blanket agreements between firms. If an agreement is solely between two brokers (or their firms) there may be no problem. But eventually three or four (or more) brokers could come to the conclusion it would be easier, more efficient, or less confusing to agree on what they will pay each other in cooperative transactions. And that could raise potential antitrust concerns.
It’s possible some brokers might consider setting up informal “private networks” limited to certain brokers or certain firms which could raise the same issues raised in the current litigation. The specter of potential fair housing concerns also lurks in the background if there’s agreement about who “qualified” buyers might be.
It’s also not clear whether the dispute resolution services of local Realtor boards/associations – mediation and arbitration – would be available for disputes between brokers or firms arising in the context of those networks.
Buyers, especially first time buyers, may find it difficult to pay for the services of a buyer broker in addition to making a down payment and paying other buyer specific costs. As you note, Fannie and Freddie could allow buyer acquisition costs to be rolled into buyer’s mortgages, but that’s not a certainty.
Last, competent, knowledgeable real estate professionals will survive and thrive but others who aren’t committed to doing everything necessary to be successful will likely turn to other occupations.
There may be other issues but this seems like a case of throwing the proverbial baby out with the bathwater.
I may be off base (it’s Opening Day after all) and I’m sharing these thoughts only with you since you’re the only journalist I’ve read who’s painted a realistic picture (in my opinion) about what the future may hold.