If commissions are decoupled, researchers believe the competition will drive real estate commissions down.
A groundbreaking $418 million legal agreement could drive down commission rates and shrink the number of real-estate agents.
As an example, the DOJ cites Northwest MLS (NWMLS), which no longer requires listing agents to make offers of buyer broker compensation in order to list a property. Despite this being allowed, the practice of cooperative compensation continues, and agent commissions have not changed.
“As long as sellers can make buyer-broker commission offers, they will continue to offer ‘customary’ commissions out of fear that buyer brokers will direct buyers away from listings with lower commissions — a well-documented phenomenon known as steering,” the filing reads.
“A rule change that merely expands the theoretical range of allowable buyer-broker commission offers by one cent is unlikely to reduce broker commission rates. If virtually no sellers make one-cent offers of compensation to buyer brokers now, they are unlikely to make zero-cent offers under the new Rule.”
As part of the settlement, NAR has agreed to amend its compensation regulations. The changes:
- NAR will prohibit offers of broker compensation or commission on the MLS. Broker compensation still can be negotiated and discussed, but it cannot be done through the MLS, NAR said.
- MLS participants working with buyers will be required to enter into written agreements with those buyers. NAR has encouraged these agreements for years as a way to help clients understand what services and value will be provided and for how much.
What is a “Fair” amount to pay for real estate compensation?
The proposal will likely be scrutinized by the U.S. Department of Justice, which showed it wouldn’t accept settlements it felt didn’t lead to enough reform for the industry.
The DOJ called for rules that require buyers to negotiate broker compensation on their own. NAR has apparently agreed to take steps in that direction, according to the report.
Listings of homes for sale in most parts of the country would no longer include upfront offers to buyers’ agents starting in mid-July, and buyers would be able to negotiate compensation upfront with their agents.
The National Association of Realtors has reached a nationwide settlement of claims that the industry conspired to keep agent commissions high, it said Friday, a deal set to usher in the biggest changes to how Americans buy and sell homes in decades.
The $418 million agreement will make it easier for home buyers to negotiate fees with their own agents and could lead more buyers to forgo using agents altogether, which has the potential to drive down commission rates and force hundreds of thousands of agents out of the industry.
NAR agreed to abandon longstanding industry rules that have required most home-sale listings to include an upfront offer telling buyers’ agents how much they will get paid. Under a system in place for a generation, sellers have typically set buyers’ agents fees. Consumer advocates say the arrangement has prevented buyers from negotiating to save money and kept commissions in the U.S. higher than in most of the world.
The association has said the current model helps buyers benefit from an agent’s advice even if they can’t afford to pay an agent out of pocket.
If the settlement is approved by a federal court, listings of homes for sale in most parts of the country would no longer include upfront offers to buyers’ agents starting in mid-July, and buyers would be able to negotiate compensation upfront with their agents. The settlement money will be distributed to recent home sellers nationwide.
Buyers are likely to be more price conscious when selecting an agent and might opt to save money by not using an agent at all, or by paying their agent a smaller fee in exchange for limited services. For example, a buyer could pay an agent to put together an offer and review an inspection report, but not to accompany the buyer on home tours.
The agreement is the answer to months of uncertainty and mounting legal threats to the residential real-estate industry. NAR, one of the nation’s most powerful trade groups, has been facing crippling antitrust liability since a Kansas City, Mo., jury delivered a $1.8 billion verdict against the organization and two national brokerages in October. The jury found that industry rules for how buyers’ agents are paid were keeping commission rates artificially high. That case and others like it were filed by home sellers who argued they paid inflated costs.
The settlement will resolve wide-ranging legal exposure for the industry, which has been facing a series of antitrust lawsuits similar to the Kansas City case. Separate litigation in Chicago, which appeared headed for trial later this year, could have threatened a damages award of more than $40 billion. State and local Realtor associations, some brokerage firms and Realtor-owned multiple-listing services are covered by the agreement.
“Buyers were cut out pretty much entirely from negotiating commissions and I think this will invite them under that tent,” said Benjamin Brown, co-chair of the antitrust practice at Cohen Milstein, one of the firms representing plaintiffs in the Chicago case.
NAR interim CEO Nykia Wright said the association “has worked hard for years to resolve this litigation in a manner that benefits our members and American consumers. It has always been our goal to preserve consumer choice and protect our members to the greatest extent possible.”
NAR was at risk of bankruptcy had its antitrust troubles continued. Its leadership made a series of decisions over the past year that prompted blowback from some industry leaders, including refusing to compromise its rules earlier and gambling that it could win the litigation.
The cost of the deal, which NAR will pay over four years, is significant for the association. NAR had about $23 million in net income and nearly $750 million in net assets in 2022, according to a tax filing. NAR said it continues to deny wrongdoing.
The rule changes make the industry newly vulnerable to the forces of technological change that have driven down fees for travel agents and stockbrokers. The current standard commission—5% to 6% of the purchase price, split between the seller’s agent and the buyer’s agent—is among the highest in the world.
Housing experts said the deal, and the expected savings for homeowners, could trigger one of the most significant jolts in the U.S. housing market in 100 years. “This will blow up the market and would force a new business model,” said Norm Miller, a professor emeritus of real estate at the University of San Diego.
Americans pay roughly $100 billion in real estate commissions annually, and real estate agents in the United States have some of the highest standard commissions in the world. In many other countries, commission rates hover between 1 and 3 percent. In the United States, most agents specify a commission of 5 or 6 percent, paid by the seller. If the buyer has an agent, the seller’s agent agrees to share a portion of the commission with that agent when listing the home on the market.
An American homeowner currently looking to sell a $1 million home should expect to spend up to $60,000 on real estate commissions alone, with $30,000 going to his agent and $30,000 going to the agent who brings a buyer. Even for a home that costs $400,000 — close to the current median for homes across the United States — sellers are still paying around $24,000 in commissions, a cost that is baked into the final sales price of the home.
The changes also require many real-estate agents that work with buyers to sign agreements with their clients about what services they will provide and how much they will be paid.
The settlement includes many significant rule changes. It bans N.A.R. from establishing any sort of rules that would allow a seller’s agent to set compensation for a buyer’s agent, a practice that critics say has long led to “steering,” in which buyers’ agents direct their clients to pricier homes in a bid to collect a bigger commission check.
And on the online databases used to buy and sell homes, the M.L.S., the settlement requires that any fields displaying broker compensation be eliminated entirely. It also places a blanket ban on the longtime requirement that agents subscribe to multiple listing services in the first place in order to offer or accept compensation for their work.
If fewer buyers use their own agents, that could push some agents out of the industry and lead to a decline in NAR’s membership. NAR has 1.5 million members, known as Realtors. Ryan Tomasello, a real-estate industry analyst with Keefe, Bruyette & Woods, has predicted that the lawsuits could eventually lead to a 30% reduction in the $100 billion that Americans pay annually in real-estate commissions and reduce Realtor head count by more than half.
The new commission structure could pose challenges for first-time buyers and others who are struggling to save for a down payment. Because the buyer’s agent’s commission has long been baked into the sale price, the buyer was able to finance that cost over the length of the mortgage instead of having to pay it upfront at the closing table.
Going forward, sellers can still offer to compensate buyers’ agents, but in most markets, they won’t be able to put those offers in the home listing. If buyers don’t want to pay for their agents out of pocket, they could ask for the seller to cover the cost of the buyer’s agent. Sellers are less likely to agree to that in a hot housing market, however.
A Couple of Key Points.
1) No one is saying there won’t be a buyers commission.
2) The buyers’ commission will no longer be offered up front. There literally won’t even be a place to display it.
3) A buyers’ agency agreement will be required. (We already started that in Washington)
4) The Buyers agent commission just becomes another addendum that is Negotiated. Just like Inspection, Financing, Septic. Well, or any other addendum. The Buyers compensation will be negotiated as part of the deal as well.
Home buyers and sellers face the prospect of major changes to how much and in what way they pay their real-estate agents, following the historic verdict against the National Association of Realtors and large residential brokerages.
There are many new rule changes regarding “Offering” a Buyer’s Agent Compensation (We no longer use the term Commission). Those changes could range from minor tweaks to the commission system to a more radical restructuring of the residential real-estate industry, such as more people buying homes without using agents or buyers paying their agents by the hour.
The Cascade Team provides buyers and sellers with choices, control, and complete transparency.
While it’s a confusing topic for both consumers and real estate agents alike, The Cascade Team has put together some Questions and Answers on the topic.
Buyer Broker compensation is now fully negotiable just like it was always meant to be!
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