The National Association of Realtors (NAR) has reached a $418 million settlement to address claims of conspiring to keep agent commissions high. This marks a significant shift in the real estate industry. The agreement aims to bring about substantial changes in how Americans buy and sell homes.
Under the settlement, home buyers will find it easier to negotiate fees with their own agents. This change could lead to lower fees and may prompt some buyers to forego using agents altogether. It potentially empowers buyers in negotiations and could alter the traditional dynamics of the industry.
NAR has agreed to abandon longstanding industry rules that required most home-sale listings to include an upfront offer telling buyers’ agents how much they will get paid. This move disrupts the traditional model where sellers set buyers’ agents fees.
The impact of these changes could result in a decrease in commission rates and may lead to a reduction in the number of agents in the industry. This could significantly affect the income of real estate agents nationwide.
If approved by a federal court, listings of homes for sale in most parts of the country will no longer include upfront offers to buyers’ agents starting in mid-July. Instead, buyers will be able to negotiate compensation upfront with their agents.
The $418 million settlement will be distributed to recent home sellers nationwide, potentially benefiting a class of around 50 million people who have sold homes recently. This distribution marks a significant aspect of the settlement, aimed at compensating those affected by the previous industry practices.
Buyers are expected to become more price-conscious when selecting an agent, potentially opting to save money by either not using an agent at all or paying a smaller fee for limited services. This could include paying for specific tasks like preparing offers or reviewing inspection reports rather than full-service representation, such as accompanying buyers on home tours.
The settlement comes after months of uncertainty and legal threats to the residential real estate industry. NAR, a powerful trade group, faced significant antitrust liability following a $1.8 billion verdict against it and two national brokerages in a Kansas City case. The jury found that industry rules artificially inflated commission rates, prompting lawsuits from home sellers who claimed they paid inflated costs.
The agreement resolves widespread legal exposure for the industry, addressing similar antitrust lawsuits across the country. In Chicago, separate litigation that could have resulted in damages exceeding $40 billion was pending trial. The settlement covers state and local Realtor associations, brokerage firms, and Realtor-owned multiple-listing services.
According to Benjamin Brown, co-chair of the antitrust practice at Cohen Milstein, one of the firms representing plaintiffs in the Chicago case, buyers were previously excluded from negotiating commissions but will now have more involvement in the process.
NAR’s interim CEO Nykia Wright stated that the association worked diligently to resolve the litigation in a manner that benefits both its members and American consumers. Preserving consumer choice and protecting members’ interests were key goals throughout the negotiation process.
Continued antitrust troubles posed a risk of bankruptcy for NAR. The association’s leadership faced criticism for decisions made over the past year, including reluctance to compromise on industry rules earlier and gambling on litigation outcomes.
The cost of the settlement, which NAR will pay over four years, is substantial for the association. Despite having significant net income and assets in 2022, according to tax filings, NAR maintains its denial of any wrongdoing.
The rule changes expose the industry to the impacts of technological advancements, similar to those experienced by travel agents and stockbrokers. The standard commission, typically 5% to 6% of the purchase price split between the seller’s and buyer’s agents, is among the highest globally.
Agents working with buyers are now required to sign agreements with their clients specifying services and payment terms. Fewer buyers using their own agents could lead to a decline in NAR’s membership and push some agents out of the industry.
Analysts predict potential significant reductions in annual real estate commissions and Realtor headcount due to these changes, posing challenges for first-time buyers and others struggling to save for down payments.
The new commission structure may require buyers to pay agent fees upfront instead of financing them through the mortgage, impacting affordability for some buyers, particularly those with limited resources.
While sellers can still offer compensation to buyers’ agents, they cannot include these offers in home listings in most markets, potentially affecting negotiation dynamics, especially in hot housing markets.
While immediate consumer impact may be minimal as sellers typically include buyer agent fees in sale prices, over time, new brokerage models may emerge, offering low-cost options to buyers.
Recent disrupters in the real estate industry have faced challenges due to existing rules that deterred sellers from offering lower commissions and buyers from seeing direct savings, indicating potential hurdles for future business models.
“I never think this is going to be a perfectly priced competitive market,” remarked Stephen Brobeck, a senior fellow at the Consumer Federation of America. He highlighted that under the current system, the market is hardly competitive in terms of pricing.
Reflecting on their experience, Mihir Shelar and Akshada Bhanushali, who purchased a townhome in Bothell, Wash., in December, expressed concerns about their real estate agent’s incentive structure. Shelar noted that their agent’s payment was tied to the sales price, potentially reducing the agent’s motivation to negotiate on their behalf.
Shelar emphasized the lack of representation for buyers within the existing system, stating, “In this entire system, there’s absolutely nobody who’s looking out for the buyer.”
While the settlement resolves a significant threat to NAR’s survival, challenges persist for the association. Some industry executives are critical of NAR’s leadership, blaming them for the association’s weakened position necessitating a settlement.
Notably, the settlement agreement does not include HomeServices of America, a Berkshire Hathaway subsidiary, which is the last defendant in the Kansas City case yet to settle. Berkshire Hathaway intends to appeal the jury’s findings and damage award vigorously.
Other entities, including Anywhere Real Estate, Re/Max Holdings, and Keller Williams Realty, have settled similar claims related to the Kansas City case for significant amounts.
It’s worth mentioning that News Corp, the owner of The Wall Street Journal, operates Realtor.com under license from NAR, highlighting the broader ecosystem in which these developments unfold.