The National Association of Realtors (NAR) has defended the existing model, arguing that it enables buyers to benefit from agent advice even if they are unable to compensate an agent upfront. However, if approved by a federal court, the proposed settlement would bring about a significant shift in how homes are listed for sale across most parts of the country. Starting in mid-July, upfront offers to buyers’ agents would no longer be included in listings, empowering buyers to negotiate compensation directly with their agents before proceeding with transactions.
Under this new landscape, buyers are expected to become more price-conscious when selecting an agent, potentially opting to save money by either not engaging an agent at all or agreeing to pay their agent a reduced fee for limited services. For example, buyers may choose to compensate an agent solely for specific tasks, such as preparing offers and reviewing inspection reports, without requiring the agent to accompany them on home tours.
The settlement comes as a resolution to months of uncertainty and mounting legal challenges faced by the residential real estate industry. NAR has been under significant antitrust scrutiny following a $1.8 billion verdict against the organization and two national brokerages in October, with the jury finding that industry regulations artificially inflated commission rates for buyers’ agents. Similar lawsuits filed by home sellers alleging excessive costs further contributed to the legal challenges.
The settlement represents a comprehensive resolution to the extensive legal challenges, encompassing state and local Realtor associations, certain brokerage firms, and Realtor-owned multiple-listing services. Benjamin Brown, co-chair of the antitrust practice at Cohen Milstein, noted that buyers were often excluded from commission negotiations, and the settlement is expected to invite them to participate in the process.
Nykia Wright, interim CEO of NAR, reiterated the association’s commitment to resolving litigation in a manner that benefits both members and American consumers, emphasizing NAR’s goal of preserving consumer choice and safeguarding member interests. However, the prospect of continued antitrust challenges posed financial risks for NAR, which faced criticism for decisions made over the past year, including a reluctance to alter regulations earlier.
The financial implications of the settlement, to be disbursed over four years, are significant for NAR, which reported approximately $23 million in net income and nearly $750 million in net assets in 2022. Despite the agreement, NAR denies any wrongdoing. However, the revised rules leave the real estate industry vulnerable to disruptive technological advancements, potentially lowering fees as seen in sectors like travel agencies and stockbrokers.
The prevailing standard commission remains high worldwide, typically ranging from 5% to 6% of the purchase price, divided between seller’s and buyer’s agents. The changes require agents working with buyers to establish agreements delineating services and compensation, potentially leading to a reduction in NAR membership, which currently stands at 1.5 million.
Analysts forecast a potential 30% reduction in the approximately $100 billion Americans pay annually in real estate commissions, possibly halving the number of Realtors. The revised commission structure may pose challenges for first-time buyers and others struggling to accumulate funds for down payments, as traditional financing allowed buyers to cover agent costs through their mortgage.
While sellers still have the option to offer compensation to buyers’ agents, such offers may not be listed in home listings in most markets. Sellers may be less inclined to cover these costs in competitive markets. Over time, new brokerage models offering low-cost options to buyers may emerge, but disruptors like Purplebricks and Rex have faced challenges due to industry regulations and consumer perceptions.
Despite the settlement addressing a significant threat to NAR’s viability, challenges remain, with some industry leaders critical of the association’s leadership. Notably, HomeServices of America, a Berkshire Hathaway subsidiary, remains the last defendant in the Kansas City case yet to settle.