A groundbreaking $418 million settlement announced Friday by the National Association of Realtors (NAR) is poised to bring about the most significant reforms to the American real estate market in a century. This change could significantly reduce homebuyers’ costs and potentially drive some real estate brokers out of business.
Here’s an overview of the situation and what to expect in the coming months.
NAR’s Recent Legal Defeat
For decades, NAR has mandated that listing brokers for home sales offer compensation to a buyer’s agent upfront, typically amounting to about 6% of the sale price, split between the seller’s broker and the buyer’s agent.
This practice has faced increasing criticism, with some likening it to cartel behavior. Late last year, a federal jury in Kansas City found this arrangement to be a form of collusion that inflated real estate fees, resulting in a $1.78 billion judgment against NAR.
Changes for Homebuyers and Sellers
If the settlement announced Friday is approved by a federal court, the standard 6% commission will be eliminated. Sellers will no longer need to propose compensation to buyers and their agents, a practice that critics argue encouraged brokers to steer clients towards more expensive properties.
Another new rule will require homebuyers to sign an explicit agreement with a broker before starting to work with them, which experts believe could lead many buyers to avoid using brokers altogether.
These new rules are expected to take effect around mid-July.
What to Expect in the Coming Months
The market will face a period of uncertainty as everyone adjusts to the new regulations, according to Marty Green, principal at mortgage law firm Polunsky Beitel Green. He predicts that creative buyer’s agent arrangements will emerge, which may have previously struggled to gain traction.
Homebuyers and their agents will need to agree on a commission and document it. Sellers will also need to collaborate closely with their listing agents as the new rules are implemented.
Potential Long-Term Savings for U.S. Consumers
These changes could lead to reduced commission costs for buyers, potentially bringing U.S. real estate fees closer to the lower transaction costs seen in other global markets. Jaret Seiberg, a housing policy analyst for TD Cowen Washington Research Group, told clients that commissions could drop by 25% to 50%, benefiting online real estate brokers. However, he cautioned that it’s too early to declare the end of local real estate agents, given their local expertise and reputations.
Increased Complexity for Buyers
Holden Lewis, a home and mortgage expert at NerdWallet, warned of a potential downside: more complex buyer-seller negotiations. Buyers with ample cash might navigate the process more easily than those with limited savings. Seiberg echoed this concern, noting it could particularly impact first-time buyers who can’t afford to pay for an agent.
Brokers and agents have opposed the settlement, arguing it will complicate the home-buying process for consumers and undervalue the important role agents play. Roy Remick, a realtor from Northern Virginia, emphasized that he aligns his goals with his clients to sell their homes for the highest possible amount, often spending thousands of dollars on services like staging homes to facilitate sales.
Remick warned that buyer’s agents would be left “flying blind” without knowing their commission from a given home. “We’ll have to make a bunch of phone calls because we don’t know what the commission is as it won’t be listed in the MLS. But we’ve already agreed with the buyer on how much they’ll compensate us.”
