Real Estate Commission Suit Settlements Explained

What the Changes to Real Estate Commission Structure Means to You

There is a lot of misinformation about the ramifications of the recent spate of lawsuits and, in particular, the National Association of Realtors (NAR) settlement regarding commission structures. Misunderstandings are bound to happen when you have lazy journalists with clickbait headlines like we saw last week from the NY Times – Powerful Realtor Group Agrees to Slash Commissions to Settle Lawsuits and CNN- The 6% commission on buying or selling a home is gone after Realtors association agrees to seismic settlement. Hopefully, the following will outline how changes to commission structure may manifest itself in our market and dispel some misunderstandings.

First and Foremost

The National Association of Realtors is a trade organization with no power over the size of commissions. Commissions have always been negotiable in a very competitive market. Avoiding the discussion of commissions is taken very seriously among agents, not only as a matter of ethics, but also because it is a criminally punishable activity. The commissions offered to buyers agents have been published on the MLS (on the members only site) while the commissions sellers’ agents charged are revealed on the closing statement. Knowing, generally, what your competitor charges can encourage an agent to match or undercut those rates in an effort to win business. Walgreens knows what CVS prices are and Exxon knows what Shell charges across the street. Granted the real estate market isn’t as liquid, but equilibrium is reached through open competition.

So what was the NAR settlement about?

The NAR agreed to 2 things: require member brokers to sign buyer agency agreements and prohibit the publishing of buyer broker cooperation on the MLS. The suits and settlement were primarily about decoupling seller and buyer agents’ commission and how it is disclosed, not about price collusion over the total fees collected from a transaction. The attorneys involved like to tout how they have struck a blow for the American home seller and buyer, the expected result being lower fees going forward (while collecting huge fees themselves). The reality is that total commissions in a transaction probably won’t change much. There will be more transparency in compensation and that’s good for consumer and real estate professional.

The impact on buyers and sellers

At the heart of the suit is the fact that buyers typically don’t know what the compensation offered to their agent by the seller is on a particular house. This set up a moral hazard for buyer agents that might be incented to steer a buyer to a higher commission property. Also, buyers agents being compensated by buyers, whose interest they represent, makes sense. Part of the NAR settlement is that the offer of buyer broker cooperation will not be published on the MLS. Buyer broker cooperation can still be offered, but is not required (while required in the past, it could have been $1). Not knowing what, if any, commission is being paid by the seller, buyer’s agents will now utilize a buyers agency agreement to ensure they get fairly compensated.

Fair compensation is agent specific and negotiable, but in a market with record low inventory where an agent might have to navigate a buyer through multiple failed bidding wars over months or years, that compensation level is likely at or above what is typically being offered currently as an offer of cooperation from the Seller.

The fierce competition for listings put pressure on commissions, with the buyer’s agent often bearing the brunt, as they have traditionally been at the mercy of the offer of broker cooperation.

So what of the slashed commissions, and who pays what?

If a seller had been paying 5.5%, with an offer of 2.5% to buyer’s broker, is now offering 3% to the seller agent and nothing to the buyer agent, they effectively cut their commission from 5.5% to 3%.

Pretty good, right?

However, the buyer’s agent will need to be compensated per their buyer’s agreement. If the buyer broker agreement is for 2.5%, then the commissions coming out of the transaction remained 5.5%, just with different parties responsible for payment.

How will buyers fund their agent’s fee?

• Two options make homes less affordable in a market already plagued by unaffordability, and the third puts us at status quo.
• A buyer could come out of pocket for the commission, increasing the required cash to close.
• They could roll the cost into their mortgage (providing it doesn’t throw off their loan to value), thereby increasing their monthly mortgage payment.
• They could ask for a seller concession to cover it, which would mirror the current system, albeit with a whole new layer of negotiation and more control for the seller.

What now?

Going forward, there will be some guideline and rule changes as well as some trial and error.

Buyers and sellers should consult with agents who can successfully structure agreements and contracts that balance all parties interests, culminating in a closed deal.

Want to know more? Contact us today.

In our over 100 years in business, we have advised clients through a lot, including:

• The Great Depression
• 2 World Wars
• Multiple recessions
• 17% mortgage rates
• Several financial crises
• Pandemics

We look forward to discussing your particular real estate needs or concerns.

Best, Rich