Residential Real Estate | How To & Education
Unless you're just coming back from a completely off-grid vacation or are now finally emerging from a month-long slumber to finish out the winter season, you've heard the news.
On March 15th, 2024, the National Association of Realtors (NAR) agreed to settle their anti-trust lawsuit for $418 million, and it's completely rocked the real estate world to its core.
Some agents even say they feel like they've been "hit by a sledgehammer" since the settlement's announcement.
While some may simplify the issue as merely a matter of commission negotiation between sellers and agents, the reality is far more nuanced and impactful.
Let's get into what it really means for agents, buyers, and sellers moving forward.
What's the Sitzer/Burnett v National Association of Realtors case about?
Before we dive too deeply, we'll briefly recap what's going on.
In the NAR lawsuit, formally known as Sitzer/Burnett v National Association of Realtors (NAR), plaintiffs alleged that NAR and other major brokerages conspired to inflate commissions paid to real estate agents.
The class action suit was brought by home sellers who had listed their homes across 20 MLSs against NAR, Realogy Holdings, HomeServices of America, Keller Williams, and RE/MAX, alleging these entities conspired together to require home sellers to pay inflated commissions to buyer agents.
After the two-week-long trial, the presiding jury deliberated for less than three hours and delivered a verdict that found NAR and the brokerages liable to the tune of $1.8 billion.
A few days ago, the NAR settled the anti-trust case for $418 million.
As a result of the case, major policy changes are imminent.
For decades, the way homes have been bought and sold has remained relatively similar, especially with how agents on both sides of the transaction interacted with their buyers and sellers.
That's all about to change.
Let's take a look at some of the most significant changes stemming from the NAR suit.
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Removal of Blanket Offer of Compensation: One of the major grievances brought against brokerages and NAR was inflated commissions. As a result, list agents can no longer publish commission split in the MLS. However, they can answer any related questions if asked, as well as post this information to outlets such as social media and within emails.
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Requirement for Written Agreements: Buyer agents must have written agreements with homebuyers, giving greater transparency into the process.
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Potential Shift in Cost to Homebuyers: Buyers may need to pay their agent's commission directly, adding financial pressure.
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Loophole for Negotiation: Sellers can negotiate compensation outside MLS platforms. This means that they can keep current commission structures if they find a willing agent.
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Buyer-Agent Commission Negotiation: Buyers must find affordable agents and negotiate their fees, posing challenges for some.
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Potential Savings for Sellers: Sellers could save significantly by not covering buyer-agent commissions and negotiating lower listing agent compensation. This could also potentially lead to lower listing prices, as listing and buyer agent commissions are no longer baked into the listing price.
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Exception for Buyer Agent's Compensation: Buyer agents can see their commission split for listings from their own brokerage.
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Concerns about Steering and Commission Rates: Higher commissions may be offered to avoid steering.
What the NAR settlement really means for agents, buyers, and sellers.
First things first, we need to dispel one of the most common myths about this entire case.
Contrary to popular opinion, the NAR lawsuit did not stem from a coordinated effort among real estate agents to hinder home sales with low commissions.
In reality, the lawsuit was brought by home sellers accusing NAR of setting illegal commissions and indirectly inflating home prices.
While negotiation of the standard commission was always a possibility, it didn't necessarily equate to a successful home sale.
Real estate commissions, contrary to popular belief, do not enhance the intrinsic value of a property; rather, they represent a substantial fee imposed upon sellers.
Hence, the significant settlement.
In the short term, the seller will enjoy immediate, substantial savings on selling their homes.
Long term, both buyers and sellers are going to enjoy several benefits that we'll get into a little later on.
Why does advertising the buyer agent's commission on the MLS listing matter?
Taking a step back, the lawsuit highlighted what some perceived to be the "anti-competitive nature" of the traditional MLS listing system, where the buyer agent's commission, typically ranging from 2.5-3%, was advertised upfront.
While it may not seem like a big deal, advertising commissions up front had two significant impacts.
Firstly, sellers often faced reluctance in aggressively negotiating commission rates due to concerns about buyer agents steering clients away from listings with lower commissions.
The financial incentives for buyer agents to prioritize higher commission listings were substantial, often leading to limited negotiation power for sellers.
Secondly, buyers found themselves unable to negotiate lower commissions with their agents, as they were led to believe that the commission rates were fixed and covered by the seller.
In reality, buyers indirectly bore the consequences of higher commissions through inflated home prices.
To address these issues, the NAR settlement proposes several policy changes.
Perhaps most notable is prohibiting the advertisement of set overall commissions in MLS listings and encouraging direct negotiation between buyers and their agents regarding agent compensation.
Under the proposed changes, buyers would negotiate agent commissions before engaging in property transactions, potentially allowing sellers to decide whether to offer seller credits to cover specific buyer agent commissions.
These adjustments are expected to exert downward pressure on agent commissions, which anti-competitive practices have artificially inflated.
The implications are significant.
Lower transactional costs benefit both buyers and sellers in the long run, fostering a more competitive and transparent real estate market.
However, the transition may not be seamless, as evidenced by concerns raised regarding buyer agency agreements and the impact on real estate agents.
What does it mean moving forward?
The ruling's short-term benefits for sellers are evident, with potential savings upon sale. In the long term, both buyers and sellers stand to gain from reduced commission burdens.
Real estate commissions, while historically entrenched, do not inherently enhance property value; they represent a sizable fee that sellers are often compelled to pay.
Moving forward, there is likely to be a fundamental shift in commission structures, with flat fees and significantly reduced rates becoming more prevalent, particularly on the buyer side.
This shift will inevitably place pressure on listing agents as sellers seek cost-effective alternatives in a market where buyers opt for flat fees or minimal rates.
Some industry observers predict that the traditional commission-based model for buyer agents may become obsolete in the face of growing competition and consumer demand for alternative fee structures.
In its place, a new era of fee flexibility and service customization is expected to emerge, offering buyers greater choice and value for their money.
Sellers are expected to refrain from shouldering the burden of a buyer agent's commission, while buyers are unlikely to pay the traditional 3% rate due to financial constraints and alternative fee structures.
Consequently, a combination of flat fees and significantly reduced commissions (e.g., 1-2%) may become the norm for buyers.
How can agents adapt to the new norm?
Inevitably, agents will need to adapt by either enhancing their service offerings or adjusting their pricing strategies to remain competitive in a changing market.
While this may lead to industry consolidation and the emergence of more efficient business models, it ultimately benefits consumers by promoting affordability and transparency.
Furthermore, the shift towards a more transparent and flexible fee structure for buyer agents reflects a broader trend toward consumer-centricity in the real estate industry.
This comes at a time when the lack of transparency of MLS data, partnered with the rise of sites like Zillow and Redfin that allow sellers to list properties themselves, has led consumers to question the necessity of real estate agents, which has significantly harmed their perceived value.
As buyers increasingly demand greater control over their transactions and a more personalized approach to service delivery, agents must invest significant time, energy, and resources to deliver a white-glove experience.
While the NAR ruling may disrupt established practices within the real estate sector, its overarching goal of fostering competition and reducing transactional costs holds promise for a more equitable and efficient marketplace.
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