The Cost of Doing Business

How a Major Real Estate Lawsuit Settlement Could Affect Your Search for a Home

The National Association of Realtors is settling a federal lawsuit over realtor commissions and transparency. Here's how industry locals are responding to the news.

By Kim Doleatto March 28, 2024

The recent National Association of Realtors settlement is spotlighting how agents are paid.

Buyers and sellers often keep a close watch on interest rates when looking at home prices, but those prices might soon be affected by another factor—a change in how seller commissions are determined.

What's changed? The National Association of Realtors, or NAR, is settling a federal class-action antitrust lawsuit—Burnett et al. v. National Association of Realtors et al.—initiated in Kansas City, Missouri. Last October, a jury ruled in favor of the plaintiffs, agreeing that the NAR and major brokerages colluded to inflate seller commissions.

​​​​​​The settlement could open the market to more genuine competition and create opportunities for new business models in a decades-old world where 5 to 7 percent commissions were commonly expected, a percentage split between the seller's agent and the buyer's representative following a sale.

What's the lawsuit all about?

Under NAR rules, sellers must advertise the buyer agent commission on the Multiple Listing Service, or MLS, the database where real estate agents place homes for sale, informing both sides what they’ll make in the transaction.

One of the issues raised by plaintiffs in the Burnett lawsuit was that homebuyers don't see the commission amount, but their agents do. As a result, buyer agents are incentivized to steer clients to higher-fee deals—meaning they may prioritize collecting a higher fee above their client's desire for a home, and avoid showing them certain listings that offer a lower commission.

The settlement puts a magnifying glass on the process, and realtors and brokers representing buyers are unsure how it may affect them. At roughly 6 percent, America has relatively high realtor commissions, compared with 2.5 percent in Australia, 1.5 percent in Britain and 4 percent in Switzerland.

According to the latest numbers, the median price for a single-family home in Sarasota is $507,500. A 6 percent commission amounts to $30,420. While there is robust data on local monthly housing inventory, active sales, days on the market and more, there is none on how much is spent on commissions, and while the seller pays for them, those costs are passed on to the buyer, boosting the price of homes.

Although agents and brokers whom they work beneath maintain there's no standard industry commission rate, and that home sellers are always welcome to negotiate a lower payout percentage, a simple Google search reveals that 5 to 6 percent is customary. Some agents charge less, and some work with a flat fee system, but 6 percent hasn’t raised eyebrows for decades, and anything less than that has been considered a good deal.

"Six percent is common and is typical, but the commission percentage has always been negotiable," says T.R. Smith, a real estate attorney with Berlin Patten Ebling. "Some brokerages offer to list a home for 1 percent. That's rare, though. Plus, at 1 percent commission, the services provided are likely limited."

“Each model is different," says Realtor Association of Sarasota and Manatee president Tony Barrett. "Throughout time, I've been offered various rates of commission. I think we’re here because we weren't as transparent as we should have been. I don’t think the general public knows how we get paid or when. Do we get more excited when the commission is higher? Of course, but if we steer people away from lower compensation homes, we're acting unethically."

"Commissions vary and have always been negotiable, but 6 to 7 percent has been common in the industry for many of the local full-service brokerages," says Fondren Watts of Coldwell Banker Realty.

“In Sarasota, we’ve been a 6 percent market as long as I can tell," adds Roger Pettingell, a veteran realtor with Coldwell Banker Realty. "Forty years ago, it was more like 7.”

Although the NAR has long said commissions are negotiable, critics have argued that the fees were expected and home sellers felt that they would lose buyers if they didn’t offer them. Now, while denying any wrongdoing, the group has agreed to change how it does business as part of the $418 million lawsuit settlemen. The case is still pending approval; changes will take hold in mid-July.

Why is this a big deal?

As a result of the lawsuit, the seller’s broker or agent will no longer be required to compensate the buyer's side. Sharing commissions will remain an option, but that commission amount cannot be advertised on the MLS.

Instead, "buyer’s agents will have to call the seller's agent to find out if the seller is offering to pay the buyer’s agent’s commission," says Smith. "There may be other methods for the seller or seller’s broker to offer a buyer's commission, but it will be strictly prohibited from appearing on the MLS."

A contract between the buyer and their broker will also now be required; that is expected to open the door to broader negotiations and conversations between the buyer and their broker or agent. The contract will lay out what services they’ll be receiving, and for how much. Conversely, sellers may still dole out a commission to the buyer to entice them, if they so choose.

"The agreement must disclose the services that the buyer’s agent will provide to the buyer, along with the compensation the buyer’s agent will be entitled to," says Smith. "The Florida Association of Realtors currently has buyer-broker agreements, but the most recent version is from 2016, so we anticipate significant changes to those forms. Some brokerages always use them, but some never have because it was optional."

What does this all mean for you?

There is speculation that the buyer may now have to shoulder their agent's commission fees.

"A seller’s broker or agent will no longer be required to offer compensation to the buyer’s broker," says Smith. "Therefore, sellers may be less willing to offer compensation to them. However, that could result in a smaller buyer pool for the seller’s property."

Since buyers will no longer be able to depend on the seller to pay for commissions, they may wind up paying out of pocket for the service, depleting cash they need for their home's down payment and other fees. But were buyers ever getting a "free” agent? No, because commission numbers were taken into account by the seller, who folded them into the price of their home when putting it on the market.

How are realtors responding?

"I'm seeing a wide variety of reactions," says Smith. "Some brokers and realtors don't expect a lot to change, and some anticipate significant changes. It's still a wait-and-see how the settlement will affect the industry from a practical standpoint. All we and the brokers and realtors can do is educate ourselves on the new rules and prepare to make changes as needed."

“I think there's a lot of confusion based on the uncertainty of the information everyone is being given and that it will take time for the dust to settle," says Watts. "Until July, we won’t know what will be implemented and what that will look like for the future of real estate, so until then it’s important that we all keep working in the best interest of our clients."

“I want to incentivize brokers to bring buyers," says Pettingell. "I do the video, the photos and the marketing all on speculation. When I look at my own business, I bring 40 years of local experience. I believe in the value I offer and I don't see that shifting. I believe in our product and I'm not worried about this noise."

"I don't see why it changes the numbers," Pettingell adds. "The cost of business didn't change."

Could this lead to realtors being paid in other ways, like with flat fees?

"Those things have continuously been tried," says Pettingell. "Our market, I think, requires a high level of service. You need human expertise. Zillow did not put realtors out of business. It needs people with particular skills."

"Brokers and realtors will have to get creative on how they conduct business to attract clients,” says Smith. À la carte packages with different commission values attached are a potential model.

Will more realtors drop out of the business as a result?  

“Yes, I believe so," says Watts. "I believe that we’ll begin to see a shift in licensees who become inactive. I think, now more than ever, it will be vital for realtors to show their value to customers, in addition to providing them with their local knowledge and expertise."

“I’m not certain," says Barrett. "HGTV has ruined the industry because the public thinks we’re driving around in fancy cars and drinking mimosas in the morning. There’s a lot of work involved. Realtors need to maintain a high level of education. If they continue to do things the right way, they'll be fine."

Barretts adds that already, “87 percent of realtors don't stick it out after five years." Realtors who have already been charging their clients less than the common 6 percent rate will probably weather the changes better than others.

Will this lead to lower costs for homebuyers?

“I don't think so," says Barrett. "We still need to work for something. We won’t sell houses for free. There will still be title companies, lenders and inspection fees and appraisals, so I don't see how that will change."

"I believe the aim is to bring down the overall costs associated with buying a home," says Smith. "But it's yet to be seen how that will play out."

Others say that without having to pay the buyer's agent's commission fees, sellers may be more apt to lower their house's listing price.

What are the pros of the settlement?

"Transparency is a pro," says Smith. "I believe the settlement aims to make commission obligations more clear to sellers and buyers."

“A buyer-broker agreement that says how the buyer’s side is going to get paid by the seller," says Barrett. "Certain states have always done it, but it's been optional in Florida. You wouldn't list a house without a listing agreement, so why not have this? It protects all parties."

What are the cons?

"The negative effect is less buyer representation," says Smith. "Buyers may seek out homes on their own if they aren't willing to compensate their own agent or broker and will be less educated than a realtor on the process. This may lead to legal issues down the road. Fewer sellers will want to pay a buying agent's commission."

“It’s hard to say this early how this will affect realtors and consumers, but I do think that changes are on the horizon,” says Watts.

“I would encourage sellers to shop real estate companies," says Barrett. "We don't all charge the same, and it’s always been that way."

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