National Association of Realtors Settles Commission Lawsuits. Major changes coming to the Real Estate Industry.

In a $418 million agreement announced Friday March 15th 2024, NAR settled legal claims that the industry conspired to keep agent commissions high.

Some are saying this “changes everything” for the real estate industry.

Follow this link for an interview I did on this topic with NBC. (Sorry, you’ll have to watch a commercial before the interview starts.)

What does this really mean for buyers, sellers and agents going forward?

Short answer is we don’t know. Everything might change or nothing changes as all. There’s a lot of total misinformation flying around right now so let’s unpack some of it. But before we delve into that, let’s take a look at how commissions have worked for the past 100 or so years.

THE HISTORY OF REAL ESTATE COMMISSIONS

Back in 1913, you know - when Henry Ford began production on the Model T, the National Association of Real Estate Exchanges - now known as the National Association of Realtors (NAR) created a standardized commission structure for real estate agents. The structure looked like this:

• A customer sells a home

• Customer pays a percentage of the sales price to the seller’s agent

• The seller’s agent shares that commission with the buyer’s agent

In those days, the standard commission was 2.5% before splits. Fast forward around 20 years to 1940 and with more communities and more houses, the need for real estate agents grew. As a result, the standard commission rate agents would charge went from 2.5% to 5%. By the 1980s the rate had grown to 6%, which is still what many believe the industry standard to be now (see below).

The standardized commission levels for agents had some basis in logic back then.

1. NO MULTIPLE LISTING SERVICE

There was not a system that included a centralized list of homes for sale. Agents had to do daily research and keep a database of their own or go into their office to look at listing books showing what their broker had for sale. Now there is a centralized Multiple Listing Service (MLS) that has almost all the homes for sale that agents can access from their phones.

2. COSTS WERE HIGHER

When the real estate agent commission structure was created, agents spent countless hours walking through neighborhoods and driving around. Listing agents also had to spend a ton of money on print advertising and other promotional material and had to do it for a longer period of time than in recent years when properties could sell in a weekend with multiple offers.

3. NO ZILLOW OR OTHER PORTALS

Today, almost every listing is also available to the public. In the old days, agents would have to print out info sheets or provide property brochures for their buyers. Now portals like Zillow and others show buyers all the listings and is no longer exclusive to realtors.

Because of this, many buyers find homes online on their own and simply hire a realtor to get into contract and close the deal.

HIGHLIGHTS OF THE SETTLEMENT

Here’s what you need to know and my (snarky) comments:

• NAR would pay $418 million in damages over the next four years (and will most likely raise agent dues).

• NAR would agree not to create rules that allow listing agents to set compensation for buyer brokers (who I guess they expect to work for free).

• Offers of compensation would no longer be displayed in MLSs starting around a mid-July timeframe (which could have been done without the rest of this).

• MLS participants will be required to work with buyers to enter into written buyer representation agreements before touring homes (including open houses?)

• There is no admission of guilt with the settlement (there never is).

• The settlement is subject to DOJ and court approval (the court will approve it, not sure if the DOJ is done with their pound of flesh).

WHAT’S BROKE AND WHAT’S NOT?

There clearly are a few things that are not optimal about the current commission practice.

• Sellers have to pay for the buyer’s agent - even ifthat agent does a terrible job, and

• Sellers are paying the buyer’s agent to essentially negotiate against them.

Additionally, before a listing can go into the MLS and be syndicated to all the portal sites, the seller has to make a unilateral offer of compensation to the other agent.

Here’s what works:

Buyers get representation from an agent who (hopefully) has their best interests at heart.

They are able to benefit from this representation because their agent is being compensated.

“One of the misconceptions around this settlement is that buyers routinely negotiate agent commissions.”

— Ellis Posner

FAKE REAL ESTATE NEWS

The media is running rampant with inaccurate headlines, such as The New York Times: Powerful Realtor Group Agrees to Slash Commissions to Settle Lawsuits. The proposed settlement does not mention “slashing commissions”. We’ll see just enough of these kind of headlines, “if it bleeds, it leads”, to totally gaslight the public to the point that no one wants to pay real estate commissions.

SIX PERCENT REAL ESTATE COMMISSIONS ARE GONE

I’ve been selling real estate for over 20 years in the Los Angeles area and throughout southern California. For the most part, commissions have not been 6% for a very long time.

So, yes, 6% commissions are gone, but not as a result of this settlement. Or maybe in places that are still paying 6%, they survive.

HOME PRICES WILL COME DOWN

Over the last twenty+ years, I have met with many homeowners when they were interviewing agents to list their homes. Here’s what they ask listing agents:

1. How much will my home sell for?

2. What are the comps?

3. How long it will take to sell?

4. What repairs do they have to make?

5. Can I sell “as-is”?

6. How much is your commission?

I’ve never had anyone, not one seller, ever, ever take the comps and then add the commission to that. It’s simply not how the process works. That’s because the cost of selling, including paying commissions, is factored into the price.

I can’t imagine that July 2024 when this is supposed to be implemented, sellers will say, let’s price the house 2.5-3% less because we don’t have to pay the buyer’s agent.

That will not happen. If this settlement goes through as drafted, windfall profit for sellers.

BUYERS WILL PAY AGENTS BASED ON SERVICES DELIVERED OR TIME SPENT

How I wish that all the buyers I’ve ever worked with paid me for the time I’ve spent on their deals. I’m sure my income would be double. But I just don’t see any data point indicating that buyers will be willing to pay for a service that up until now has not been identified as a separate line item. And I don’t see any indication that they will pay for agent’s time or even that agents and brokerages have the ability to track that.

How exactly would this work?

Is anyone suggesting that agents keep a time card which is submitted at the close of escrow?

THE REAL ESTATE INDUSTRY WILL BE CHANGED

However this plays out, whether you are a buyer, seller or agent or the many affiliates we work with, don’t expect things to ever look the same.

Other than redoing a few fields in the MLS, which is doable, the listing contract - at least the one we use in California, will need substantial revisions. The same may be true of purchase contracts as well. While there are buyer broker agreements that can handle the brave new world we are headed into, they may only confuse the process more.

The real estate industry has taken a lot of steps to eliminate discrimination. This settlement may open up those doors again.

For example:

1. Some listing agents may not want to work with certain buyer’s agents or their buyers based on unfair bias. What happens when the listing agent doesn’t like a certain agent or brokerage, and doesn’t offer the same compensation that they telling agents from other companies is available? Who monitors this?

2. Some listing agents may have preconceived notions about buyers based on race, background, creed or sexual orientation - all those things that are prohibited by law outside of this settlement. A seller or agent who is biased may discourage an offer from certain agents representing that buyer by telling them they aren’t offering any compensation - offering very little.

3. There is no way to vet what the buyer’s agent or their client may be told because nothing is disclosed in MLS. So what does the agent and their buyer do at that point?

DO WE REALLY NEED NAR?

Most agents don’t really like NAR. Do we really need them? Will there be a competing trade group and MLS?

Actually there is already a new trade group being formed called the American Real Estate Association (AREA) that may step into this space and others talking about launching a national MLS.

STAY TUNED

This is an ongoing unfolding story and I’ll be writing about it in the coming months. I’m hoping that doesn’t drag into years.