Real Estate Agents Secure Agreement Set to Revolutionize The Process Of Home Buying and Selling in America

The National Association of Realtors declared on Friday that it had reached a nationwide settlement concerning allegations of industry collusion to maintain high agent commissions, a landmark deal poised to bring about significant changes to the landscape of home buying and selling in the United States.

In a statement, the association disclosed that the agreement, valued at $418 million, will streamline the process for home buyers to discuss fees with their respective agents.

This development could potentially encourage more buyers to opt out of using agents altogether, potentially leading to a decline in commission rates and a consequential exit of hundreds of thousands of agents from the industry.

One of the pivotal changes involves NAR’s decision to abandon longstanding industry protocols that mandated most home-sale listings to feature an upfront offer disclosing the payment amount for buyers’ agents.

For decades, sellers have typically determined buyers’ agents’ fees. Critics argue that this setup has restricted buyers from negotiating for cost savings and has maintained commission rates in the U.S. at levels higher than those observed in many other parts of the world.

Real Estate Agents Secure Agreement Set to Revolutionize The Process Of Home Buying and Selling in America
National Association of Realtors settlement: $418 million payout, reshaping home buying dynamics. (Credits: BAM)

While defending the existing model, the association has contended that it allows buyers to benefit from the advice of agents even if they cannot afford to compensate an agent upfront.

If approved by a federal court, the settlement would prompt a significant shift in how homes are listed for sale across most parts of the country, with upfront offers to buyers’ agents no longer included in listings starting in mid-July.

This change would empower buyers to negotiate compensation directly with their agents before proceeding with the transaction. Additionally, the settlement funds will be dispersed among recent home sellers nationwide.

With this new landscape, buyers are expected to become more price-conscious when selecting an agent, potentially choosing to save money by either not engaging an agent at all or by agreeing to pay their agent a reduced fee for limited services.

For instance, a buyer might opt to compensate an agent solely for tasks such as preparing an offer and reviewing inspection reports, without requiring the agent to accompany them on home tours.

The agreement comes as a resolution to months of uncertainty and mounting legal challenges faced by the residential real estate industry.

The National Association of Realtors (NAR), one of the most influential trade groups in the nation, has been under significant antitrust scrutiny since a jury in Kansas City, Missouri, issued a $1.8 billion verdict against the organization and two national brokerages in October.

The jury determined that industry regulations regarding payment to buyers’ agents artificially inflated commission rates. Similar lawsuits were filed by home sellers who argued that they had been subjected to excessive costs.

The settlement represents a comprehensive resolution to the extensive legal challenges faced by the real estate industry, which has been grappling with a succession of antitrust lawsuits akin to the high-profile Kansas City case.

Another litigation in Chicago, which seemed poised for trial later this year, loomed with the potential for damages exceeding $40 billion. The agreement encompasses state and local Realtor associations, certain brokerage firms, and Realtor-owned multiple-listing services.

Benjamin Brown, co-chair of the antitrust practice at Cohen Milstein, one of the law firms representing plaintiffs in the Chicago case, remarked, “Buyers were largely excluded from commission negotiations, and I believe this settlement will invite them to participate in that process.”

Real Estate Agents Secure Agreement Set to Revolutionize The Process Of Home Buying and Selling in America
Upfront offers to buyers’ agents are discontinued and negotiation power shifts to buyers. (Credits: Getty Images)

Nykia Wright, interim CEO of NAR, expressed the association’s commitment to resolving the litigation in a manner that benefits both its members and American consumers. She emphasized NAR’s longstanding goal of preserving consumer choice and safeguarding the interests of its members.

The prospect of continued antitrust challenges had placed NAR at risk of financial distress. The association’s leadership faced criticism from some quarters of the industry for decisions made over the past year, including a reluctance to alter its regulations earlier and a bet on prevailing in the legal battles.

The financial implications of the settlement, which the National Association of Realtors (NAR) will disburse over four years, carry considerable weight for the association. According to a tax filing, NAR reported approximately $23 million in net income and nearly $750 million in net assets in 2022. Despite the agreement, NAR maintains its stance of denying any wrongdoing.

The revised rules leave the real estate industry susceptible to the disruptive forces of technological advancement, mirroring trends that have lowered fees for sectors like travel agents and stockbrokers.

The prevailing standard commission—typically ranging from 5% to 6% of the purchase price, divided between the seller’s and buyer’s agents—remains one of the highest worldwide.

Also, the changes necessitate that many real estate agents who work with buyers establish agreements with their clients delineating the scope of services to be provided and the corresponding compensation.

The potential decrease in buyers utilizing their agents may result in the departure of some agents from the industry, potentially leading to a reduction in membership for the National Association of Realtors (NAR), which boasts 1.5 million members known as Realtors.

Ryan Tomasello, a real estate industry analyst at Keefe, Bruyette & Woods, has forecasted that these lawsuits could ultimately result in a 30% reduction in the approximately $100 billion Americans annually pay in real estate commissions, and could halve the headcount of Realtors.

The revised commission structure may present challenges for first-time buyers and others struggling to accumulate funds for a down payment.

Traditionally, the commission for the buyer’s agent has been factored into the sale price, allowing buyers to finance this cost throughout their mortgage rather than paying it upfront at the closing table.

Moving forward, sellers still have the option to offer compensation to buyers’ agents, but such offers may not be listed in the home listing in most markets.

Real Estate Agents Secure Agreement Set to Revolutionize The Process Of Home Buying and Selling in America
Potential decline in agent numbers, and NAR membership; lawsuits threaten the industry’s financial stability. (Credits: Getty Images)

If buyers prefer not to cover their agents’ costs out of pocket, they could negotiate for the seller to assume this expense. However, sellers may be less inclined to agree to this arrangement in a competitive housing market.

In the short term, consumers may not see significant changes as many sellers are accustomed to factoring the cost of a buyer’s agent into their sale price. However, over time, there is potential for the emergence of new brokerage business models that offer low-cost options to buyers.

Despite recent attempts by well-funded disruptors like Purplebricks and Rex, co-founded by a former Goldman Sachs partner, to shake up the industry, they have encountered challenges.

Executives from these firms cited industry regulations as hindering their success, as sellers were reluctant to offer lower commissions to buyers’ agents out of fear of losing potential buyers. Additionally, buyers had little motivation to opt for a lower-cost firm if they perceived minimal direct savings.

Stephen Brobeck, a senior fellow at the Consumer Federation of America, expressed skepticism about the competitiveness of the current market, noting that it lacks substantial price competition.

While the settlement addresses a significant threat to NAR’s viability, challenges persist. Some industry leaders are critical of the association’s leadership for placing itself in a vulnerable position that necessitated negotiating a settlement from a position of weakness.

It’s worth noting that the settlement agreement excludes HomeServices of America, a subsidiary of Warren Buffett’s Berkshire Hathaway, which is the last remaining defendant in the Kansas City case yet to settle.

Michael Manua
Michael Manua
Michael, a seasoned market news expert with 29 years of experience, offers unparalleled insights into financial markets. At 61, he has a track record of providing accurate, impactful analyses, making him a trusted voice in financial journalism.
Subscribe
Notify of
guest
0 Comments
Inline Feedbacks
View all comments
0
Would love your thoughts, please comment.x
()
x