Groundbreaking Real Estate Commission Settlement

Groundbreaking Real Estate Commission Settlement

  • 03/19/24
Answer: This week’s column was supposed to be my annual analysis on property tax assessed vs market values, but on Friday, the National Association of REALTORS® (NAR) and every major news outlet broke news of a groundbreaking settlement regarding on-going class action lawsuits over RReal Estate Agent commissions, so with apologies to the person I promised my tax assessment vs market value analysis to this week, I will use this week’s column to discuss Friday’s news about the NAR settlement related to Real Estate Agent commissions.
How We Got HereThis issue has been simmering for years in the Real Estate Agent community – the Dept of Justice (DOJ) has long sought to change how Real Estate Agent are compensated and we’ve been hearing about class-action lawsuits over Real Estate Agent commissions for years. Last year, the first major class-action suit was brought against NAR and multiple large brokerages in the Sitzer-Burnett case (I wrote about it here) and after a favorable ruling for the plaintiffs, other copycat lawsuits popped up across the country and the DOJ became heavily involved to ensure any settlements took DOJ priorities into consideration.
With a seemingly endless wave of class-action suits totaling way more than NAR and Brokerages had in the bank, settlement became necessary and that is what led to Friday’s announcement from NAR, pending court approval. Of note, the Dept of Justice is not directly involved in the settlement, but it’s understood that their priorities were considered in the terms, and they will not protest (as they did in another recent class-action settlement case), but that still remains to be seen.
The Main Problem What these cases and DOJ concerns come down to is how buyer agents are compensated in real estate transactions. In nearly all real estate transactions (99%+ based on my analysis of Arlington), especially those that go through the MLS, buyer agent commission comes from the seller and that compensation is shared up-front as a predetermined amount (percent or dollar amount) through the MLS listing and also displayed on most consumer-facing real estate websites.
The DOJ and class-action plaintiffs believe that this creates an artificially high commission for Real Estate Agents and leads to Real Estate Agents steering clients away from properties that offer a lower commission (this seems to be the DOJ’s biggest gripe). So the lawsuits claim, in-part, that NAR/Brokers colluded to force sellers to pay artificially high commissions to buyer agents. In the column I wrote last year, I address a lot of these claims and won’t rehash them here.
What You Read vs What Actually Happened I saw all sorts of absurd headlines and read plenty of terribly uninformed articles about what the settlement meant and I’ll address some of the most common misconceptions soon, but first let’s discuss what is in the settlement agreement:

  • Offers of Compensation (commission): The most significant part of the settlement for consumers and most Real Estate Agents is that offers of compensation to buyer agents will no longer be allowed in any MLS. The settlement does not make offers of compensation to buyer agents illegal and specifically states that offers of compensation can and should be handled outside of the MLS (e.g. via email/phone call between agents, posted on broker websites, etc). The effective date for this change is July 2024, pending court approval, so it could be later.
  • Buyer Agency/Representation Agreements: The settlement will require buyers and buyer agents to sign a Representation Agreement before touring properties. This is already common practice and amounts to little change. The effective date for this change is July 2024, pending court approval, so it could be later.
  • Release of Liability and Settlement Payment: The most significant part of this settlement for NAR and most Brokerages is that it puts an end to the wave of class-action lawsuits by releasing NAR and the included Brokerages from current and future liability, at a cost of $418M paid over four years. Larger Brokerages can and may opt out and seek their own settlement.
There’s a ~100 page legal settlement agreement that I have not read and gets into the legal weeds, but these three points summarize what is actually in the settlement, but because they aren’t interesting enough to drive clicks to CNN, NY Times, and other news outlets what you read in the news over the past few days likely sounded much different.
What This Looks Like in Practice The DOJ and consumer advocacy groups that are behind this settlement expect this change will lead to buyers negotiating their real estate agent’s commission up-front and buyers agreeing to pay that commission at closing if it isn’t being paid by the seller; seller-paid commission to buyer agents would be negotiated along with negotiations for the home purchase. The expectation is that pushing buy-side commission negotiations to the buyer and their agent will create a more natural/free marketplace and bring overall commission payments down.
The DOJ has also been clear that their top priority is the elimination of commission-based steering, which they explain as the practice of buyer agents steering their clients towards homes where the seller is offering a higher commission and away from homes where the seller is offering a lower commission. They believe that this is solved by removing offers of compensation from the MLS.
Whether or not the DOJ and advocacy groups see their goals come to fruition probably won’t be known until we’ve had about 18-24 months with the new rule(s). The only thing I’m certain of is that once this rule goes into effect, we’re going to experience 6-18 months of uncertainty and confusion for agents, buyers, and sellers as the entire industry figures out the implications of the new rule(s).
Who Benefits, Loses? As a consumer, proponent of free-ish markets, and a level-headed Real Estate Agent I understand the position of the DOJ, consumer advocacy groups, and plaintiffs in the class action suits, but good intentions don’t necessarily lead to good results, so what I’m focused on is whether these changes lead to a net benefit for housing/consumers or the changes create more unintentional losers and hardship than they bargained for.I’m doing my best to approach this not from a pro/anti-Real Estate Agent position, but an honest take on how the settlement terms affect the consumer and housing markets overall, from the perspective of a Real Estate Agent who watches the business closely every day.I see this change as an overwhelming benefit to the following groups:

  • Sellers: It’s unclear if moving offers of compensation to buyer agents off the MLS will actually change the traditional practice of sellers paying the commission of the buyer agent. At the very least, it empowers sellers and listing agents in a way they previously were not, and at best (for sellers) it reduces the cost of selling by 2-3% (per current norms of buyer agent commission) and thus increases seller profitability.
  • Investors/Corporate Buyers: There’s a pretty obvious path to buyers paying their own agents for buyer representation or needing to negotiate for the seller to pay it for them. Both scenarios put investors and corporate buyers at a huge competitive advantage over most buyers because they have experience and resources to eliminate buyer agent representation without much risk or they are simply acting as their own well-informed buyer agent representative.
  • Well-funded Buyers: Buyers who have the cash and budget to afford to pay their own agents as part of their closing costs will be able to afford better representation and gain a competitive advantage over buyers who can’t cover the cost of buyer agent representation or can only consider homes where sellers are offering compensation or they’re able to negotiate for it (how effective will that be in competitive bidding?). As of now, and for the foreseeable future, buyer agent commission paid by a buyer cannot be rolled into a mortgage and must be paid in cash with closing costs.
I see this change as an overwhelming loss for most home buyers, including:

  • Most first-time homebuyers
  • Veterans using VA loans to take advantage of buying with little or no money down
  • FHA and other low down payment programs that support those with fewer financial resources and/or lower credit scores
  • Anybody who benefits from having buyer agency representation/advocacy and cannot afford the cash needed to pay for it themselves (buyer agent commission can’t be rolled into a mortgage)
It is possible for two things to be true at the same time here — you can agree that it doesn’t make sense for the marketplace to have sellers paying buyer agent compensation AND agree that this policy is a net loss to housing consumers by giving a great advantage to those who don’t need it and weakening the position of those we want to help.I will reiterate that I understand the position of the DOJ/class-action plaintiffs, but I think in their effort to take corrective action, they’re harming the consumers of the housing market that we’re also desperately trying to support and handing out a considerable advantage to those least in need of it. The housing market has never been better for sellers, investors, corporate buyers, and well-funded buyers and we’ve reached a crisis level for pretty much everybody else due to desperately low housing supply and impossibly high housing costs, with no solutions to either. It seems contradictory that two weeks ago the White House announced plans to support homeownership during the State of the Union and the following week, the DOJ is behind a settlement that will likely make homeownership even more difficult for the same groups of home buyers the White House wants to help.
Misrepresentation in the Media I’ve seen a lot of misguided headlines and articles about what the settlement means and will address some of them here:

  • From CNN “The 6% commission on buying and selling homes is dead”…average commissions have been falling for years. Nationally, average total commissions usually range from ~5-5.5% total in each state. Locally, my research found that the average buyer agent commission fell 12% from 2015 to 2022 to 2.54% (and likely lower in 2023, but I can’t access that data anymore) and I suspect the average listing side is around 2.5% as well, but I don’t have access to that data.
  • Home prices will fall (and this is good for buyers): I think the theory here is that if sellers are paying less in commission, they will accept a lower price for their home and thus prices will fall? Sellers will always want the most they can get from the market and the market is defined by supply (number of homes for sale) and demand (number of buyers and their budgets), which remain unchanged. Maybe the thinking is that if buyers are paying their agents directly, their budgets drop and they will pay less for homes? But that doesn’t really seem like a win, just a reshuffling of transaction costs from sellers to buyers.
  • Commissions will drop: First of all, commissions were already dropping. Second, the settlement agreement just deals with how the buyer agent compensation is published, so there’s likely no change to the marketplace for listing agent compensation, possibly just buyer agent compensation. Third, there are some very likely scenarios where this change leads to a significant drop in the number of licensed Real Estate Agents and there is a plausible scenario where there is a short-term drop in average buyer agent commissions during the transition period but the drop in the number of Real Estate Agent leads to commissions increasing to similar levels (or higher) as they are now because there are fewer agents.
  • New buyer representation business models: I’ve read that this change will allow different agent models and discount models to form. There is already a wide-open landscape for different business models of representing buyers and sellers. One of the advantages of having so many Real Estate Agent is that there are a lot of agents with varying levels of experience, skills, and willingness to work at different compensation – with some effort, you should have no problem finding somebody willing to work by the hour, at a fixed fee, or crediting back a percentage of a seller-paid commission. I don’t see how the publication of an offer of compensation to buyer agents on the MLS restricts different business models for agents or consumers. The ultimate restricting factor is the same as any other industry/service – are service providers (agents) willing to work under that model and do consumers like the service they get within that model.
Will Sellers Continue to Pay Buyer Agent Commission? This is the question on everybody’s mind – will sellers, who currently pay buyer agent commission in nearly all transactions, continue to pay buyer agent compensation and what will that look like. In theory, the answer to that question is simple – do sellers create a better outcome for themselves by continuing to offer buyer agent compensation? In practice, answering that will be more difficult, and why I think it could take 18-24 months from the implementation of the settlement ruling for us to know how the market will adjust.In my opinion, the justification for sellers offering compensation hasn’t changed from what we’ve been used to. The decision to offer compensation and how much has always been at the discretion of the seller and their agent to determine what maximizes their chances of success. Yes, the compensation field was always required but you could enter zero or $1.It is the listing agent’s job to advise their seller clients on how to maximize the results of their sale based on market conditions, seller priorities, etc and buyer agent compensation is part of that decision. Unfortunately for data-minded agents like myself, we no longer have the benefit of current data like this to help inform that decision.
What Happens to Buyer Representation? If the DOJ/class-action rulings get the results they (presumably) want and eliminate the payment of buyer agent compensation by most sellers, many homebuyers will choose to forego representation and attempt to make the most consequential purchase of their life relying on themselves, guidance from the listing agent, who has a fiduciary responsibility to maximize the results for the seller, or maybe relying on a friend or family member.
There are plenty of lawsuits, studies, and anecdotes about the downside of having unrepresented buyers or dual agency (one agent representing both sides, which usually means the existing listing agent representing the new buyer). In fact, dual agency is illegal in many states, including Maryland.I highly doubt that the DOJ and consumer advocacy groups want to see large numbers of buyers taking on home purchasing unrepresented because they cannot afford to pay for representation so I’m guessing they expect sellers will continue to cover the cost of representation, via negotiations between buyer, seller, and agents while also negotiating the home purchase terms. While that sounds good in theory because it creates a more open marketplace, I defer back to my previous statement of the winners and losers. If sellers stop offering buyer agency compensation as a standard and the default becomes zero offer of compensation, it leaves buyers who want/need representation and can’t afford to pay for it at a tremendous disadvantage in competitive housing markets.
This is the thought exercise that I find most difficult to understand here. On one hand, we cheer for a more open marketplace and a drop in total commission payments to brokers, on the other hand, we leave many buyers between a rock (risk of no representation) and a hard place (much harder to buy a house).
What Does it Mean for Real Estate Agent? It is true that the current standard of up-front offers of compensation to buyer agents creates a relatively easy income stream to untrained, inexperienced agents who stumble upon a few deals per year with persistent lead generation tactics. Many buyers spend little or no time vetting their buyer agents and see their buyer agent as a free service (DOJ has a HUGE problem with the idea that buyer agency is free) to open some doors and write a contract because they don’t have to pay them directly. That’s a problem for consumers and for Real Estate Agent that this settlement is meant to fix.If a buyer agent wants to ensure they get paid in a world where buyer agency compensation is not commonly offered by sellers, buyers will need to be comfortable backing their agent to negotiate their fee from the seller or paying their agent directly which will lead to a much higher standard and vetting process for buyer agents. Higher standards of service in any industry, especially ours, is a good thing for everybody involved.
So how might this play out? I encourage you to reference some of the statistics I pulled on the number of agents who worked in Arlington last year. Of the 1,425 agents who represented a buyer last year in Arlington, 1,043 (73%) represented just one buyer and only 31 agents (1.5%) represented 5+ buyers in Arlington. While some of the agents who represented just one buyer last year have good business in other jurisdictions, many of those one-off deals are agents who may not be able to stay in business if they need to provide a higher value proposition to new buyer clients and struggle to claim the few deals per year that currently allow them to stay in business.
I can see a 6-12 month “transitional” period after the settlement rules are implemented with a large loss of Real Estate Agent who rely on buyer agency compensation without a meaningful value-add service that leads to a wild-west of commission arrangements, followed by the market reestablishing a balance with fewer, higher quality Real Estate Agent. Whether the average total commission per transaction is lower, similar, or higher in 12-18+ months compared to what it is currently depends on how many Real Estate Agents leave the business (I’ve heard estimates of ~1M).
Conclusion I hope this cleared up some of the misconceptions of what you’ve read elsewhere and you see this as an honest assessment of how this might play out. My hope is that these changes lead to more home buyers and sellers receiving high-quality Real Estate Agent services in a more natural marketplace without severely harming the experience and competitive landscape of most homebuyers. I feel pretty good about the former being true, but I am concerned about the latter.
For those who made it through the entire column, thank you! I’d love to hear your thoughts.
If you’d like to discuss design trends, buying, selling, investing, or renting, don’t hesitate to reach out to me at [email protected].


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