The National Association of Realtors (N.A.R.) reached a settlement last week agreeing to pay $418 million in damages to a group of homeowners in Missouri who claimed that the N.A.R. artificially raised realtor commissions. In addition to the payment, the N.A.R. agreed to change their rules on how real estate agents are compensated.
The change to the rules is so seismic that even though we're not a real estate-focused newsletter, it's worth discussing them, since they signal a massive shift in the way people buy and sell homes, potentially upending one of the biggest sales-focused industries in the country.
A commission rate between 5 and 6 percent of the home sale price, paid by the seller and split between the two agents on each side of the sale, has been standard practice in the U.S. for decades. In the U.K., commission rates are just above 1 percent, while countries like Singapore, Denmark, and the Netherlands have rates between 2 to 3 percent. According to The New York Times, here are five ways the real estate industry could change:
1. Commission Decoupling: A Shift in Payment Responsibility
The heart of the settlement lies in the concept of commission decoupling, meaning buyers and sellers will now each pay their respective agents. Traditionally, sellers have shouldered the cost for both agents’ commissions, but under the new structure, buyers will need to account for their agent's fees. This change aims to create more transparency and fairness in real estate transactions, although it may pose challenges for buyers, especially those struggling to afford a down payment.
2. Potential for Lower Commissions
The settlement is expected to introduce a competitive edge to commission rates. Historically, buyer agents received a share of the 5-6 percent commission, but with the new rules, there's room for negotiation and potentially lower rates. Research suggests commission rates could drop by as much as 2 percent, particularly on the buyer’s side. This competition could lead to reduced overall costs for buyers and sellers alike, making the process of buying a home more affordable.
3. Increased Transparency in Agent Commissions
Under the old system, the commission structure was often murky, with many buyers unaware that the seller was covering their agent’s fee. The settlement seeks to clarify this process, making commissions more transparent. Sellers and buyers will now have a clearer understanding of how agents are compensated, which (in theory) could enhance trust in real estate professionals and make the market more accessible to newcomers.
4. The Rise of DIY Home Buying
As buyers become responsible for their agent's fees, some may choose to bypass agents altogether. With a wealth of information and listings available on platforms like Zillow and Redfin, buyers might opt to conduct their home searches independently. However, this approach comes with its risks, including potential fraud and misunderstandings about the buying process.
5. Implications Beyond N.A.R. Members
The settlement not only affects members of the National Association of Realtors (N.A.R.) but also has broader implications for the industry. Non-members, particularly in cities with alternative real estate associations, may also see changes in how commissions are handled. For instance, New York City’s Real Estate Board outlined new rules allowing buyer’s brokers to negotiate their fees directly with the buyer, hinting at industry-wide shifts.
A More Equitable Future for Real Estate Transactions
This settlement marks a pivotal moment for the real estate industry, challenging the traditional norms of commission payments. By decoupling commissions and introducing more negotiation and transparency, the settlement aims to create a fairer and more competitive market. Buyers and sellers will need to navigate this new landscape with care, potentially reaping the benefits of lower costs and a more transparent process. As the industry adapts, all parties involved in real estate transactions will likely feel the ripple effects, heralding a new era of buying and selling homes.
