Real Estate Brokers’ Commissions Upended by Recent Settlement

Decades-old norms regarding Realtor commissions and other policies surrounding home buying and selling have been swept away by the March 15 court settlement between the National Association of Realtors and groups of homeowners who filed suit against the realtors’ group arguing that home buyers should pay their agents’ commissions directly and  – most significantly – be able to negotiate that fee.

As a result of the settlement – which is still subject to the approval of the judge overseeing the case – the standard 6% commission on a home sale, heretofore split between the buyers’ and sellers’ agent, will be replaced with a system whereby prospective buyers can shop around for a lower rate and brokers can advertise those rates, even charging flat fees if they wish.

Some estimate this will cause real estate commissions to fall between 25% and 50% according to TD Cowen Insights creating opportunities for alternative models like flat-fee and discount brokerages, as the more than $25,000 sellers pay in brokerage fees for the average-priced $417,000 American home drops between $6,000 and $12,000 overall.  This could drive as many as half of the nation’s estimated 2 million agents out of the business—while boosting compensation for highest-performing among those remaining—and could very well cause the housing market to kick into higher gear as homebuying costs plummet, according to some experts.

In addition to nixing the fixed 6% commission, which is considerably higher than the 1% to 2% charged by brokers in other countries the court settlement:

• Requires the National Association of Realtors to pay $418 million in damages;
• Ends any requirements that brokers subscribe to multiple listing services, many owned by association subsidiaries;
• Requires brokers representing buyers to enter into written agreements with their clients; and,
• Prohibits agents from advertising their compensation on the multiple listing services—which some say causes them to steer customers to higher-priced properties.

To that last point, while the National Association of Realtors long had contended that fees were negotiable, the fact that they were listed publicly made them feel like a de facto requirement for sellers, and prompted sellers to fear they would lose buyers if they did not play ball, according to critics of the longstanding 6% standard.

The settlement does not cover all real estate brokers, as the brokerage HomeServices of America still plans to fight the lawsuit in court.

The bottom line is that this class action lawsuit has upended the real estate brokerage industry and reduced the cost of home buying for consumers.