Will the realtors’ settlement lower costs for consumers?

BY FREDA MIKLIN
GOVERNMENTAL REPORTER

We have been getting lots of questions from our readers about what the much-publicized settlement agreed to by the National Association of Realtors (NAR) to “end litigation of claims brought on behalf of home sellers related to broker commissions,” will mean to them as home buyers and/or sellers.

Real estate commissions were historically six percent, paid by the seller. That amount has always been negotiable, a fact not known or well understood by the majority of buyers and sellers because the industry applied subtle but consistent pressure to maintain it. 

In October, a jury found NAR guilty of colluding to keep home sales commissions artificially high and ordered the trade organization to pay $1.8 billion in damages to affected victims. 

Negotiated commission rates have become more common in recent years, especially in high-priced homes, as prices have escalated precipitously. 

What has been confusing for some people is that real estate agents who worked for home buyers were paid by home sellers, causing what could be perceived as potentially inconsistent loyalties. 

For example, a seller’s real estate agent could negotiate his or her fee, traditionally 3.2% out of the six percent total, when they agreed to list the seller’s property in the Multiple Listing Service (MLS) for sale, but buyers’ real estate agents had no similar ability to negotiate with the seller because they are unknown when a property is listed. Thus, buyers’ agents’ commissions, which were traditionally the remaining 2.8% of the six percent total, but sometimes less, have always been unilaterally controlled by the seller. 

It has long been industry practice, set by NAR, to disclose buyers’ agents commission rates for a specific property, within the MLS listing for the property. Some felt that was unfair because potential buyers, not having access to the MLS, did not know how much their agent could earn from one property versus another, which could lead to buyers’ agents choosing to show their customers those properties on which they could earn higher commissions, ignoring those on which they would earn less.

As part of the settlement of the outstanding claims, set to go into effect July 1, 2024, subject to court approval, NAR agreed to pay $418 million over approximately four years to home sellers involved in the litigation.

Additionally, under the settlement, NAR will 1) prohibit the inclusion of selling agents’ compensation in MLS property listings, and 2) enact a new rule requiring buyers’ agents to have written agreements with their clients. 

Regarding that change, NAR said it, “Continues, as it has done for years, to encourage its members to use buyer brokerage agreements that help consumers understand exactly what services and value will be provided, and for how much.” That seems to mean, although a written agreement will now be required between buyers and their agents, what is included in that contract was left open-ended.

Many industry observers are saying these changes will lead to lower overall real estate fees, especially for buyers, who will have many options to save money. With the information available on the internet, it is believed that buyers will use agents for only curtailed, specific services, such as writing a contract, and forego their help in areas like identifying and visiting properties, to limit the time spent by and cost of an agent. Experts also believe the changes will reduce the number of real estate agents overall, since the settlement removes barriers to buyers and sellers doing much more themselves than they could previously. 

Not everyone agrees. The Villager spoke to two highly experienced real estate agents about how they thought the settlement would impact the market. Both believe that this change will disrupt the industry but ultimately not really help buyers.

Edie Marks, who has been a broker for 46 years, told us, “This will hurt the lower-end buyers and it will make it more difficult for appraisers and lenders to determine home values.” 

She continued, “In the long run, I think real estate will be done the way it’s always been done. Experienced agents will get paid because they have the knowledge, trust, and relationships to get the transaction to the closing table.”

Another Greenwood Village realtor, who has been a broker for 30 years, explained that a good realtor always has their clients’ best interests at heart and will show any property that meets their needs, regardless of the commission listed in the MLS.  She explained that this change will mean that buyers’ agents will need to contact sellers’ agents for every property they show to find out what the seller plans to pay the buyers’ agent because it’s not listed in the MLS. The reported wording of the settlement encourages that communication, which, while necessary to properly value the transaction, creates a new extra step in the process.

If the buyer chooses not to use an agent, that would reduce the price the seller is willing to accept, based on the math. But that also assumes buyers can perform what many realtors consider their nuanced skills of asking all the right questions, negotiating, and successfully navigating all the details that come up before the transaction closes. 

Many who are analyzing this change in the industry expect that to happen. Experienced realtors believe the value they bring to the process is worth the cost. Time will tell.

As Edie explained, “Nobody is going to work for free. It just puts buyers, some of whom can’t afford it, at risk of paying their brokers a reasonable commission if the seller refuses to do so and the written agreement requires it.”

Nykia Wright, Interim CEO of NAR, said, “NAR has worked hard for years to resolve this litigation in a manner that benefits our members and American consumers. It has always been our goal to preserve consumer choice and protect our members to the greatest extent possible. This settlement achieves both of those goals.”