Real Estate Commissions, the Class Action Lawsuit, and What It Means for You

You’ve perhaps heard that the National Association of Realtors® has recently settled a class action lawsuit… or maybe you’ve seen a headline screaming that the 6% commission on real estate transaction is no more…¹ or maybe you are just thinking of buying or selling a home? Well, you are in the right place because I am here to help you sort the truth from fiction! Read on for the inside scoop…

Agents & Commissions – The Way They Work

Buying or selling a home involves making important financial and lifestyle decisions, and the process can certainly be complicated. How can you avoid the pitfalls, calculate the risks, and ultimately end up with the best result? Agents help you navigate the entire way, from buyer prequalification to closing and everything in between. Good agents help buyers and sellers with intelligent searching, strong marketing, by optimizing showings, addressing offer strategies, handling inspections and negotiations, and understanding current market conditions on both sides of the deal.

Agents don’t work for free. So how do we get paid? When a seller hires an agent to list their home, the professional fee (or commission) is negotiated as part of the listing agreement. This amount is negotiable – it always has been. And for the last 30 years or so, listing agreements have also included information stating that listing brokers can and will share a portion of that negotiated commission with the broker who brings and represents the buyer. Why is this? Let’s take it back several years…

The Birth of Buyer Agency – Buyer Beware!

Years ago there really wasn’t such a thing as a buyer agent. Buyers didn’t have agents dedicated to representing their interests and were often unaware that the seller’s agent didn’t actually represent their interests. Seller’s agents have a duty to protect their seller’s interests first and foremost, even at the expense of unrepresented buyers.

Seems unfair to the general public, yes? So back in the early 90’s, in order to even the playing field, rules were made and laws were passed and listing agents became compelled to offer buyer agents a percentage of the negotiated listing commission if they represented a buyer on a house they were listing. This gave buyers more choice in who represented them, and the ability to compensate their agent without having to pay out of pocket.

It works like this: the total amount of commission is negotiated between the seller and the listing agent when setting the listing price. The portion of commission being offered for buyer agents has historically been published in the MLS, whether that be a %, or a dollar amount, or nothing at all. When the buyer purchases the house, they are paying the seller. Commissions are taken from the seller proceeds and paid to the listing broker, then the listing broker pays the buying broker as per what was offered in the MLS unless something else has been negotiated along the way.

This structure is good for both buyers and sellers. Firstly, buyers are spared the burden of extra costs at closing; buyers already must come up with money for the down payment, loan fees, title fees, escrows (which is money paid upfront for homeowner’s insurance, property taxes, interest, and sometimes mortgage insurance), and inspections. Structuring commissions this way allows buyers to receive professional representation without paying additional money out of pocket, which in turn makes homeownership possible for more everyday, average American people. At the same time, this structure is good for sellers. When listing brokers are able to pay buyer brokers in the marketplace, sellers have an expanded pool of buyers who are ready, willing, and able to purchase. The larger the buyer pool, the more market demand. So, why are things changing?

The Class Action Lawsuit & NAR Settlement

In 2019 a lawsuit called “Sitzer/Burnett & Moehrl” was filed against several major broker companies and the National Association of REALTORS® ² (the NAR is a trade association for people who work in the real estate industry; it is made up of more than 1.5 million professionals, and membership requires strict adherence to a Code of Ethics and Standards of Practice).³ The lawsuit claims that this practice of paying cooperating commissions violates antitrust laws and unfairly increases the cost of home prices. While it can be argued that by including these costs in the purchase price makes things more affordable for buyers since a mortgage can be paid off over several years, not everybody sees it this way. While the NAR continues to deny any wrongdoing, they agreed to a settlement recently in the amount of $418M to be paid out over the next 4 years.⁴

What does this mean for Buyers and Sellers?

Nothing has been settled just yet – the proposed settlement must be approved by the courts. If it is approved as written, changes will take effect in July 2024. Here are the key takeaways:

Buyers and agents will now enter into a written agreement with each other prior to touring any homes, and the agreement must outline specifically the amount or rate of the buyer agent’s compensation.
Seller offers of compensation for buyer’s agents may not be published on the MLS (multiple listing service).

OK, but what does this REALLY mean for Buyers and Sellers?

Commissions are still negotiable; they always have been and they still are, even under the proposed settlement. The main difference will be that brokers will no longer be allowed to look up buyer agent commissions on the MLS, so the method of communication will be changing. Nothing prevents sellers from offering buyer agent commissions, and nothing prevents listing agents from including this information as part of their advertising when marketing listings on their own platforms.

Will the Seller want to negotiate down so as to not pay a Buyer’s broker?

Most sellers are savvy enough to recognize that buyer brokers bring in the buyers, and the more ready, willing, and able buyers there are, the more money sellers will eventually get for their home.

Will the price of homes go down?

Some predict that prices will come down if a seller decides not to offer buyer broker compensation. And while many headlines claim that cutting an agent out of the deal will save tens of thousands on home prices, these claims are false! Home values are driven by market conditions. In my experience, if a seller chooses to pay less commission, they are typically not going to just pass that along to someone else in the form of a lower price – most are looking to keep as much out of the sale as they can.

What ACTUALLY affects home prices?

Supply & Demand

First and foremost is supply and demand. We currently are experiencing a lack of inventory as population growth over recent years has outpaced our new construction build rates.⁵ In addition to being behind on the pace of new construction, factors including interest rates, inflation, and investor influence also play a role.

Low Interest Rates

Interest rates have a huge impact on home prices. When interest rates are low, as they were during the pandemic and through part of 2022, more buyers are able to purchase. Buyers can afford more house for the same money. When more buyers are ready, willing, and able to purchase (and now we are back to the topic of supply and demand here), prices are driven up. More buyers = higher prices.

Investors

During this time when borrowing money was cheap, we also saw a lot of institutional investors purchasing single family homes to rent out for profit. You’ve probably seen the signs, “We’ll buy your house in any condition,” and “We Buy Houses As-IS for CASH.” Investors accounted for over 13% of all residential real estate purchases in 2021, thereby removing those units from the pool of availability for the rest of the general public and further reducing the available supply.⁶

Higher Interest Rates

When interest rates jump quickly as they did in 2022 & 2023, it complicates things further. Hopeful buyers have lost a lot of purchasing power as mortgage rates have risen to their highest point in more than 20 years. The average 30 year fixed mortgage rate in 2021 was approximately 3.15%. In 2022 that rate was 5.53% and we saw as high as 7.0% in 2023.⁷ To put things in perspective, on a $300k loan a buyer in 2023 pays over $700 more per month in interest alone than a buyer taking out the same loan just 2 years previously. Additionally, high rates discourage owners from selling for fear of losing their locked in rate, further limiting the availability of existing homes for sale (and again here we are back to supply and demand).

Inflation

Has anybody else noticed how expensive everything is these days? Economists point to free stimulus money and excessive government spending along with supply chain issues and labor shortages as reasons that have driven up the price of everyday goods and services for all Americans at such a quick pace.⁸⁹ Food, insurance, transportation services, utilities and rent have all significantly increased since 2021. Not surprisingly, the cost of building materials and services has also increased. This, coupled with the highest interest rates we’ve seen in the last two decades serves to put a damper on the affordability of building new construction (which doesn’t help with the supply and demand problem).

Key Takeaways

Soooooo, what now? Here is what you need to remember as things continue to unfold:

Clear communication is key. Both buyers and sellers should have a definite understanding of how agents are compensated. While this has always been a contractual agreement between the seller and listing broker, going forward buyers and their agents will also spell this out in writing prior to beginning to work together.
It is important for buyers to have agent representation. Buyer agents help navigate today’s complicated market while looking out for buyers’ best interests. For many, buying a home is the single most important and expensive purchase they will ever make. You want an expert with you the entire way.
Sellers want buyers to be represented by good agents too. Having good agents on both sides helps keep the deal together and avoid problems before they become problems. Remember that offering buyer agent compensation increases the potential buyer pool for sellers, and the larger the buyer pool, the more market demand. More available buyers = more money for sellers.
Sellers can STILL offer buyer agent compensation. This just cannot be advertised on the MLS.

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