Landmark real estate settlement shakes up decades-old commission policies for agents

Real Estate Agent-Commissions-Settlement
FILE – A sale sign stands outside a home in Wyndmoor, Pa., Wednesday, June 22, 2022. The National Association of Realtors has agreed on Friday, March 15, 2024, to pay $418 million and change its rules to settle lawsuits claiming homeowners have been unfairly forced to pay artificially inflated agent commissions when they sold their home. (AP Photo/Matt Rourke, File)

A powerful real estate trade group has agreed to do away with policies that for decades helped set agent commissions, moving to resolve lawsuits that claim the rules have forced people to pay artificially inflated costs to sell their homes.

Under the terms of the agreement announced Friday, the National Association of Realtors also agreed to pay $418 million to help compensate home sellers across the U.S.

Home sellers behind multiple lawsuits against the NAR and several major brokerages argued that the trade group’s rules governing homes listed for sale on its affiliated Multiple Listing Services unfairly propped up agent commissions. The rules also incentivized agents representing buyers to avoid showing their clients listings where the seller’s broker was offering a lower commission to the buyer’s agent, they argued.

As part of the settlement, the NAR agreed to no longer require a broker advertising a home for sale on MLS to offer any upfront compensation to a buyer’s agent. The rule change leaves it open for individual home sellers to negotiate such offers with a buyer’s agent outside of the MLS platforms, though the home seller’s broker has to disclose any such compensation arrangements.

The trade group also agreed to require agents or others working with a homebuyer to enter into a written agreement with them. That is meant to ensure homebuyers know going in what their agent will charge them for their services.

The rule changes, which are set to go into effect in mid-July, represent a major change to the way real estate agents have operated going back to the 1990s, and could lead to homebuyers and sellers negotiating lower agent commissions.

Currently, agents working with a buyer and seller typically split a commission of around 5% to 6% that’s paid by the seller. This practice essentially became customary as home listings included built-in offers of “cooperative compensation” between agents on both sides of the transaction.

But the rule changes the NAR agreed to as part of the settlement could give home sellers and buyers more impetus to negotiate lower agent commissions.

“It may take some time for the changes to impact the marketplace, but our hope and expectation is that this will put a downward pressure on the cost of hiring a real estate broker,” said Robby Braun, an attorney in a federal lawsuit brought in 2019 in Chicago on behalf of millions of home sellers.

Analysts with Keefe, Bruyette & Woods also anticipate that the NAR rule changes will lead to lower agent commissions and could persuade some homebuyers to skip using an agent altogether.

“In our view, the combination of mandated buyer representation agreements and the prohibition of blanket compensation offers made by listing agents and sellers should result in significant price competition for buyer agent commissions,” the analysts wrote in a research note Friday.

While setting the stage for homebuyers to negotiate a more competitive price for their agent’s services, the rule changes mean home shoppers will have to factor in how to cover their agent’s compensation.

Homebuyers could still ask a prospective home seller for a concession that includes money to help cover the buyer’s agent compensation. However, a home seller with multiple offers, for example, could refuse such a request, or opt to go with a bid from a different buyer who isn’t asking for such a concession.

“The real solution is for the industry to work to remove regulatory barriers that make it difficult for buyers to include this compensation in their mortgages,” said Stephen Brobeck, senior fellow at the Consumer Federation of America.

The NAR faced multiple lawsuits over the way agent commissions are set. In late October, a federal jury in Missouri found that the NAR and several large real estate brokerages conspired to require that home sellers pay homebuyers’ agent commissions in violation of federal antitrust law.

The jury ordered the defendants to pay almost $1.8 billion in damages — and potentially more than $5 billion if the court ended up awarding the plaintiffs treble damages.

The settlement, if approved by the court, resolves that and similar suits faced by the NAR. It covers over one million of the NAR’s members, its affiliated Multiple Listing Services and all brokerages with a NAR member as a principal that had a residential transaction volume in 2022 of $2 billion or less.

“Ultimately, continuing to litigate would have hurt members and their small businesses,” Nykia Wright, NAR’s interim CEO, said in a statement. “While there could be no perfect outcome, this agreement is the best outcome we could achieve in the circumstances.”

The settlement does not include real estate agents affiliated with HomeServices of America and its related companies.

Last month, Keller Williams Realty, one of the nation’s largest real estate brokerages, agreed to pay $70 million and change some of of its agent guidelines to settle agent commission lawsuits.

Two other large real estate brokerages agreed to similar settlement terms last year. In their respective pacts, Anywhere Real Estate Inc. agreed to pay $83.5 million, while Re/Max agreed to pay $55 million.