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In a nutshell
A proposed court settlement could drastically change how commissions are paid for home sales. For years, seller’s agents have charged a “standard” commission of 5% to 6% of the home’s sales price, which is then split evenly with the buyer’s agent. However, this rate and how it’s paid is likely to change dramatically in the future.
- Critics and plaintiffs in major lawsuits against the National Association of Realtors (NAR) and major real estate brokerages have complained that long-held industry practices drove up commissions and harmed home sellers.
- NAR admitted no wrongdoing in agreeing to the landmark $418 million legal settlement.
What’s the Realtor commission lawsuit all about?
The proposed settlement, announced in March, would bring to a close several lawsuits that home sellers filed over commissions paid to real estate agents and brokers. The plaintiffs argued that NAR’s policies artificially boosted commissions, reduced competition and hurt home sellers.
In October 2023, plaintiffs in the Sitzer-Burnett case won their lawsuit against NAR and some of the nation’s largest real estate brokerages for $1.8 billion in damages. The NAR agreement would protect the trade group and most of its members from the fallout of these lawsuits and reduce the damages they must pay.
At the heart of the legal case is a practice that the Brookings Institution think tank describes as “tying.” This involves a seller’s agent setting the commission for a buyer’s agent when the home is posted on a Multiple Listing Service (MLS), which houses a housing market’s real estate listings. Between 2019 and the first quarter of 2023, 84% of homes were marketed and sold through an MLS database, according to a Bright MLS study.
The settlement effectively ends the practice of commissions for buyer’s and seller’s agents being connected in MLS listings. The U.S. Justice Department alleged that this arrangement violates federal antitrust laws.
Details of the NAR settlement
In late April, a federal court in Missouri gave preliminary approval to the NAR settlement. A final hearing on the settlement is set for late November.
Defendants in the case are:
- NAR, the nation’s largest real estate trade group.
- More than 1 million NAR members.
- Local and state Realtor associations.
- All association-owned MLSs.
- All brokerages with an NAR-member principal closing residential transaction volumes of $2 billion or less in 2022.
NAR agreed to pay about $418 million to the plaintiffs over a four-year span. In agreeing to the settlement, the group didn’t admit any wrongdoing.
This agreement is separate from the $208.5 million in separate settlements with three brokerage defendants: Anywhere Real Estate, RE/MAX and Keller Williams.
What if you already sold a house?
If you already sold a house, you may be eligible for a payment from the two announced settlements if:
- You sold a home during a certain period.
- Your home was listed on a local MLS.
- You paid a commission to a real estate brokerage.
If you believe you could be eligible for a payment under the settlement, contact an attorney to discuss your options. If you’re not sure, call the settlement administrator at (888) 995-0207.
How will this change real estate commissions?
The settlement should open the door for both buyers and sellers to negotiate compensation for real estate agents. As a result, homeownership costs could plummet by tens of billions of dollars a year, according to the Consumer Federation of America (CFA).
Typically, the commission for both a buyer’s and seller’s agent has amounted to 5% to 6% of a home’s sale price, with each agent often evenly splitting the commission. It’s been customary for the seller to pay the commission for both agents.
Several forecasts indicate real estate commissions paid to real estate agents and brokers will fall substantially in the wake of the settlement because real estate agents will be under pressure to offer lower commissions. A report from the CFA cites predictions that commissions will decrease by 20% to 50%. The nonprofit group’s own estimate is a 20% to 30% decline. Meanwhile, investment bank TD Cowen estimates that commissions may plummet as much as 25% to 50%.
NAR maintains that it doesn’t nor has it ever set commissions, that they were negotiable well before the settlement and will stay that way.
Will first-time buyers be helped or hurt?
The CFA says lower commissions should benefit first-time homebuyers in particular. In fact, the organization believes the settlement will lead to groups of real estate agents coming together to focus on first-time buyers.
However, the National Housing Conference, a nonprofit coalition of advocates for affordable housing, insists that “wealthy, financially sophisticated consumers” will be the biggest beneficiaries of the settlement, with first-time homebuyers being the “biggest losers.”
As TD Cowen points out, the current commission system essentially provides a real estate agent to a buyer at no cost. But under the new setup, some first-time buyers may be unable to afford an agent because they’ll likely be responsible for paying their own agent’s fee at closing, the investment bank says.
Related: Mortgage closing costs explained: Your complete guide
What will the increased negotiations mean for buyers and sellers?
The Brookings Institution says the settlement should enable homebuyers to better negotiate commissions and more easily pursue alternative compensation, such as paying hourly fees or purchasing a slimmed-down menu of services. Meanwhile, home sellers will probably feel less pressure to list homes on an MLS or with a real estate agent, the think tank adds.
The CFA says that, in some cases, negotiations with a buyer’s agent might not happen at all. Instead, buyers might bypass a buyer’s agent and work directly with the seller’s agent. This is especially true because most real estate listing data is accessible to consumers online through a variety of search portals.
With home prices and mortgage rates already high, how will homebuyers pay their own agents?
NAR says the new arrangement won’t mean buyer’s agents will work for free. The group suggests that buyers will still have options for compensating their agents. They may include:
- A fixed fee paid by the buyer.
- Concessions made by the seller.
- A share of the compensation for the seller’s agent.
“Compensation would continue to be negotiable,” says NAR, “and should always be negotiated between agents and the consumers they serve.”
The AP Buyline roundup
The market for buying and selling homes is poised for a major shakeup thanks to NAR’s pending settlement over real estate sales commissions. By some estimates, commissions could fall anywhere from 20% to 50% — likely putting more money in the pockets of homebuyers and home sellers.
Frequently asked questions (FAQs)
Does this mean renters don’t have to pay brokers anymore?
The NAR settlement is specific to home sales; it doesn’t affect commissions that some renters pay a real estate broker to help them find a place to live.
What should people who are thinking of buying or selling in the next six months do?
If you’re thinking of buying or selling a home in the near future, keep track of developments in the NAR settlement. More importantly, as both sides of the case await final approval of the settlement, try negotiating agents’ compensation rather than sticking with the standard 5% to 6% commission.
AP Buyline’s content is created independently of The Associated Press newsroom. Our evaluations and opinions are not influenced by our advertising relationships, but we might earn commissions from our partners’ links in this content. Learn more about our policies and terms here.