Realtors settlement eliminates commission rules
American homeowners could see a significant drop in the cost of selling their homes after a real estate trade group agreed to a landmark deal that will eliminate a bedrock of the industry, the 6% sales commission.
The National Association of Realtors, a powerful organization that has set the guidelines for home sales for decades, has agreed to settle a series of lawsuits by paying $418 million in damages and by eliminating its rules on commissions. The Realtors legal counsel approved the agreement early Friday morning, and The New York Times obtained a copy of the signed document.
The deal, which lawyers anticipate will be filed within weeks and still needs a federal court's approval, would end a multitude of legal claims from home sellers who argued that the rules forced them to pay excessive fees.
In a statement released on Friday morning, Nykia Wright, the interim chief executive of the Association of Realtors, said “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.”
Housing experts said the deal, and the expected savings for homeowners, could trigger one of the most significant jolts in the
U.S. housing market in 100 years. “This will blow up the market and would force a new business model,” said Norm Miller, a professor emeritus of real estate at the University of San Diego.
While many details remain unknown, one thing for certain about the proposed settlement is known: The home selling process is about to change, and with it, how buyers and sellers compensate their agents. The rest, members of Southern California's real estate industry say, is uncertain.
“There's just a lot of moving pieces that have to be settled,” said Art Carter, chief executive of the Chino Hills-based California Regional Multiple Listing Service, which covers much of Southern California. “And I'm not going to say I have my arms around every one of those moving pieces.”
Some of those moving pieces include:
• Will buyers now start paying their agents directly?
• Will buyers now have to sign a contract before their agent will show them any homes?
• And ultimately, will the settlement lead to smaller commissions and lower home prices?
“The only certainty I can give you is the process will change,” Carter said.
A law firm that took part in the settlement hailed the agreement as “groundbreaking,” saying it could save consumers billions of dollars in broker fees.
“This settlement changes (Realtors) rules so that competition will occur at the commission level,” Steve Berman, a lead attorney in the case, said in a statement.
Americans pay roughly $100 billion in real estate commissions annually, and real estate agents in the United States have some of the highest standard commissions in the world. In many other countries, commission rates hover between 1% and 3%. In the United States, most agents specify a commission of 5% or 6%, paid by the seller. If the buyer has an agent, the seller's agent agrees to share a portion of the commission with that agent when listing the home on the market.
An American homeowner currently looking to sell a $1 million home should expect to spend up to $60,000 on real estate commissions alone, with $30,000 going to his agent and $30,000 going to the agent who brings a buyer. Even for a home that costs $400,000 — close to the current median for homes across the United States — sellers are still paying around $24,000 in commissions, a cost that is baked into the final sales price of the home.
The lawsuits argued that the Association of Realtors, and brokerages who required their agents to be members, had violated antitrust laws by mandating that the seller's agent make an offer of payment to the buyer's agent, and setting rules that led to an industrywide standard commission of 5% or 6%. Without that rate essentially guaranteed, agents will now most likely have to lower their commissions as they compete for business.
Economists estimate that commissions could now be reduced by 30%, driving down home prices across the board. The opening of a free market for Realtor compensation could mirror the shake-up that occurred in the travel industry with the emergence of online broker sites such as Expedia and Kayak.
“The forces of competition will be let loose,” said Benjamin Brown, co-chair of the antitrust practice at Cohen Milstein and one of the lawyers who hammered out the settlement. “You'll see some new pricing models, and some new and creative ways to provide services to homebuyers. It'll be a really exciting time for the industry.”
In Southern California, the announcement led to a combination of confusion, anxiety and relief.
Carter, the regional MLS CEO, tried to explain the settlement Friday to a meeting of brokers in Arcadia.
“I think there's just a lot of confusion,” he said of the brokers' reaction to the news. “They're just curious to see what the new normal is going to look like.”
There was an element of relief at the Glendale Association of Realtors, one of 19 local Realtor associations named in a class-action lawsuit filed in January.
The settlement appears to be “a good start, a step in the right direction,” said David Kissinger, Glendale Realtors association chief executive.
“We are in defendant in one of the cases,” Kissinger said. “And as a defendant in a case, … that's concerning. There is substantial risk to us. We were certain in the belief that the case did not have merit. But, you know, the court and the jury are going to do what they're going to do.”
Carter echoed that sentiment.
“We support NAR for taking the steps” toward settling the cases. “If it would have been litigated further, it could have been quite detrimental to the the industry.”
The original lawsuit, filed in April 2019 by a group of Missouri home sellers, ended in a verdict of $1.8 billion in October. Because the suit included accusations of antitrust violations, plaintiffs could have been eligible for triple damages of up to $5.4 billion. In exchange for the reduction in damages, the association gave up its right to appeal.
The verdict sent shock waves through the real estate industry and has since catalyzed into more than 20 copycat suits across the country, including a nationwide class-action case that ensnares the country's largest brokerage and its owner, Warren Buffett. That brokerage, Berkshire Hathaway, has not settled, but others, including Keller Williams and Re/ Max, have settled in separate cases. The Association of Realtors now joins them.
Under the settlement, tens of millions of home sellers will likely be eligible to receive a small piece of a consolidated class-action payout.
Ed Coulson, director of the Center for Real Estate at UC Irvine, predicted the settlement could have a major impact on agent earnings and commission rates.
People accepted 5-6% commission rates as if it were a rule, which it's not, he said.
“One of the things that's going to happen is people will recognize it's not a rule, and that's going to bring commission rates down,” he said. “I think the thing that is most important is we don't know the impact on prices. There's been a lot of speculation it would lower house price, but that depends on the seller folding the commission into the house price. And I'm very uncertain that we'll have the extent to which that happens.”