What the Realtors lawsuit settlement really means

The settlement reached in the class-action suit against the National Association of Realtors, or NAR, has the potential to radically change how real estate is bought and sold, but much of the reporting on it has missed the mark.

Before the 1990s, all agents worked for sellers. The person driving you all over town, showing you a dozen houses, counseling you on neighborhoods and helping you negotiate? They worked for the seller. This was an obvious conflict of interest.

That is why states started introducing buyers’ agency laws to ensure real estate buyers could have an independent agent bound by law to represent their best interest. Buyers’ agents are typically paid via a commission split.

Though much of the recent coverage of the NAR suit makes it seem as if these commission splits are cheating homeowners and inflating real estate prices, the reality is that commissions — like everything in real estate — are negotiable.

The standard Pennsylvania Association of Realtors listing contract makes clear that there is no set or recommended fee. It leaves a blank space for if and how that commission will be shared with a buyers’ agent. While real estate markets seem to have settled into patterns regarding fees, when I sold houses there were times I was working for three different sellers at three different commission rates and with three different commission splits.

Listing agents advertise commission splits through the Multiple Listing Service. The MLS was created by Realtors to promote sellers’ homes. Advertising the commission split lets buyers’ agents know they will be compensated and ensures that doesn’t need to be a negotiation point between buyers and sellers.

The settlement agreement with NAR will do away with this form of advertising. Moreover, it will require buyers and buyers’ agents to enter into a contract before the agent shows buyers a home. Stop and think about that for a moment. If you find a house you want to see, under the mandate of the NAR settlement agreement, you will have to sign a contract with an agent to go inside.

Because the commission split won’t be advertised, alternative arrangements will have to be made to ensure buyers’ agents are compensated. Either they’ll have to include their commission in the sale negotiation or seek compensation directly from buyers.

The former could be a test of whether comingling negotiations over commissions with negotiations over the sale of homes is detrimental to buyers and sellers. Since the Pennsylvania listing contract includes a section about splits, this could become little more than a formality, but sellers might see this as an opportunity to reduce expenses by cutting out buyers’ agents. This could lead to a rise in “flat fee” agency, which seems like a boon to sellers. This would be regressive, because the fee would be a smaller share of what a seller with a higher-priced home will make.

If buyers’ agents have to seek commissions from buyers, it could severely impact the ability of buyers to retain an agent. It may be cost prohibitive, and the money a buyer would have to pay an agent could have been used for a larger down payment or closing costs.

Working with buyers is already harder than working with sellers. You can have signs in 100 yards at one time, but you can’t show homes to 100 buyers at once. Making it harder for buyers’ agents to get fair compensation will make it harder to find them.

I don’t think any of us can predict what this settlement will mean for buyers, but my instinct tells me that agents are going to be less inclined to work with buyers, and I do not see how that will benefit them in the long run.