The Standard 6% Real Estate Commission is Over

The Standard 6% Real Estate Commission is Over

The 6% standard commission on home purchases is gone.

The National Association of Realtors has announced a settlement agreement with home sellers that will reduce costs for buying and selling homes. They have agreed to pay $418 million to settle landmark antitrust suits and eliminate rules regarding commissions.

The NAR, representing more than one million Realtors, has also agreed to implement a new set of rules. The first rule prohibits the inclusion of agents’ compensation on listings on local listing portals, also known as multiple listing service. Critics claim that this led brokers to push customers towards more expensive properties. Another change is to end the requirement that brokers subscribe to multiple listing services, many of which are NAR-owned subsidiaries. These services allow homes to be viewed by a large number of people in their local market. Another new rule requires that buyers’ brokers enter into written agreements for their buyers.

The agreement will effectively destroy the current business model for homebuying and sales, where sellers pay their broker as well as a buyer’s agent, which critics claim has artificially pushed housing prices higher.

Some estimate that real estate commissions will fall by 25% to 50%. It will also create opportunities for other models of selling property that are already available but do not have a large market share. These include flat-fee brokerages and discount brokers.

Investors feared that lower agent commission rates could result in less business for real estate platforms.

Zillow, in a 10-K filed last month, warned that “if agent’s commissions were meaningfully affected, it could result in a reduction of marketing budgets for real estate partners, or fewer real estate partners taking part in the industry. This could negatively affect our financial situation and results of operation.”

Redfin, a real estate brokerage firm, also saw its shares fall by nearly 5%.

Homebuilder shares rose in response to the news. Lennar gained 2.4%; PulteGroup added 1.1%; and Toll Brothers added 1.8%.

Sellers pay more than $25,000 in brokerage fees for the average American home priced at $417,000. These costs are passed onto the buyer and increase the value of American homes. According to TD Cowen Insights, this fee could drop by $6,000 to $12,000.

“While the settlement comes at a significant cost, we believe the benefits it will provide to our industry are worth that cost,” said Kevin Sears, president of the NAR, in a statement.

In November, in Missouri, a federal court found that the NAR was liable for $1.8 Billion in damages after conspiring with two brokerages to artificially raise agent commissions. The NAR could be liable for triple the damages, $5.4 billion, because it was an antitrust lawsuit.

The NAR pledged to appeal, but other brokers settled the case — and finally, the NAR did so as well on Friday.

Nykia Wright said in a press release that “NAR worked tirelessly for years to settle this litigation in a way that benefits both our members and American customers.” It has always been NAR’s goal to protect and preserve the consumer choice, as well as our members. The settlement achieved both goals.

NAR required that homesellers include compensation for agents in their listing when they placed it on a multiple-listing service. NAR has said for years that commissions can be negotiated and that this structure helps make housing more affordable to buyers. However, critics argue that these fees are expected and that homesellers feel they will lose customers if they don’t include them.

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Homebuying costs could be reduced as a result of the settlement

Homeowners who sued the NAR argued that, in a market where there is competition, the commission of the buyer agent should be paid for by the client, and not the seller. The lawsuit was brought by the sellers against the NAR, the brokerages and the NAR. They argued that in a competitive market the buyer should pay the commission of the agent.

The settlement is subject to the approval of a judge and opens up the housing market to more competition. Buyer agents can now compete for commissions. This allows prospective buyers to compare rates before committing to buying a house. Brokers can begin advertising their fees to allow customers to select agents with lower costs. In its announcement, the NAR did not specify a fee.

This is the biggest change in the housing market since the turn of the century, according to Norm Miller. Professor emeritus of Real Estate at the University of San Diego.

Miller stated, “I have been waiting for this moment for 50 years.”

Miller stated that although it is unclear how the future housing market will be, he expects homebuying activity to increase as homebuyers’ costs are falling dramatically.

He said that there will be many models in the future. No one knows which ones they will be. Some brokers might charge a $3,000 commission for selling a house, while others may offer a more competitive rate.

Benjamin D. Brown (co-chairman of Cohen Milstein Sellers & Toll’s antitrust practice and managing partner) who helped to craft the settlement said that it will bring sweeping changes for millions of Americans.

Brown said that anticompetitive real estate rules have financially hurt millions of Americans for years.

Robert Braun, partner at Cohen Milstein’s antitrust department, says that individual sellers feel powerless when it comes to negotiating a better deal, as they fear brokers will steer buyers away from their property if they offer lower commissions.

Home sellers have been subjected to a system that is unfair and unjust for far too long. Braun said that this class action settlement will provide justice to our clients, and it will also require significant changes for future home sellers.

The NAR stated that although most realtors were included in the settlement agreement, HomeServices of America, a brokerage, continues to litigate the case.

The NAR stated that it had fought hard to ensure HomeServices of America’s agents were covered by the settlement. However, it said it was happy to see more than one million of its members sign up for the agreement.

Wright said in a press release that continuing litigation would have ultimately hurt members and small businesses. While there is no perfect solution, the agreement we reached was the best possible outcome in the circumstances.

Miller said that the settlement could result in a mass exodus from the brokerage industry – potentially up to half of the approximately 2 million agents in America.

Low fees will cause mediocre agents to quit the business, while top brokers get more work. He said that “the good ones will definitely do better”.

Miller pointed out that American fees are much higher than those in other countries. Brokers in Israel, Singapore, and the UK charge between 1% and 2% for the same service as US based brokerages.

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Years of troubles for NAR

Years ago, the NAR fought US antitrust officials as well as litigation regarding alleged anticompetitive practices. The November verdict was the biggest blow to the association yet, and led to the end of rules that had protected their compensation model for years.

It’s not clear if the settlement reached with the sellers will have any impact on the US Department of Justice’s investigation of the brokerage industry.

Over the last year, there has been a lot of turmoil in the leadership of this trade group.

Tracy Kasper, the former NAR president, quit in January after receiving a threat that she would be forced to reveal a personal matter, not financial, unless she compromised the position she held at NAR. Sears took over from Kasper in early this year.

Kasper took over the role of president in August 2023 after Kenny Parcell , the former president , resigned due to sexual harassment claims , which were published first by the New York Times. NAR employees claimed that Parcell inappropriately touched them, and sent them lewd pictures and texts. Parcell denied these accusations in the Times article.

Wright replaced Bob Goldberg as the NAR’s chief executive in November 2023. Goldberg resigned two days after the NAR was awarded $1.8 billion.

This article was originally posted on CNN. (Click Here to see the original article)