The real estate industry has been severely impacted by several class action lawsuits aimed at disrupting the commission-based system.
The legal action and subsequent settlement include a substantial settlement for the home seller plaintiffs, as well as rule modifications restructuring the agent commission system, which will take effect in mid-July 2024.
In this blog, we analyze the potential shifts in the commission structure for real estate agents, examining how these changes may impact market dynamics in the future for both buyers and sellers.
Table of Contents
Court Case Background
A Multiple Listing Service, or MLS, is a set of approximately 550 databases of sale listings in the US, compiled by realtor associations on a regional basis and guided by the national trade association, the National Association of Realtors (NAR). The MLS functions to enhance the marketing of listings and facilitates cooperation between brokers representing buyers and sellers, thereby advancing the interests of their clients. Approximately 80 percent of housing sales in the country are transacted with the assistance of an MLS listing.
While entering properties in the MLS, brokers are required to comply with the Buyer Broker Commission Rule. It stipulates that the selling broker (or listing agent) shall guarantee payment of a fixed commission to the buyer broker, who usually takes half, for doing the services of paying for the property.
While the regulation aimed to guarantee that MLSers highly valued their services and that all parties were fair within compensation, any believe the policy also increased
In other critiques, NAR is accused of creating impediments to real estate agents showing clients listings where the seller’s broker’s commission split was lower or stifling new and innovative commission models.
Without a doubt, limiting commission structures to conventional sale price percentages carved up the consumers’ options. Some sellers might have preferred paying a broker on a flat fee scope or hourly wage.
The Litigation
In October 2023, plaintiffs in Burnett et al. v. The National Association of Realtors et al., Trans America Premier Realty, and Colliers demanded that NAR’s directives concerning listing brokers on MLS systems disproportionately provided listings with ultra-high commissions and punitive payment rates to them breached such primitive guidelines justifying their competitive nature over antitrust justification. For this reason, sellers and buyers alike incur costs that escalate unnecessarily.
The lawsuit verdict awarded $1.8 billion to plaintiffs and triggered a torrent of follow-up antitrust litigation, which culminated in a mixed settlement approved on March 15, 2024, during consolidation. After the court’s endorsement, NAR will be required to compensate the plaintiffs $418 million in damages. The court decided that the NAR would modify certain specific rules regarding payments made in the system.
Key Settlement Terms
Following settlement, some changes, if approved by the court, will take effect in mid-July 2024. These changes include:
- MLS listing agents are prohibited from offering to compensate buy-side agents on the Multiple Listing Service (MLS).
- A buyer is required to contract with their agent regarding the agent’s compensation before viewing any properties.
- Any compensation offered or accepted between the seller’s agent and the buyer’s agent must be made outside of the Multiple Listing Service (MLS) and in the presence of all participants, including the seller. The consent of all parties must be obtained before the transaction.
Implications: What Buyers & Sellers Need to Know
Since the changes aren’t yet operational, the homebuyers and sellers do not know how profound the changes to the forecasted real estate market will be in the long run. However, with the information available, a straightforward assessment can be provided of their expectations in the post-implementation period.
For Home Buyers
From now on, the burden of compensating their agents when a home is on the market and signing a compensation document before viewing any prospective targets shifts to the buyer. With that in mind, the following points should be noted:
Bargaining War on the Buy Side of Price. Anticipating that buyers will rush to clinch a reasonable compensatory price, buyers’ agents may lower their fees to win clients.
More Negotiation With Their Agent.
Now, buyers will have the flexibility (or burden) to negotiate the specific services they desire, along with the corresponding remuneration impacts from their agents. Services could include all aspects of property acquisition, from sourcing and viewing the apartment to assisting with financing, inspections, and contract negotiations. A compensation plan may take the form of a flat fee, hourly rate, or bundled package of specific services rendered.
Increased Difficulty for First-Time Home Buyers.
A down payment is challenging enough for first-time homebuyers. In this case, covering the agent’s compensation will only add to the financial strain. For some, this could hinder their ability to retain professional representation and, in some cases, to afford the property they desire. It might even push some buyers out of the market entirely.
Lengthening the Home Purchasing Timeline.
Given the financial delicacies’ concerns, sellers may be willing to make concessions as reasonable to their preferred buyer. Additionally, this may include covering some or all of the buyer’s closing costs or reducing the sales price. For buyers, this could mean additional time spent looking for a property with the right terms, particularly in terms of concession benefits.
For Homesellers
Although the impacts for the seller in particular are less sharply defined, there are still key details to attend to as the situation develops.
Lower Selling Expenses.
Given that sellers no longer have to pay buyer-side commissions, they are likely to receive higher proceeds from their sale.
Sale-Side Price Cut Competition.
Just as what happened on the buy side, with commissions practically being offered on the table, sellers’ agents may lower their fees to obtain more clients.
Offering Additional Concessions to Preferred Buyers.
This was addressed earlier from the buyer’s angle. However, there are implications for sellers as well. To attract preferred buyers and alleviate the financial burden, sellers may feel compelled to offer concessions to buyers.
What About Home Prices?
How will the changes made to the MLS rules impact the broader housing market? It remains unclear how they will affect home prices, but there is strong reasoning for both sides of the argument.
Some argue that sellers will end up selling at a much lower price since they no longer have to pay buyer-agent commissions. On the contrary, given the overall market conditions, it’s hard to imagine that sale prices will be significantly affected. Additionally, the expected increase in demand from buyers due to the upcoming cuts in mortgage rates will help maintain higher home prices for an extended period.
The Takeaway
We’re clearly in the early stages of rolling out the rule changes, but we also appear to be moving toward greater market fragmentation and complexity. With a higher degree of negotiation required from both sellers and buyers, there is a potential for enhanced opportunities for all involved, albeit at the risk of increased transaction complexity.
It won’t be the last of the changes we see in this regard. For example, buyers currently can’t take out a loan to finance their agent’s fees, but this could very well change. The American Real Estate Association (AREA), along with other affiliated bodies, actively advocates for Fannie Mae, FHA, and HUD.
In any case, we are currently waiting. While it is being implemented, we will do our best to assist you in understanding the changes in the real estate market by providing relevant information.
Contour Mortgage operates across the continental United States, offering its clients exceptional lending services. Contact us today to learn how we can assist you with all your home lending needs.
Have You Checked Your Eligibility to Receive Compensation from the Settlement?
Provided you sold your property within the relevant time frame, and the sales advertisement was compliant with the MLS rules in place, you may qualify for some payment from the settlement.