A settlement reached this week threatens to strike a blow to an established standard of residential real estate: the 6 percent sales commission. It also will change who pays it. The deal, reached after a yearslong court battle initially brought by a group of home sellers in Missouri, calls for the powerful National Association of Realtors, which has long regulated the way U.S. homes are sold, to amend its rules on how Realtors for sellers and buyers are compensated.
In most real estate transactions in the United States, both the seller and buyer have an agent representing them. For decades, there’s been a standard for paying these agents: a commission of between 5 and 6 percent of the home’s sale price, covered by the seller and split between the two agents.
Commission rates are significantly lower in many other countries. In Britain, they are just above 1 percent, while in Singapore, the Netherlands and Denmark, they hover between 2 and 3 percent, according to a study by the investment firm Keefe, Bruyette & Woods. The homeowners who sued in federal court in Missouri said that N.A.R., through its rules on agent compensation, conspired to artificially inflate the commissions paid to real estate agents.
Now those rules are set to change as early as July, pending court approval of the settlement that includes N.A.R.’s agreement to pay $418 million in damages.
There could be more room for negotiation.
Real estate agents argue that commissions have long been negotiable, and the standard 5 to 6 percent is practice rather than precept.
But an N.A.R. rule that required seller agents to clearly advertise compensation to buyers’ agents — effectively setting compensation for the buyer’s agent — stifled competition, the lawsuits argued. It also led to a practice called “steering,” in which buyer agents direct their clients to more expensive homes where the agents stand to earn a larger commission.
Under the terms of the settlement, listing agents will no longer be able to advertise commission rates to buyers’ agents on most of the databases where homes are listed for sale.
That will allow for more negotiation.
When Joanne Y. Cleaver decided to sell her five-bedroom home in Mint Hill, N.C., a suburb of Charlotte, in December, she knew a settlement was probably in the pipeline. Ms. Cleaver, a former real estate editor of the Milwaukee Journal Sentinel, interviewed several agents to see if she could get them to reduce their fee, and succeeded in getting her own agent to drop the fee from 2.5 to 1.5 percent. But the process ground to a halt when she tried to get the commission paid to the buyer’s agent reduced from 2.5 to 2 percent.
Agent after agent told her that if the percentage were reduced, buyers’ agents would steer their clients away from her home. “They laughed at me,” said Ms. Cleaver, who published the Kindle book “Negotiate Real Estate Commissions and Keep More Money!” and began a Facebook group where buyers and sellers can swap negotiation tactics.
Buyers would be expected to pay their own agents.
At the heart of the proposed rule changes is commission “decoupling” — buyers and sellers would now each be responsible for paying their own agents rather than making sellers cover fees for both.
For buyers, especially those already struggling to amass a down payment for a home, this could sting.
“Most entry and lower end buyers BARELY can come up with 3 percent down,” one broker, Stephen O’Hara, chief executive of Common Ground Properties in Rancho Santa Margarita, California, wrote on a Facebook discussion thread. “They don’t have enough money for a can of paint, much less a $20k Commission.”
The good news is that those commissions may go down. Most buyer agents currently earn 2.5 to 3 percent on a home sale (half of the standard 6 percent commission). An overhaul of the system could spark more competition, with agents offering lower rates, said Ryan Tomasello, the managing director of Keefe, Bruyette & Woods, an investment banking firm and the author of a 77-page study of the impact of the changes on commissions.
Mr. Tomasello’s research predicts that commissions may fall by as much as 2 percent — mostly from the buyer’s side, he said. At the same time, he doesn’t believe that home prices will be affected. “We think ultimately that this will reduce commissions in aggregate and therefore the friction costs of one of life’s biggest transactions,” he said.
Buyers also are now more likely to be offered a written agreement with their agent, just like sellers.
Commissions could become more transparent.
Despite N.A.R. guidance against the practice, many buyer agents advertise their services as free. But in real estate and in life, nothing comes free — many home buyers simply weren’t aware that the fee for their agents was covered by the seller.
Sellers were often unaware, too. A recent survey of 1,000 Americans found that 42 percent of home sellers didn’t know that they were expected to pay the commission for the buyer’s agent. The five home sellers in Missouri who brought the lawsuit against N.A.R. had the same grievance.
“Today’s consumers view the present commission system as confusing and unfair, which has made it difficult for many to trust their real estate agent,” Luke Babich, the co-founder of the real estate education platform Clever Real Estate, which conducted the poll, wrote in a blog post.
One potential upshot of the deal is that home buyers will become more aware of the process, and of the mechanism through which the agent representing them is paid.
Some buyers could opt to go it alone.
Today, 85 to 90 percent of home buyers use an agent who exclusively represents them while shopping for a home, according to Keefe, Bruyette & Woods. Faced with the prospect of footing the bill for their own agents, some buyers — already relying on sites like Zillow and Redfin to search for listings on their own — may now opt to eschew a buyer’s agent entirely.
But buyer beware: Agents caution that those who go it alone are more likely to fall victim to fraud or misunderstand the process.
Even agents who aren’t members of N.A.R. may be affected.
In most cities, access to the databases where homes are listed for sale, called multiple listing services, is restricted to dues-paying N.A.R. members, which has helped cement the organization’s influence. But this is not the case in every city, including New York, where many agents carry membership only with the Real Estate Board of New York, known as REBNY, the local real estate trade association.
Some major brokerages have already offered their agents an exit ramp from N.A.R. As lawsuits against the organization piled up last year, several real estate companies, including Re/Max and Redfin, did away with a requirement that their agents hold N.A.R. membership.
In New York City, where most agents aren’t members of N.A.R., the settlement won’t directly affect most buyers and sellers. Not yet anyway: The changes are expected to ripple through the entire industry. In January, REBNY outlined new rules allowing buyers’ brokers to reject a seller’s offer of commission and negotiate the fee from the buyer.