Last week’s proposed settlement of civil price-fixing allegations against the National Association of Realtors put real estate agents in the spotlight like never before.
Home sellers pay an estimated $100 billion a year in commissions. The seller’s agent, in keeping with a century of convention, typically splits the money with the buyer’s agent. The going rate has long been 5 percent to 6 percent, though that can vary by location.
A string of class-action lawsuits filed by home sellers alleged that NAR violated antitrust laws by requiring the selling broker to offer — via listing databases run by local realtor affiliates — a cut of the commission to the buyer’s broker. The mandate, combined with other NAR rules, has kept the payments artificially inflated, according to the lawsuits.
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The realtors’ group, whose members handle about 90 percent of all home sales, denied wrongdoing but agreed to bar commission offers from the databases, known as a multiple listing service, or MLS.
If approved by a federal judge, the settlement is expected to give sellers more leeway to negotiate lower rates. Buyers, on the other hand, may wind up paying thousands of dollars upfront for a broker to help them find a house. Until now, that cost was essentially baked into the price of the home.
NAR’s decision to resolve the claims has left buyers, sellers, and agents uncertain about what comes next. Here are answers to some common questions about the NAR settlement and what it may mean for the real estate market.
Does posting commission info on MLS really inhibit competition among agents?
NAR dismissed this assertion.
“The rule that has been the subject of litigation requires only that listing brokers communicate an offer of compensation,” Mantill Williams, a spokesman for the organization, said in an email. “That offer can be any amount, including zero.”
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But lawyers representing home sellers argued that most buyer brokers don’t show homes to clients when the seller’s agent is offering less than the standard 2.5 percent or 3 percent, or they steer house hunters to listings with a higher payout.
Without the NAR’s rule, “the cost of buyer broker commissions would be paid by their clients (home buyers). Buyer brokers would thus have to compete with one another by offering a lower commission rate,” according to a complaint filed in Missouri. The jury ruled in favor of the plaintiffs, awarding them $1.8 billion in damages, a verdict that pushed NAR to settle.
Why would a buyer pay an agent for something they used to get for free?
Some buyers will go DIY. But most prefer the help of an agent, who not only shows houses, but also advises on bids and writes up purchase-and-sale agreements. It’s possible the seller’s agent could agree to split the sales commission, which will still be permitted as long as the offer is made outside of an MLS. Otherwise, buyers will have to pay, either a flat fee or a percentage of the sales price. They may be able to negotiate the rate, depending on how desperate the agent is for business.
Won’t buyers just seek a seller concession to cover their agent’s commission?
They can try, says Stephen Brobeck, a senior fellow and former executive director of the Consumer Federation of America. A concession is when the seller agrees to pay some closing costs, often for appraisals, inspections, or title searches. The idea is that, as with these costs, the broker’s commission could be paid by the seller, with a corresponding increase to the purchase price rolled into the mortgage.
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In a seller’s market, however, “some sellers won’t be willing to do so,” Brobeck said
Lawyers who sued NAR say the settlement will mean lower costs for both sellers and buyers. How so?
Experts estimate that sales commissions will drop anywhere from 20 percent to 50 percent. Brobeck comes in at the low end. “We think it likely that average rates will eventually decline from 5-6 percent to 3-4 percent, saving consumers tens of billions of dollars a year,” he said.
That’s good for sellers. What about buyers?
Brobeck and others believe that smaller commissions will, over time, translate to lower home prices. Moreover, they say buyers’ brokers won’t have an incentive to guide their clients to more expensive properties to earn bigger commissions.
Will buyers need to sign a contract with their agent?
Yes, says Brobeck, if you hire an NAR member agent. “It will be important for buyers to request a copy of the contract and learn about commissions and any other fees before signing the contract,” he said. “Most of these contracts contain anti-consumer features. If the agent won’t remove them, consider using another agent or employing an attorney to work with the listing agent who facilitates the sale.”
The unfair terms relate to commissions, other fees, conflicts of interest with buyers and other sellers, and dispute resolution.
Is this good or bad news for agents?
It depends on who you ask. NAR has some 1.6 million members, many who work part-time. Some say not much will change. Others say they will adapt. Still others plan on finding a new job. Keefe, Bruyette & Woods analyst Ryan Tomasello has said that more than half of all agents could leave the business.
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Larry Edelman can be reached at larry.edelman@globe.com.