You’ve probably heard about the court case involving the National Association of Realtors (NAR) by now, which has resulted in a $418 million settlement. The crux of the lawsuit was the accusation that realtors set their commission percentage and did not allow for consumer input in negotiation of those commissions. As a result of the National Association of Realtors settlement, the previous way of the seller directly offering compensation to both buyer and seller agents in the MLS listing is going away nationally on August 17, 2024. In the Phoenix marketplace, the changes took place on August 1, 2024. These changes will undoubtedly affect you or someone you know, but it may be a little confusing as to how and what those effects are.
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A Bit of History of Representation and Compensation
The practice of consumers having buyer representation and sellers offering commissions to buyer brokers has been around since the 1990s. Prior to that, Sellers were the only ones to have express agent representation during the sale of a home. Consumers demanded buyer representation as a result of the one-sided practice. As a result, the current (and soon outgoing) way of offering compensation for that representation entered the marketplace. Sellers took the commission they were traditionally paying to the seller agent and they split it in half to compensate both the buyer agent and seller agent. In most cases, the total amount of commission paid did not increase, but was split between representatives.
The lawsuit alleged the commission practice was anticompetitive and fixed. However, many agents disagree with the assertion as commissions have always been negotiable and clearly so on the Arizona Association of Realtors listing documents. Agents and consumers alike are going to quickly learn how the settlement will affect the buying and selling of real estate. Please keep in mind that no one truly knows how things will play out, but let’s take a peek at some of the different ways the settlement may affect all involved in real estate transactions. Understanding these changes is crucial for anyone involved in buying or selling property in the near future.
Less Immediate Transparency in Commissions
Impact on Consumers: Previously, buyers were able to see the commission being offered to their representatives directly on the MLS and through websites like Zillow and Realtor.com. Much of the time the disclosure of commissions was not material to buyers as they were usually not obligated to pay their representatives. Now that sellers are no longer able to offer commission directly on the MLS, buyers will not have any visibility into how much they may be obligated to pay their agents for each property they are interested in seeing. Their agents must now contact each listing agent to discuss potential concessions being offered by the seller to the buyer. Once the buyer agent learns the amount for each property the buyers are interested in, buyers will have the ability to decide which property to view in light of the compensation being offered and how much they may be obligated to pay their agent.
Impact on Real Estate Agents: If the payment of commissions is material to buyers, their agents must now directly contact each listing agent prior to showing the home to determine what, if any commission is being offered to the buyer side to cover commissions. This extra layer of time burden will slow down the buying process for both agents and consumers. Furthermore, agents must have each buyer sign an agreement with them outlining commission to be paid prior to showing any home, even if it is a single showing.
Potential Shift in Burden of Payment of Commissions
Impact on Consumers: Now that Buyers may be on the hook for paying commissions, their overall cost to transact is likely to go up. Up until a few days ago, in order to close a purchase, Buyers had to have enough cash to pay their loan down payment, lender fees, title and escrow fees, insurance fees, and prepaid taxes. Such fees, outside of downpayment, could cost roughly 1% of the purchase price. Now, buyers may be obligated to cover the cost of their agent’s commission, which could add 2-4% to their cash requirements at closing. Such an increased burden is likely to make home buying more financially difficult, especially for first-time homebuyers or lower income buyers. Should buyers decide to forego working with a buyer’s agent to save cost, they will open themselves up to entering a complicated and difficult transaction with no representation, which is exactly why the idea of buyer representation and compensation came into the marketplace 30 years ago to begin with.
Impact on Real Estate Agents: In the past, buyer agents were compensated by sellers and therefore, buyers were not as concerned with the exchange of value received from their agent because they were not directly paying them. Now that buyers may be obligated to pay commissions to agents representing them in purchases, agents representing buyers will need to prove their value much the same as agents representing sellers have to do. Competition among agents is likely to increase as agents must prove to their buyers why they are worth being paid. Many part time agents or agents possessing less skill in presenting their value proposition are likely to earn less business while skilled agents who provide extensive knowledge, negotiating skill and an extensive set of services, are likely to earn more business.
Shift Towards Flat-Fee Services
Impact on Consumers: With the spotlight on commission structures, there may be a rise in flat-fee real estate services, offering consumers an alternative to traditional percentage-based commissions. This model could appeal to those looking for more predictable costs and could simplify the budgeting process for buyers and sellers.
Impact on Real Estate Agents: Agents may need to adapt by offering flat-fee services or other innovative pricing models to stay competitive in the changing market landscape. This shift might require agents to rethink their service offerings and how they present value to clients, potentially leading to a more diverse array of service options.
Market Diversification
Impact on Consumers: Consumers may benefit from a more diversified market with new entrants and innovative business models emerging as a result of the settlement. This could lead to a wider range of services and potentially lower costs as competition increases. As with any emerging technology or business practice, there will be the good, the bad and the ugly and only through trial and error will consumers find what works and what doesn’t.
Impact on Real Estate Agents: Established agents and brokerages might face competition from new players offering disruptive real estate services, prompting them to innovate and enhance their value propositions to retain market share. This increased competition could drive improvements across the industry, ultimately benefiting consumers.
The National Association of Realtors settlement marks a significant turning point in the real estate industry, promising to reshape how transactions are conducted and how commissions are handled. While consumers stand to gain from increased transparency, real estate agents will need to navigate a more competitive landscape. By staying informed and adaptable, both consumers and agents can find opportunities in the changes ahead.
Author: Trevor H. Halpern, J.D. is CEO of Halpern Residential at eXp. As a Phoenix native, Halpern’s deep knowledge of both people and property has allowed him to create client success in all areas of town. A graduate of ASU’s College of Law, Halpern prides himself on delivering high-level strategy, efficient negotiations and precise tactical execution. Since 2011, Halpern has sold over $300 million in real estate and is in the top 1% of real estate agents in the Greater Phoenix area.
