As a result of the settlement of a class action lawsuit brought against the National Association of Realtors (NAR) and four real estate brokerage firms, the way sellers and buyers of homes will pay commissions will change in July 2024. The settlement was reached after a Missouri jury rendered a $1.8 billion verdict against NAR and the brokerage firms finding that they had conspired to keep commissions high. As part of the settlement, the NAR had to agree to change the industry standards on how commissions are paid and who is to pay them.
For decades, payment of real estate commissions for home sales was largely controlled by the NAR’s Multiple Listing Services (MLS). There are regional MLS’s throughout the United States. When a seller of a home signs a commission agreement with their agent, the agent lists the property for sale on the MLS serving the local geographic area. Under the MLS terms of service, when the seller’s agent’s listing is placed on MLS, it is a standing offer to all other real estate agents that if an agent procures a buyer for the property, then the seller’s agent splits the commission with the buyer’s agent.
Typically, the commission agreement signed by a seller provides that a seller pays a 6 percent commission for a home sale, although in some instances it can be negotiated down usually to 5 percent. The commission agreement also discloses that the home will be listed on MLS. Critics of the MLS system complained that it kept commissions artificially high in part because buyers had no negotiating power over the cost of commissions which in turn contributed to higher home prices.
Under the new rules beginning in July, sellers’ agents can no longer use the MLS to offer buyers’ agents a split of the commission on the sale of a home. Further, buyers if they choose to hire an agent must enter into a written agreement with their agent to pay a commission. There is, however, nothing to prevent buyers’ agents and sellers’ agents from agreeing amongst themselves to split commissions.
The consequence of this is that if the new rules are followed, buyers will have to pay their agents a commission out of their own pocket. It’s hard to predict how this is all going to shake out going forward. One possibility is that many sellers will be unwilling to pay a 6 percent commission for the sale of their home since the commission they pay out of the sale proceeds will not have to be split with a buyer’s agent.
If the seller’s agent has entered into an agreement with a buyer’s agent to split the commission, then the commission for the seller’s agent and buyer’s agent will be a smaller split, perhaps substantially so. Some savvy buyers may forego altogether the hiring of an agent to find them a home. Instead, these buyers could try to find homes on their own through Zillow, Redfin, or through searching on the internet.
A buyer without an agent would need to have knowledge of real estate transactions in order to effectively negotiate a contract for purchase and to take all the necessary steps to close on the home. Most buyers are not going to be able to navigate effectively through this process, so buyer’s agents will still be needed. Alternatively, a buyer could retain a real estate attorney to handle their purchase once they found a home they wanted to make an offer on.
Assuming sellers begin paying lower commissions to their agents, there will be less commission money to split. This may result in many real estate agents leaving the industry. Time will tell, but it is going to be a time of upheaval in the home buying industry. It will likely take a couple of years for real estate agents and home sellers and buyers to adjust to the new rules for payment of commissions.
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