Exciting news for homesellers and homebuyers! The National Association of Realtors (NAR) has reached a settlement in its lost $1.8+ billion lawsuit on price fixing and collusion, agreeing to pay $418 million in damages. This settlement marks a significant shift in the homebuying and selling business model, where sellers traditionally paid both their broker and a buyer’s broker.
With the settlement agreement, sellers’ agents will no longer be required to make offers of commission to buyers’ agents, a practice I believe was fundamentally flawed. With the decoupling of commissions, both sellers and buyers will have a greater ability to negotiate down their commissions. In addition, there will be less “steering,” the practice in which buyers’ agents direct their clients to pricier homes in an attempt to earn a bigger commission check.
I highly recommend listening to my podcast with Mike Ketchmark, the lead trial attorney for the lawsuit, to gain insight into the implications of this settlement. While the NAR does not admit to any wrongdoing, the agreement represents a victory for both buyers and sellers of residential real estate moving forward.
With real estate commissions expected to decrease, we can anticipate improved price discovery and increased transactions in the market. Ultimately, the consumer wins.
The Seller Paying The Buyer Agent’s Fee Made No Sense
In my personal experience selling a house in 2017, I faced challenges during escrow over a $25,000 concession for “repairs” to some rear windows. The actual repair cost would have been between $2,000 and $5,000, but the buyers insisted on replacing all the windows, hence the hefty $25,000 request.
It was evident to me that this was simply a tactic by the buyer’s agent to negotiate a lower price. As veteran homebuyer of many homes since 2003, I’m aware of all the tactics buyers use to try and get a better deal or delay the close of escrow.
At that moment, I couldn’t help but question why I was paying a 2.5% commission to the buyer’s agent, who was pushing for a price reduction on behalf of their client. I was close to canceling the deal after the 40th day of escrow, but I didn’t because I just had a newborn and wanted to focus. After closing the deal, I made a vow to myself never to sell another property as long as real estate commissions remained so high.
I had paid a 4.5% commission at the time, which had been negotiated down from 5%. 4.5% still felt like 1.5% too much for the service that I received and the work my agent did.
How The NAR Settlement Will Impact Real Estate Commission Rates
TD Cowen Insights projects a substantial decrease in real estate commissions, ranging from 25% to 50%.
For instance, if the standard rate stood at 6%, this would lead to an average commission rate of approximately 3% to 4.5%. In cities where the standard rate was 5%, which is common in many high-priced markets, the average commission is anticipated to fall between 2.5% and 3.75%.
I anticipate an immediate decline in real estate commission rates following the NAR settlement, contrary to the expectation of some that it will take years to materialize. The rapid jury decision against the National Association of Realtors, Keller Williams, and Homesellers of America in under two hours, coupled with the $418 million settlement, expedites the process of lowering real estate commissions.
Even prior to this settlement, I observed instances of real estate agents willing to charge 3.5% in total commission. For example, in January 2024, an experienced husband and wife team offered to earn a 1% commission while allocating 2.5% to the buyer’s agent when I was considering selling my old home. Although I initially perceived this arrangement as unfair to them, they were content with compensating the buyer’s agent more.
This disparity in commission distribution underscored the significant role of financial incentives in motivating buyer’s agents to advocate for listings to their clients (steering). What a sobering reality given that most buyers independently discover listings online.
The Commission Rate Sellers Should Target Paying
Following the NAR settlement, if you intend to sell your property, I recommend negotiating for a 1.5% commission to the listing agent. This is down from 2.5% – 3% (half of 5% – 6%).
Whatever the buyer’s agent will receive will be up to the buyers and buyers’ agents to decide. While many agents may resist this adjustment, it is within your rights to seek a lower commission rate now. Remember, in real estate, everything is negotiable.
Homebuyers Will Not Have To Pay Their Agents 2.5% – 3% Of The Value Of The House In Commissions
There is a misconception among some that homebuyers will now be responsible to pay their agents 2.5% to 3% directly out of pocket given the homeseller is no longer paying. This is not entirely accurate. Instead, buyer’s agents will either receive a fixed fee or a significantly reduced commission percentage, determined by the MARKET.
The core issue addressed in the lawsuit was the alleged price fixing by the NAR and various real estate brokerage firms to maintain artificially high commission rates. With the seller no longer obligated to pay the buyer’s agent commission, the market now has the autonomy to determine the compensation for buyer’s agents.
Homebuyers must consider how much they are willing to compensate their buyer’s agent upon the successful completion of a home purchase. While some may agree to pay 2.5% to 3% of the home’s value, particularly if the agent has diligently assisted them in their search and transaction process, most buyers will likely opt for lower payments.
My conjecture is that homebuyers will be reluctant to pay more than 1% of the home’s value in commissions. For instance, a buyer may be willing to allocate up to $10,000 to their agent for closing on a $1 million property. It’s either up to 1% or a flat fee. Of course, a buyer’s agent and a buyer can agree to incentive commissions if the agent is able to negotiate a lower price.
The market will then adjust the supply of buyers’ agents accordingly. With declining commissions, there will likely be fewer agents over time.
What Does The Buying Real Estate Agent Do?
A buyer’s agent can offer significant value to homebuyers, particularly those navigating the process for the first time. It’s important to note that the settlement with the NAR does not reflect negatively on the dedication or work ethic of buyer’s agents; rather, it addresses issues related to price fixing and market dynamics.
The role of a buyer’s real estate agent involves several key responsibilities:
- Identifying suitable homes that align with the buyer’s specific household and financial requirements.
- Assisting in managing a buyer’s real estate FOMO (fear of missing out) by ensuring they don’t overpay for a property.
- Facilitating connections with reputable lenders if financing is required.
- Providing insights and expertise on the local real estate market and any upcoming developments.
- Offering an honest evaluation of the current state of the market and providing housing price forecasts for the short and medium term.
- Conducting thorough assessments of potential properties, highlighting both their strengths and weaknesses.
- Serving as the primary negotiator for the buyer, negotiating price, terms, and concessions during the escrow process.
- Guiding the buyer through disclosures and identifying any red flags or warning signs.
- Recommending qualified home inspectors to evaluate the condition of the property.
- Reviewing the property layout and verifying square footage to avoid discrepancies.
The value of a buyer’s real estate agent tends to be higher for less experienced homebuyers and those purchasing in unfamiliar markets. Conversely, experienced homebuyers may require less guidance from a buyer’s agent.
The Listing Agent Cannot Lie Or Mislead A Buyer
Many emphasize the importance of having a buyer’s agent to navigate the offer and escrow process, especially given that a home purchase is a major investment. I fully agree that having a knowledgeable buyer’s agent can be worth it, as there are numerous potential pitfalls to watch out for when buying a home.
However, it’s crucial to note that the listing agent is legally obligated to provide accurate information and disclosures during the home selling process. In other words, a listing agent cannot lie, omit, or misrepresent facts on purpose If a listing agent were to lie or mislead a buyer, the buyer would have legal recourse and could seek damages if any undisclosed issues were discovered after the sale.
The listing agent is required to furnish an agent inspection and comprehensive disclosure statement about the property. This includes disclosing any significant issues such as structural damage, plumbing or electrical problems, fire damage, and roof leaks. It is then the buyer’s responsibility to thoroughly review all disclosures and conduct inspections to verify the property’s condition. This is why waiving a home inspection contingency is a risk.
While there may be gray areas regarding what must be disclosed, ultimately, it falls on the buyer to uncover any undisclosed issues during the inspection period. This involves not only examining the property for defects but also assessing neighborhood factors, safety concerns, HOA regulations, easements, and more.
What Does The Listing Real Estate Agent Do?
To be thorough, let’s delve into the responsibilities of a listing real estate agent. With the NAR settlement, the competition to represent listings is expected to intensify. Why? Because listing agents have a higher likelihood of receiving payment and may command a higher real estate commission compared to buyer’s agents.
Here are the key tasks handled by a listing agent, who is hired by the seller:
- Pricing the home appropriately
- Marketing the property effectively
- Facilitating the sale of the property
- Maintaining communication with both the seller and potential buyers
- Ensuring that prospective buyers are financially qualified
- Negotiating terms favorable to the seller
- Overseeing inspections and necessary repairs
- Coordinating with service providers for home repairs
- Representing the seller during home appraisals
- Arranging staging to enhance the appeal of the house
- Recommending title, escrow, insurance companies, and other essential vendors to aid in the escrow process
Being a listing agent entails extensive preparation and involvement. Once the property is in escrow, the workload for a listing agent is comparable to that of a buyer’s agent. Therefore, it’s widely acknowledged that listing agents deserve higher compensation for their services than buyers’ agents.
If You Are An Experienced Buyer, Consider Dual Agency
After the NAR settlement, I anticipate that dual agency will become more prevalent in real estate transactions. Dual agency occurs when the listing agent represents both the seller and the buyer. This practice is common in other places of the world.
While many real estate agents may be reluctant to engage in dual agency due to the increased workload without additional compensation, savvy agents will recognize the opportunity to expand their business and increase their earnings. Dual agency creates less economic waste.
My Good Experiences With Dual Agency
I have purchased my last three houses through dual agency. I took the initiative to find listings online, attend open houses, and establish rapport with the listing agents. Subsequently, I proposed that they represent me as well, provided we could reach a mutually beneficial agreement. All of them agreed, recognizing me as a credible buyer who understood the process.
Through dual agency, the sellers were able to save between 1% to 2% in commission fees, while I perceived savings ranging from 2% to 4% off the purchase price of the house.
Dual agency can streamline the buying process by eliminating an intermediary. Instead of communicating through a buying agent who then communicates with the listing agent, the buyer interacts directly with the listing agent. Moreover, since the listing agent also represents the buyer, they have a fiduciary duty to act in the buyer’s best interest.
That said, a dual agent will likely have a stronger allegiance to the seller initially since they’ve had a longer relationship. Despite the unbalanced relationship, a homebuyer can still cultivate a meaningful relationship with the dual agent over time.
More Transaction Volume, Better Price Discovery
Lower real estate commissions are expected to incentivize more homeowners to list their properties, resulting in higher transaction volume and enhanced price discovery. With a greater number of comparable sales, prospective buyers will have more reliable data points to inform their offers.
Initially, this surge in supply may exert downward pressure on prices if suddenly a surge of real estate agents agree to lower their commissions. However, homeowners will likely aim to retain a significant portion of the commission savings for themselves.
It’s unlikely that sellers will reduce their asking prices by 1-3% simply because they are paying lower commission rates. Instead, they will likely list their homes at market value and aim to capitalize on all of the commission savings. Consequently, sellers stand to benefit with a larger sum deposited into their bank accounts after completing a transaction.
Despite the downward trend in real estate commission rates, the enduring impact of homeowners with low mortgage rates is expected to overshadow any incremental increase in housing supply resulting from reduced commissions. The locked-in effect is more powerful. Therefore, the effect of lower commission rates on overall supply may not be readily apparent.
The Positive Case For Home Prices Due To Lower Commission Rates
One could argue that the NAR settlement is bullish for home prices for two reasons.
On March 15, 2024, firms like Zillow and Redfin experienced declines of 13.5% and 5%, respectively, following the settlement. While these losses may impact these real estate firms financially, they signify a financial gain for consumers. Essentially, the free market is indicating that firms such as Zillow and Redfin will see reduced profitability post-settlement, leading to more funds flowing into the bank accounts of both home sellers and buyers.
Ultimately, the trajectory of home prices will be influenced by the overall health of the economy and labor market. However, with sellers and buyers having more disposable income as a result of lower commission rates, there will be additional capital available for purchasing homes. Ultimately, more capital the more upward pressure there may be on home prices.
The Clearest Winner Is The Consumer
In a world where commission rates across industries are steadily declining, it was only a matter of time before real estate commissions followed suit. The NAR settlement marks a significant victory for consumers, empowering both homesellers and homebuyers who seek to save money by negotiating lower real estate commission fees.
While lower real estate commissions may not be favorable for real estate agents, brokerages, and the National Association of Realtors, it reflects the reality of today’s modern economy. Just as online brokerage firms thrive despite zero trading fees, small businesses like Financial Samurai remain profitable despite charging nothing.
The real estate industry must adapt to the changing landscape. Industry players will likely find innovative ways to remain profitable. However, if they fail to do so, it may be time to consider alternative occupations or business models.
Reader Questions
Where do you anticipate the average real estate commission rate will eventually settle? Do you foresee a rise in flat fees as an alternative? How do you propose compensating a buyer’s agent? And how rapidly do you believe real estate commissions will decrease if both sellers and buyers begin negotiating?
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