Proposed Real Estate Settlement: Changing the Rules in Residential Purchases

Late last week, the National Association of Realtors  (“NAR”) reached a $418 million nationwide settlement of claims, pending approval by a federal court, that the industry conspired to keep agent commissions higher. As we discussed in a recent blog,   the NAR had been faced with a jury verdict of $1.8 billion in damages, finding that industry rules for how buyer’s agents are paid were keeping residential commissions artificially high.  Despite this ruling, another defendant in this litigation, HomeServices of America, a subsidiary of Warren Buffett’s Berkshire Hathaway, chose not to settle.

This ruling upends an industry system in which sellers have typically set the buyers’ agents’ fees. Currently, sellers pay their agent’s commission, which is generally 5% to 6% of the home’s selling price, which in turn is shared with the buyer’s agent. The buyer does not pay for this fee directly; instead, the commission is fully paid by the seller as part of the closing costs. The issue at trial was whether this custom suppressed competition by making it difficult for both buyers and sellers to negotiate lower commission rates.

Consumer advocates claimed that this system precluded buyers from negotiating to save commission fees, which in turn, kept real estate commissions in the United Sates higher than in most of the world, and in turn bloating the asking price by the seller.

If the proposed settlement is approved by a federal court, residential listings for sale in most of the United States would no longer include upfront offers to buyers’ agents commencing in mid-July, and buyers would be able to negotiate compensation for their agents upfront.

What are the effects of this ruling?

The complexion of a typical residential real estate closing is dramatically changing. Should a federal court approve the settlement, buyers will be able to select an agent, negotiate the commission, or not use an agent at all. Further, the role of a buyer’s agent may include less services. For example, a buyer may opt to pay less by searching for and reviewing properties online, and contract with an agent to only present an offer.

In addition, a buyer’s agent may resort to flat fees or hourly rates for their commissions. Under the flat fee approach, a buyer would agree to pay the buyer’s agent directly but may still seek the seller to cover the cost. Alternatively, the buyer’s agent may determine the commission by how many homes the agent has shown to the buyer or use a variable as to the number of house showings and then a fixed rate for specific services related to the transaction such as finding home inspectors, appraisers, or other service professionals.

While some buyers are unable to afford to pay a buyer’s agent fee, sellers are still able to offer to compensate the buyer’s agent, but now the seller will be prohibited from placing the commission structure in a home listing. As a result, more buyers may simply ask the seller to pay the buyer’s agent. The reality of whether a seller will be motivated to pay for a buyer’s agent will depend upon the housing market in general, as most sellers in a hot market with increased demand will most likely not be willing to pay for the buyer’s agent. Another factor is that if a seller chooses to lower a commission in order to include the buyer’s agent, there may be some buyer’s agents who steer buyers away from certain homes for sale.

Although sellers are accustomed to include the cost of a buyer’s agent in the overall sale price of their home, over time, this practice will evolve. Instead of 5% to 6% typical commission, which has been split between the seller and buyer agents, sellers could now list their homes for a total commission of 3.5% or less, which would include 3% for the listing agent. Further, new brokerage models which may include providing low-cost options for buyers may further disrupt the industry standard. The hope is that, with this proposed settlement, there is less cost to sell a home which, in turn, may make more homes affordable and attainable.

Yet, with this change in residential real estate broker commissions, buyers may have to do more work themselves if they negotiate the buyer agent fee and/or if they decide to not use a buyer’s agent at all. Buyers typically seek advice from their agents before investing a substantial amount of funds as an escrow deposit. The proposed settlement and underlying court case indicates that, while buyers understand and will pay for service, they do not want to overpay for the service and would rather negotiate commission rates in order to do so.

What does this all mean?

The truth is most buyers now look online before even contacting a buyer’s agent. The old days of the buyer’s agent controlling what the buyer sees for sale is long gone. Having said that, while the NAR settlement creates a disruption of how residential real estate transactions have been structured, the need for real estate agents still exists. The question, however, as to what services buyers are willing to pay for, with or without the seller agreeing to cover such services remains to be seen.

From the trenches,

Roy Oppenheim

originally posted at: Proposed Real Estate Settlement: Changing the Rules in Residential Purchases – Oppenheim Law