The announcement made by the National Association of Realtors® (NAR) on Friday marks the resolution of longstanding legal disputes with homeowner groups dating back to 2019. With a settlement totaling $418 million, this development effectively brings an end to the prevailing NAR broker commission model, which had been contested by the homeowner claimants for its alleged imposition of exorbitant commission fees.
Pending approval by a federal court, this landmark settlement is poised to instigate significant transformations within the housing market, potentially representing its most substantial upheaval to date. The alterations to the commission structure agreed upon by the NAR could revolutionize the entire process of real estate transactions and may also precipitate declines in home prices nationwide.
Here are the key modifications and their potential implications for investors and agents.
Abolishment of the 6% Commission-Sharing Framework
The most far-reaching adjustment brought about by the settlement is the elimination of the existing commission-sharing arrangement endorsed by the NAR.
Traditionally, real estate agents designated as Realtors were obligated to allocate a portion of the commission to the buyer's agent, if present. This practice, owing to the NAR's pervasive influence on agent designations across the United States, essentially established a standard commission rate within the industry, a contention raised by the plaintiffs as a violation of antitrust laws.
Although NAR guidelines stipulate that commission rates are negotiable and dictated by the market, in practice, they have typically been set by listing agents at rates ranging from 5% to 6%. For properties priced at $350,000, this could translate to a commission payout of $21,000.
Since sellers bear the brunt of these commissions, the crux of the argument is that they contribute to inflated home prices. With the settlement now finalized, a reduction in home prices could conceivably be on the horizon.
Consequently, listing agents will no longer be required to extend commission offers to buyer agents, fostering increased competition among agents as sellers seek out lower commission rates. While the exact extent of commission adjustments remains uncertain, some economists anticipate reductions of up to 30%, as reported by the New York Times. It is also predicted that the changes could prompt a mass exodus of real estate agents from the profession.
Elimination of the MLS Subscription Mandate
The second significant change introduced by the ruling pertains to the cessation of the requirement for real estate agents to subscribe to their regional Multiple Listing Service (MLS). Under this ruling, the MLS will no longer disclose information regarding commission offerings for sales, thereby putting an end to the practice of "steering," where buyer agents gravitate towards properties offering higher commissions.
Furthermore, the new regulations abolish the obligatory subscription to an MLS for Realtors to conduct their services.
The NAR settlement mandates that any broker subscribing to an MLS must enter into a written agreement with a buyer outlining the services provided and their associated costs. Speculation persists as to whether buyer-broker agreements will become standard practice in scenarios where MLS access is absent.
Immediate and Increased competition will undoubtedly create significant changes in how buyers, sellers, and real estate agents work together, as well as, present new opportunities for investors traditionally operating outside of the "open market".
Pending approval by the federal court, these changes are slated to take effect in July 2024.
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