The real estate industry has been rocked by a handful of class action lawsuits targeting the long-entrenched commission system governing how most real estate agents are paid.
The litigation and resulting settlement include a significant award to the home seller plaintiffs and rule changes governing how agent commissions are structured, scheduled to take effect in mid-July 2024.
In this blog, we examine how real estate commissions might change for homebuyers and sellers, and the potential impacts on market dynamics going forward.
Court Case Background
The Multiple Listing Service (MLS) is a collective of approximately 550 databases of sale listings throughout the U.S. established by cooperating real estate brokers with guidance and rulemaking provided by the national trade group, the National Association of Realtors (NAR). MLS amplifies visibility for listings and promotes cooperation between buyers’ and sellers’ brokers for the benefit of consumers. Approximately 80% of home sales in the U.S. involve an MLS listing.
When listing properties on the MLS, brokers must adhere to the Buyer Broker Commission Rule. This requires the seller's broker (also called listing agent) to offer a non-negotiable commission to the buyer's broker (typically half the total commission) regardless of the services provided. In 2023, the average total commission rate for realtors in the U.S. was 5.46 percent of the home sales price.
While the rule intended to ensure all parties were fairly compensated一and to encourage MLS use一many believe the practice also unnecessarily inflated the total commission paid.
Other related criticisms involved disincentivizing buyers’ agents to show their clients listings where the seller’s broker offered a lower commission split and imposing obstacles to new and innovative commission models.
Finally, restricting commission structures to conventional sale price percentages limited consumer choice. For example, some sellers may have preferred to compensate their broker via a flat fee or hourly rate.
The Litigation
In October 2023, the plaintiffs (a group of Missouri home sellers) successfully argued in Burnett et al. v. The National Association of Realtors et al. that NAR rules for homes listed on MLS platforms unfairly violated antitrust laws and artificially inflated broker commissions, thus raising costs for home sellers and buyers alike.
The resulting $1.8 billion award prompted several copycat antitrust lawsuits, which were consolidated and settled on March 15, 2024. Once approved by the court, NAR is expected to pay $418 million in damages to the plaintiffs and revise select compensation rules.
Key Settlement Terms
Following the settlement, a few key changes were made to the MLS rules, which, if approved by the court, will go live in mid-July 2024. They include the following:
- MLS listing agents are now prohibited from offering compensation to buy-side agents on the MLS platform.
- A buyer must enter into a written agreement with their agent specifying their compensation before viewing any properties.
- Any agreed-upon compensation between the seller’s and buyer’s agents must be agreed outside of the MLS system and disclosed upfront to all parties involved, including the seller.
Implications: What Buyers & Sellers Need to Know
As the new rules have yet to take effect, it’s unclear how they will impact the market long term. However, given current information, we can offer a few insights into what home buyers and sellers might expect in the initial periods after these changes are implemented.
For Homebuyers
Buyers will now be directly responsible for compensating their agents in a home sale and documenting their compensation agreement in writing ahead of touring any prospective purchase targets. Here are a few implications to consider:
- Buy-Side Price War. Recognizing buyers will want to minimize their newly mandated compensation responsibilities, buyers’ agents may drive down their fees to win clients.
- Increased Negotiation With Their Agent. Buyers will have the flexibility (or burden) to negotiate the scope of services they desire from their agents and related compensation. Services could range from sourcing and viewing properties to assistance in securing financing, attending inspections, and negotiating contract terms. Compensation could be a flat fee, hourly rate, or via a la carte services.
- Increased Challenges for First-Time Homebuyers. For first-time home buyers who have a hard enough time scraping together a down payment, covering their agent’s compensation will only add to their financial burden. For some, this could affect their ability to retain professional representation or afford their desired property. It could even price buyers out of the market entirely.
- Extending the Homebuying Timeline. Given the additional financial strain on buyers, sellers may offer concessions to attract their preferred buyer. This could include covering some or all of the buyer’s closing costs or a sales price reduction. For buyers, this could mean more time spent finding the right property that offers favorable concession terms.
For Homesellers
While the changes impacting sellers may be less pronounced, there are still important nuances to be aware of as the situation unfolds.
- Reduced Selling Costs. Since sellers are no longer obliged to cover the buyer-side commission, they may collect additional proceeds from their sale.
- Sale-Side Price War. Similar to the buy side, with commissions essentially up for grabs, sellers’ agents may reduce their rates to attract clients.
- Providing Additional Concessions to Preferred Buyers. We discussed this topic from the buyer's perspective above. However, there are implications for sellers as well. To attract preferred buyers (and mitigate their added financial load), sellers might feel pressure to offer buyers concessions, such as making repairs or offering flexible moving dates.
What About Home Prices?
Will MLS rule changes significantly affect the broader housing market? It remains uncertain how they might influence home prices, yet there are well-founded perspectives on both sides.
Some experts suggest that sellers may lower their selling prices because they are no longer required to cover buyer agent commissions. On the other hand, given the generally tight market conditions, it's unlikely that sale prices will be meaningfully affected. Moreover, an anticipated increase in buyer demand, spurred by forthcoming reductions in mortgage rates, could sustain higher home prices for an extended period.
The Takeaway
While we're clearly in the preliminary stages of the rule change rollout, it appears we’re likely headed toward greater complexity and market fragmentation. The increased need for negotiation from both buyers and sellers could complicate transactions yet also create more opportunities for all parties involved.
And there’s likely to be further developments down the road. For instance, right now, buyers aren’t able to finance their agent’s fees through their home loans, but this, too, could change. The American Real Estate Association (AREA) and other adjacent organizations are lobbying hard for agencies like Fannie Mae, FHA, and HUD to reconsider these restrictions.
In short, we're currently in a waiting game. As we monitor the rollout, we’ll continue to provide updates as needed to help you navigate the evolving real estate landscape effectively.
Contour Mortgage provides premier lending services throughout the U.S. Contact us to learn more about how we can help with all your home lending needs.
Are You Eligible for Compensation Under the Settlement?
If you sold your home during the specified periods and your listing conformed to existing MLS rules, you might be entitled to a portion of the settlement.
Visit the Residential Real Estate Broker Commissions Antitrust Litigation website for detailed information on the eligibility periods, specific conditions under which you can claim, and how to submit your claim.
