Real Estate Commissions
Wapo
Finally the real estate broker trust has been busted, likely lowering house buying costs significantly.
https://www.washingtonpost.com/business/2024/03/15/nar-real-estate-commissions-settlement/
Realtors’ proposed settlement could lower cost of home sales
The proposed agreement with the National Association of Realtors could dramatically change how much consumers pay during real estate transactions By Julian Mark and Aaron Gregg Updated March 15, 2024 at 12:15 p.m. EDT|Published March 15, 2024 at 10:44 a.m. EDT
A home is on the market near Atlanta. The National Association of Realtors has agreed to pay $418 million in damages and revise its fee structure under a proposed settlement announced Friday. (Mike Stewart/AP) Listen 2 min
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Comment 975 Add to your saved stories Save The National Association of Realtors has agreed to settle litigation that accused the real estate group of artificially inflating real estate commissions, a move that could dramatically change how much consumers pay during real estate transactions.
Get a curated selection of 10 of our best stories in your inbox every weekend. Under the proposed deal, the group representing 1.5 million real estate agents would pay $418 million over four years to settle several cases, and change rules that plaintiffs alleged supported 5 to 6 percent commissions paid by home sellers. The association said it continues to deny wrongdoing.
“Ultimately, continuing to litigate would have hurt members and their small businesses,” said Nykia Wright, interim CEO of NAR. “While there could be no perfect outcome, this agreement is the best outcome we could achieve in the circumstances.”
If a federal court approves the settlement, the new rules will take effect in July, according to a person close to the settlement talks who spoke on the condition of anonymity because they were not authorized to discuss it publicly.
Michael Ketchmark, a plaintiff attorney representing Missouri home sellers in one of the cases, said he was confident that agreement would fundamentally change the real estate market and help lower the cost of housing and home sales.
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“There’s no doubt in my mind that this is going to bring about tremendous savings to homeowners,” he said.
The realtor association’s century-old commissions structure provided that sellers’ and buyers’ agents split an amount that typically ranges between 5 and 6 percent of the home sale price. Home sellers in Illinois and Missouri alleged in a pair of class-action lawsuits alleged that NAR’s rules artificially inflated commissions by requiring sellers’ agents to make a nonnegotiable compensation offer to list on the Multiple Listing Service, a home selling database.
In October, a jury ruled in favor of the Missouri plaintiffs, awarding them $1.8 billion. The case in Illinois had been moving toward a trial. The agreement announced Friday, if approved by a judge, would resolve those cases and end the long-standing commissions structure, said Ketchmark, who represented the Missouri plaintiffs.
Since the October verdict, experts predicted the commissions system was poised for change. Not only was it threatened by the class-action cases, but the Justice Department had been asking the U.S. Court of Appeals for the District of Columbia Circuit to reopen an antitrust investigation into NAR’s commissions rules that it had settled in 2020.
Aaron Gregg contributed to this report.
NYT
Current spend on commissions is $100B, and this result will save home buyers $20-50B annually on transaction fees.
https://www.nytimes.com/2024/03/15/realestate/nar-realtors-settlement-takeaways.html
4 Ways a Settlement Could Change the Housing Industry
The influential National Association of Realtors agreed to make several changes to its policies to settle class-action lawsuits brought by home sellers who say they were forced to pay inflated commissions to real estate agents.
That National Association of Realtors building in Chicago. Under a global settlement agreement, the National Association Realtors will pay $418 million in damages and rewrite a number of rules that have long been the standard of the U.S. housing industry. Credit...Jamie Kelter Davis for The New York Times Debra Kamin
By Debra Kamin March 15, 2024 Updated 12:06 p.m. ET In the early hours of Friday morning, the National Association of Realtors agreed to a global settlement deal that would resolve several lawsuits against the trade group.
A group of Missouri home sellers sued N.A.R. over their policies on agent compensation, arguing that a N.A.R. rule requiring home sellers to pay commissions to their agents and the agents of their buyers led to inflated fees and price fixing. The lawsuit also called into a question another rule requiring agents to list homes on N.A.R.-affiliated databases in order to sell them. In October, a jury agreed that both practices were anticompetitive, and a judge ordered damages of at least $1.8 billion.
More than a dozen copycat cases, all accusing N.A.R. of stifling competition and violating antitrust laws, have followed.
With the settlement agreement, N.A.R. will pay $418 million in damages, but more important, it has agreed to rewrite a number of rules that have long been central to the U.S. housing industry. Here’s how things stand to change, pending court approval.
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Home prices will drop. In the United States, most agents specify a commission of 5 or 6 percent, paid by the seller. That means that someone with a $1 million home should expect to spend up to $60,000 on real estate commissions alone, with $30,000 going to his agent and $30,000 going to the agent who brings a buyer. Even for a home that costs $400,000 — close to the current median for homes across the United States — sellers are still paying around $24,000 in commissions, a cost that is baked into the final sales price of the home.
Turmoil at the National Association of Realtors The powerful real estate group, which is the largest professional organization in the United States, has come under increasing scrutiny. Losing Its Grip: The National Association of Realtors, which was delivered a one-two punch of scandals in 2023, is facing competition from a new trade group that was started by two prominent real estate agents. Sudden Exits: The president of the N.A.R. resigned after just four months into her tenure, becoming the group’s second president to abruptly step down. The N.A.R.’s chief executive also recently resigned. Harassment Allegations: The leadership exits come after The New York Times exposed complaints of sexual harassment in the N.A.R., including allegations against the group’s former president. Commissions Conspiracy: In an antitrust lawsuit, a federal jury ruled that the N.A.R. and several large brokerages had conspired to inflate artificially the commissions paid to real estate agents. With the settlement agreement, sellers’ agents will no longer be required to make offers of commission to buyers’ agents, a practice called decoupling. This will save homeowners billions.
“Decoupling will allow commissions to be removed and negotiated down, lowering both housing prices and overall consumer costs,” said Steve Brobeck, the retired executive director of the Consumer Federation of America. Mr. Brobeck said that Americans spend about $100 billion a year in real estate commissions, and with the settlement, that number is expected to dip by at least $20 billion and up to $50 billion.
Since commissions are tacked onto the price of a home, “Over time, both sellers and buyers will force rates down through negotiation and comparison shopping in a more price-transparent marketplace,” he said.
The 6 percent commission will cease to be the norm. The lawsuits argued that N.A.R., and brokerages that required their agents to be members of N.A.R., had set rules that led to an industrywide standard commission of 5 or 6 percent — one of the highest rates in the world. Without that guaranteed rate, agents will now most likely be forced to lower their commissions to compete for business.
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“U.S. commissions are unlikely to decline to the 1 or 2 percent rate level in England, where only one agent and an attorney are usually involved in a home sale. But they certainly will decline substantially, and commissions will also increasingly reflect the competence and efforts of agents on sales,” Mr. Brobeck said in an email.
Steering — the practice of agents directing buyers to more expensive houses — will be less common. Most of the databases where homes are listed for sale in the United States are restricted to dues-paying members who belong to N.A.R., a dominance that has led to antitrust allegations against N.A.R.
One N.A.R. rule demands that a listing agent, when posting a home on the database, clearly state the amount of compensation that a buying agent will receive should they bring a buyer. This is a practice that critics say has long led to “steering,” in which buyers’ agents direct their clients to pricier homes in a bid to collect a bigger commission check.
Under the settlement, any fields displaying broker compensation will be eliminated entirely, which will help damper the practice.
About one million real estate agents could leave the profession. The number of real estate agents swelled during the pandemic, when mortgage rates plummeted and the housing market boomed. In 2020 and 2021, more than 156,000 people got their real estate licenses, and membership in the National Association of Realtors hit a peak of 1.6 million members in 2022.
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A lot of that growth was predicated on the idea of easy money.
But now a lot of those agents are struggling, and a reduction in commission rates will only increase the pain. Half of the agents in the country sold one house — or no houses at all — last year. With the industry now staring down a massive overhaul, veteran agents predict their less experienced peers will leave the field all together.
Some analysts predict a mass departure. One widely cited report from investment banking firm Keefe, Bruyette & Woods projects 1 million agents leaving the field as shared commissions vanish.
“Veteran agents have built strong relationships, established reputations and extensive networks. Newer real estate agents may struggle,” said Jen McDonald, who leads LPT Realty in Reno, Nev., and has spent 24 years in the industry. “Without established reputations or strong clients bases, they are going to find it challenging to retain clients or attract new ones.”
