The Truth Behind the Headlines - NAR Settlement

by Erin Mara

Powerful Realtor Group Agrees to Slash Commissions to Settle Lawsuits - NY Times

Well... not reallly. Commissions have always been negotiable. The push here is to end the cooperative compensation model where the seller pays both buyer and seller broker commissions from the proceeds of the sale. How did we get here? Since way back, homesellers have been paying both parties because both actually worked for the seller. Up until the 1990's home buyers didn't have their own agent. The buyer's agent was a subagent and a fiduciary of the seller which meant that noone was looking out for the buyer's best interests. Real estate's version of the wild west. The 90's cooperative compensation model was born out of an effort to protect home buyers. It was a simple fix: the seller continues to pay everyone but the buyer has their own agent fiduciary. This has been going on for so long that commissions are baked into home values. What a mess.

In the past 24 hours the Washington Post has run a few articles equating the settlement to a lowering of housing prices. It's hard to see this coming to pass. It's also outrageous to insinuate that commissions are what's making housing so expensive. In terms of supply and demand, there are plenty of agents to go around (all negotiating each and every commission); what's sorely lacking is housing inventory. Are sellers and listing agents really going to reduce the price by 2.5-3% because the seller isn't offering the buyer's agent commisssion? Not in a competitive low inventory market like DC.

In my opinion the commission structure should be removed entirely. In what other profession do you see people working for months and incurring expenses without payment? On the listing side, marketing expenses run thousands of dollars. This high risk element of not knowing when and even if payment will come is a big part of what keeps commissions high. High risk, high reward. Home sellers benefit from this as well, i.e. no risk, because they have no money out of pocket until the home sells and proceeds are on the table.

So, while these were pretty murky waters, they kind of made sense.
What's next? Hard to say. Are agents going to work for less but with the same level of risk, effort and financial outlay? Not the good ones. It's the home buyers, especially those with limited means, who are really going to get hurt here. It seems likely that buyer agent commissions will eventually be rolled up into mortgages, but whether it's cash or financed, the cost of buying a home just went up.

Below are the Key Takeaways from the Settlement:

It is important to note that nothing is changing right now, as the settlement still needs to be approved by the court, which likely will not occur for many months.

Here’s a quick overview of what those proposed changes would look like:

New MLS Rules. A set of requirements for MLS subscribers that would go into effect in the second half of 2024. There will undoubtedly be lots of questions about how these will be implemented, but initial feedback is that they largely reaffirm common and best practices:

Buyers will continue to be able to be represented by REALTORS, who will need to have representation agreements that address how much they will be paid. In the DMV, buyers and their agents already use representation agreements so no change here.
What’s not changing: Sellers and their brokers will continue to have the option to pay the buyer’s broker.
What’s changing (late this year, if the settlement is approved):
- While MLS subscribers will continue to be able to offer to share their compensation with a buyer’s broker, no longer would that be allowed in the MLS (effective July 2024). Instead, those offers of compensation could still be made, albeit only through separate negotiation, as needed (like commercial brokers do today).
- And a new option will be added: A seller's agent will be able to enter into the MLS whether and what their seller client is willing to offer as a concession in the price, such as “$x towards a new roof and x% towards closing costs.”
- MLS subscribers WILL NOT be allowed to put a specific amount of buyer-broker compensation in the concession field. More to come on this point in the coming weeks.

The full settlement agreement is available here.

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Erin Mara

Assoc Broker | License ID: 662306, SP98376969, 0225223633

+1(202) 494-4092