Homebuying and real estate commissions are about to change in big way

A recent jury verdict against the National Association of Realtors and large residential brokerages could upend the residential real estate industry. 

The real estate compensation model is at the heart of the issue. Plaintiffs contend that commission rates are too high, buyer brokers are being overpaid and NAR rules, along with the corporate defendants’ practices, lead to fixed pricing. By contrast, NAR contends the rules promote competition and efficient, transparent and equitable local broker marketplaces. 

NAR, whose CEO left shortly after the landmark court loss, is appealing the $1.8 billion jury verdict, so it could be several years before the case — which covers the Missouri markets of Kansas City, St. Louis, Springfield and Columbia — is resolved. But coupled with similar lawsuits that are in process, the potential for policy changes that could impact realtors’ pocketbooks is palpable.

The impact on the market continues to spread. Shares of Re/Max Holdings, for example, were down over 8% on Tuesday amid fears of litigation, even though it had settled with plaintiffs before the recent NAR case verdict.

Here’s what real estate agents, homebuyers and sellers need to know about potential changes in residential real estate economics.

A bad time for bad news in real estate

The jury verdict comes at a time when many real estate agents are already feeling a pinch.

The rapid rise in interest rates caused by the Federal Reserve’s fight against inflation recently led to the 30-year fixed mortgage average rate topping 8%, exacerbating an existing affordability crisis in the U.S. housing market. Potential sellers don’t want to move if they have to contemplate a mortgage rate as much if not more than double their current one, while millions of potential homebuyers can’t make the monthly payment and are currently shut out of the market.

Existing home sales recently dropped to their lowest level since 2010. According to an October report from University of Colorado Boulder scholar-in-residence Mike DelPrete, existing home sales are on pace for 4.15 million transactions this year, based on NAR data, which would be down from over 6 million in 2021 and 5 million in 2022.

At a time when home sales are already under pressure, “this lawsuit is just another punch in the gut for real estate franchises,” said Bill Gross, a self-employed real estate broker associate in California with eXp Realty.

Thus far, there’s been little-to-no trickle-down effect for individual brokers and agents as a result of the legal proceedings, but that may not be the case forever, depending on how legal battles, taking place on multiple fronts, shape up. An analysis from Keefe, Bruyette & Woods analyst Ryan Tomasello published last month, before the jury verdict was reached, estimated a 30% reduction in the $100 billion paid in real-estate commissions annually and as many as 1.6 million agents losing their source of income.

Pressure on transaction fees will increase

Fees generally have been under pressure for the past number of years, with technology leading to more transparency and the recent court battles intensify that industry pressure.

Also, as home prices have gone up, the fees are more apparent relative to the deal size, said Gilbert J. Schipani, founder of Tempus Fugit Law, which represents buyers, sellers, realtors, lenders and businesses through commercial and residential real estate transactions.

Lawsuits focused on fees reinforce the general trend of trying to lower fees in the real estate market, Schipani said. 

“It’s another step in the direction that we’ve been going for the past 10 years,” he said.

As the court cases progress, there’s likely to be more disclosure around fees in the future, for transparency purposes, he said.

As Glenn Kelman, CEO of tech-led real estate brokerage firm Redfin recently wrote, “In the weeks leading up to the verdict, the National Association of Realtors already updated its guidelines to let agents list homes for sale that don’t offer a commission to the buyer’s agent. … Traditional brokers will undoubtedly now train their agents to welcome conversations about fees. … This is as it should be.”

RedFin, and another tech-focused realty brokerage firm, Compass, are among targets added to new legal challenges.

Buyers agents could be the biggest losers

Plaintiffs argue that buyers, not sellers, should foot the bill for the buyer’s agent, but that could have an untoward impact on how readily buyers’ agents are used.

“If plaintiffs had their way, home buyer representation would be a thing of the past in what is for many the most significant and complex purchase they will make in their lifetime,” said NAR spokesperson Mantill Williams, in an email.

If courts force today’s norms to change, more home-buyers are likely to try finding properties on their own to save money, and bargain with listing agents, thinking they’ll get a discounted fee since the latter is already being compensated by the seller, Gross said. 

Not all real estate professionals will agree to work both sides of a deal because of the “inherent bias,” but it could happen more often depending on how the market shapes up, Gross said. There’s also the possibility that new rules imposed by courts could prohibit real estate professionals from working both sides of a deal, Schipani said.

Kelman noted in his post-verdict analysis that if buyers still hire a buyer’s agent, they’re likely to negotiate a lower fee given the heightened focus and because it may no longer be part of the home price, which allowed it to be financed by a mortgage. 

This also suggests new agents may be less likely to enter the industry, according Gavin Myers, managing partner at Prudence, a venture capital firm that invests in the real estate sector. Most new agents start on the buy side and there’s a risk when you’re trying to break into the industry. If there are questions about how they get paid, or if they’ll get paid, people might not want to work on the buy side, or you might not find high-quality people, Myers said.

Local housing market changes will be key

Local market rules could change based on what’s happening in the courts, or broader market shifts. 

For example, the Real Estate Board of New York (REBNY), which is unaffiliated with NAR, recently announced upcoming changes to its rules, in a stated effort to promote transparency and consumer confidence in the residential marketplace. The changes, which had been in the works for months, were voted on in October.

Starting Jan. 1, offers of compensation to buy-side brokers must originate from the seller/owner, according to the change. Listing brokers will no longer be permitted to make the offer of compensation to the buy-side broker, even on the seller’s behalf. Also, listing brokers will no longer pay the buy-side compensation. Rather, the buyer’s broker will be directly compensated by the seller or owner of the exclusive property, which should occur at the closing as is customary in the New York City area, the group said.

“Decoupling the buy side compensation represents the future of how residential real estate is transacted, and expect other listing services to follow this lead,” REBNY said in a FAQ on its website discussing the changes.

Commissions are already negotiable

Right now, real estate professionals don’t have to change their way of doing business, while legal challenges are ongoing. But NAR strongly recommends the use of buyer representation agreements for clarity and understanding purposes. NAR also urges members to continue to tell clients that commissions are negotiable and set between brokers and their clients.

A separate suit against NAR and brokerages, involving multiple markets, could go to trial next year, and there’s also another recently filed nationwide lawsuit to contend with.

“No matter what happens with the Missouri judge, or in any other courtroom, one thing is certain: there’s no going back to the way things were,” Kelman, whose company left NAR before the verdict, wrote in his recent post.

Real estate professionals should stay tuned.

“This is a time to read the fine print, stay as informed as possible both for the sake of your business as an agent and for your client’s best interests,” said Vickey Barron, a licensed associate real estate broker with Compass in New York City.