Imagine you are looking to buy a new house. You look online and see a bunch, but don’t really know if they are right for you. You wonder how to even make an offer and do all the negotiation. You decide to find a real estate agent. After all, there is a big billboard down the street offering to help you buy your new home.
You walk into the agent’s office, where he tells you he will be happy to represent you, free of charge! What a great deal, you think. You sign the dotted line and your agent goes to work. What you don’t know is what is happening behind the scenes.
The NAR Lawsuit
On October 31, 2023, jurors in a federal courtroom in Kansas City determined that the National Association of Realtors® (NAR) and a few other national real estate brokers were liable for essentially colluding to set prices and inflate real estate commissions.
How Commissions Work
Agents do a lot of work. The seller’s agent helps advise about price and repairs. This agent pays for advertising and markets your property. The agent makes sure the house is ready for showing. They negotiate to get the seller the highest price. In return, the seller pays a percentage of the sale price to the seller’s agent. This is often 6% but can be negotiated when the seller signs the dotted line on their agreement. This aligns the incentives of the seller and agent – a higher sale price means a higher commission. So far so good.
The seller’s agent then markets the house. They might pay to put ads up online, or in those throwaway magazines they give out for free in the supermarkets (I’ve done this!). The seller’s agent offers the buyer’s agent a portion of the commission. This gives an incentive for the buyer’s agent to bring a buyer. That portion is usually 1/2 of the commission. If the commission was 6%, then the buyer’s agent gets 3%. All of this happens in the background and is rarely spelled out to sellers and buyers. It just happens after the closing of the property. The seller sees that he paid 6% of the final price to his agent and that’s it.
Where’s the Problem?
Imagine that your agent is looking around and finds a great house for you. One that meets all of your specifications. It’s in a great location and has everything that you want. The agent only finds one problem: the seller’s agent is only offering a 2.5% commission, when the buyer’s agent thinks it should be 3%. On a $1 million dollar house, that’s $50,000. So, your agent sends you over a list of potential properties, putting this low-commission house in a slightly-bad light, maybe talking more about the dated fixtures, or about how the layout isn’t great. Meanwhile, he is talking up the other ones. You see, he’s steering you to another property and you may never know it. This house is less likely to be sold and there is more incentive for other sellers to increase their commissions.
There’s more to it but the lawsuit alleged that this amounted to collusion between agents, to the detriment of their clients, whom they should have a fiduciary duty to protect. The alleged outcome would be that there are less buyers and sellers and commissions would increase. Further, the verdict was that the NAR and a number of large real estate brokerages’ practices encouraged this practice.
What Does That Mean for Me?
Not much yet. It’s expected that there will be multiple years of appeals and may finally go to the U.S. Supreme Court. Until then, expect to see individual brokerages making changes in how transparent they are about commissions in their agreements. This will mean more paperwork to do but not likely to change anything about the commission system for a few years.
The easiest solution would be that sellers negotiate and pay a commission to their agents and the buyers do the same. The problem here is that buyers’ and their agents’ interests are not fully aligned. Buyers want the lowest purchase price, but that would mean lower commissions for buyers’ agents. Another option would be that the buyer’s agent charges a fee up front based on number of showings and then another fee for helping with the negotiation. Or just a flat fee based on the size of house for which they are looking.
The bottom line is that you shouldn’t expect any seismic changes in the next couple of years. Before you sign, ask about the agent’s commission policy. Sign an agreement that you are comfortable with and ask for legal help if you need it.
