A landmark lawsuit against the National Association of Realtors (NAR) has the entire real estate industry abuzz with opinions and speculation on how it will impact the industry as a whole. Agencies, agents, and real estate boards are preparing for the effects of this one lawsuit that may permanently change the way firms conduct business.
Although it will have the most direct impact on real estate professionals, it will inevitably have repercussions for the average home buyer and seller as well. Here is an in-depth look at the NAR commission lawsuit and the upending of one of America's most popular professions.
What is the NAR Lawsuit Regarding Commissions?
Late last year, a Missouri court found the NAR and two top brokerages liable for $1.8 billion in damages for conspiring to keep realtor commissions artificially high. NAR is the largest organization of professionals in the country and a major lobbying group for the real estate industry. The two firms also named in the lawsuit were Keller Williams Realty and HomeServices of America, a brokerage owned by Berkshire Hathaway.
The suit initially included two other major real estate firms, but they settled out of court for $140 million. Those firms were RE/MAX and Anywhere Real Estate, the parent company of brokerages like Coldwell Banker, Century 21, Sotheby's, and Corcoran.
The suit argued that the NAR conspired with these top firms to keep realtor commissions artificially high, by forcing home sellers to pay a commission for both the buyers’ and sellers' agents. It's long been commonplace for the seller to pay a commission of 6% that is split equally between both agents.
However, the suit argues that sellers should not pay both commissions when they only receive direct benefits from their own representation. Even though realtor commissions are always negotiable, the plaintiffs argue that firms expect sellers to pay the 6% commission to gain access to the Multiple Listing Service (MLS).
The MLS is a comprehensive database that realtors use to share listing information. It's a powerful tool that can help homeowners sell their properties faster and for more money. So, the lawsuit argued that brokerages have been able to keep realtor commissions high by withholding access to the MLS.
The NAR and their co-defendants argued that sellers always have a right to negotiate. Plus, the practice of sellers paying both commissions has more to do with protecting buyers than enriching brokers. Home shoppers are already on the hook to pay for a down payment and closing costs that can quickly add up.
So, expecting them to pay a realtor commission out of pocket will only make the dream of homeownership even less affordable for many average Americans. The NAR has vowed to appeal the verdict and continue to fight the decision. However, other similar brokerage commission lawsuits have also started rolling in.
What is the REBNY Commission Lawsuit?
The Real Estate Board of New York (REBNY) received a similar complaint shortly after the court decided on the NAR realtor lawsuit verdict. A Manhattan property owner named Monty March accused REBNY and over two dozen of NYC's top real estate firms of working together to force sellers to pay the buyer's agent commission percentage. As a result, he paid an inflated commission when selling his home in the Upper East Side.
He argued that brokers should not require sellers to pay a 2.5% to 3% buyer's commission to use REBNY's listing service. The suit claims that commissions are lower in "fully competitive" markets like Brooklyn, where percentages are negotiated separately and average around 1%. The court has yet to rule in that case, and REBNY has stated that they plan to fight back. But the NAR buyers agent commission lawsuit may have opened the floodgates for similar cases.
Potential Impacts of the NAR Buyer Commission Lawsuit on the Real Estate Market
The lawsuits against the NAR and REBNY will inevitably impact the way homes are bought and sold. But it's difficult to know exactly how things will play out in the long run. Here are a few ways the NAR commission lawsuit may impact the market overall.
Sellers Agents Will Dominate the Market
When sellers split the commission evenly between the buyer and seller's agent, both parties receive fair compensation, making the process run more smoothly. But if that is no longer the case, they will inevitably favor their own representation because the buyer's agent isn't helping them directly.
Seller's agents tend to be more experienced. So, the NAR lawsuit may tilt the scale even further in favor of the seller's agents and lead to a consolidation of the market. A few top seller agents may control the majority of the listings. Meanwhile, buyer agents may begin to make less over time and eventually disappear, as experienced agents will not be willing to put in the same amount of work for less pay.
Buyers Won't Have Representation
Mukul Lalchandani, founder of Undivided, says that in a perfect world, the buyer would just accept the cost of hiring their own agent. But, in reality, most home shoppers can't afford to pay a commission on top of closing costs and a down payment.
A 3% commission on an average million-dollar home in Manhattan would equal $30,000,. Buyers also have to put down 10-20% of the purchase price as a down payment ($100,000 to $200,000) and another 2-5% in closing costs ($20,000 to $50,000). So the expenses can quickly add up.
In reality, many buyers are more likely to go without representation rather than pay the additional expense. However, that means not having someone in their corner to look out for their best interests and help them make an informed decision. It also means they may not see all the available inventory and know how to best move forward when it comes to buying a home.
Listing Prices May Not Change
Consumer advocates have argued that the NAR lawsuit may lower home prices. Sellers may be willing to accept a slightly lower price for their home or market it at a discount to accommodate the change if they don’t have to pay the additional commission. While this may happen in specific circumstances, the lawsuit is unlikely to have much of a significant impact on home prices overall.
According to Mukul, the conditions of the market determine home prices, not the rates charged by the professionals who work in the industry or closing costs. Sellers agree to a sale price after a meeting of the minds with the buyer based on market forces of demand and supply. The commission is paid after the fact. So, it seems unlikely that prices will suddenly drop by 1-2% if they don't have to pay a buyer's agent. In reality, they're more likely to keep profits for themselves, rather than drop their prices.
What Should Buyers and Sellers Do?
Although certain conditions of the real estate market are out of your control, there are a few ways you can prepare for the impacts of the NAR commission lawsuit. Here are a few tips for buyers and sellers.
Advice for Buyers
When you apply for a mortgage, ask your lender if you can include the cost of the buyer commission in the loan. Some lenders will allow you to roll the closing costs into the principal so you can pay over time. However, you should inquire as to whether this includes your agent’s commission.
Others may offer unique loan products that provide more favorable terms and can be used to finance the commission. Not all lenders offer these options, and you should always do your due diligence to ensure it's the best option for your circumstance. However, financing the commission may be preferable to paying out of pocket or proceeding without representation.
Advice for Sellers
Although the prospect of not paying an additional commission may sound tempting, buyer's agents provide more value than you may realize. Even if they aren't serving you directly, they still help to ensure that you have a steady stream of customers coming through the door, which can impact how quickly you get an offer and how much you get for your home.
If seller John is paying a 3% buyer's commission and seller Wayne is only paying 1%, you can count on John seeing more buyer traffic through the door. Increased traffic may result in a higher price that justifies the higher commission, depending on the circumstances.
How to Navigate the Real Estate Market in 2024
When in doubt, it helps to have an experienced partner by your side to ensure you make informed decisions and stay up to date with any changes in the market. If you are looking to make a move this year, reach out to our team at Undivided. We are experts at helping buyers and sellers navigate the real estate market at every turn. Our first-class service ensures an exceptional and seamless journey from beginning to end.
