Earlier this month, the National Association of Realtors – the trade group representing the real estate industry – agreed to pay $418 million in damages to settle a series of antitrust lawsuits and eliminate its rules on commissions. A group of home sellers claimed the decades-old National Association of Realtors home sales guidelines forced sellers to pay excessive fees.
While many people are calling this a landmark settlement that could shake up the industry, others remain cautious while waiting for the dust to settle.
Newly appointed executive director of the Wilbur C. Henderson Real Estate Institute in Drexel University's LeBow College of Business, Carter Murdoch, PhD, shared his extensive expertise as a real estate agent and executive in real estate, and what this settlement agreement will mean for different segments of the industry – from the real estate agents to home buyers and sellers.
Can you briefly describe the lawsuit?
The Sitzer/Burnett verdict, along with several other cases, claim antitrust violations by several of the largest real estate brokerages and the National Association of Realtors for controlling/inflating sales commissions. The primary issue is that buyer agent fees, or commissions, are published in the multiple listing service (MLS) and detailed in the listing agreement (paid for by the property seller). This has been a widespread practice since the early to mid-1990's when "buyer's agency" was implemented.
The concept of buyer's agency has merit, as it was intended to remove potential conflicts of interest by having buyer's agents declare in writing that they represent the "buyer" not the "seller" who is going to pay the buyer's agent commission. The challenge: the buyers fee, or what is commonly called the cooperating fee, paid to the buyer's agent became standardized at a market rate and typically was not negotiated. This makes sense, as a below market buyer agent fee would alter showing behavior and result in those homes with less-than-market buyer agent commissions either being shown last or not shown at all. Keep in mind, the published buyer agent fee in the MLS is only seen by the licensed personnel with access to the MLS and NOT by the buyer themselves.
What does the settlement mean for different segments of the industry?
Home buyers will either need to hire their own buyer representative (pay them directly and negotiate that fee with the buyer agent) or transact without an agent (primarily through homebuilder sales representatives or for sale by owner). Agents have stayed at the center of the real estate transaction as a result of a very complex process that expertise is generally needed to navigate. Hence, why the real estate agent has not been disintermediated.
First-time home buyers will be the biggest losers as they will need to have additional savings to pay their buyer's agent to assist with the transaction. This is a material change, as previously the seller paid both the listing agent and the co-operating, or buyer's agent, for the transaction. This will likely result in 2-3% additional down money for a first-time home buyer. This is material and will slow the "top of the pipe" as first-time home buyers enable other buyers to sell their existing home and move up and/or move down based on needs.
Sellers will benefit as they would not be paying the buyer's agent to assist with the sale. There has always been a natural conflict between buyer's agents who represent and negotiate for the buyer and are paid by the seller. It is being reported that the cost of homes will come down as the seller does not need to pay a competitive market co-operating fee to the buyer's agent. I do not believe this will be the case, and if there is some price relief in the market, it will be negligible.
For real estate agents, it will become very awkward, amazingly fast negotiating a buyer representative fee with your realtor family member or friend since you (the buyer) will be paying them directly. The result, the buy side paid commission will come down – meaning overall realtor commissions will come down over time by up to 1% of the sales price. That said, top agents will continue to demand premium pay for being a buyer representative and their overall commissionable income might not be as impacted.
There's been mention of this settlement leading real estate agents to leave the industry. Do you think that will happen?
Think of real estate as the "10/90 rule": 10% of agents do 90% of the business. There are currently 1.5 million realtors in the U.S. The average agent transacts 6.5 sides per year (there are two sides in each transaction: The "sell or listing side" and the "buy side"). But again, top agents pull up the average. For example, Re/MAX agents average 13.5 sides per year as they attract the top performing agents with a 95% commission split model.
So, for agents who produce one or two transaction sides per year, it may not be lucrative to stay in the business. So yes, some part-time agents will likely leave the business as there will be some downward pressure on commissions especially on the buy side of the transaction.
Who is benefiting from the settlement? Who is not?
Primarily, the lawyers will benefit in a large class action suit – as the splitting of the pot among 5.5 million home sellers per year over some period will result in very small payouts to sellers, while the lawyers will make 25-33% of the settlement.
In the long term, it's the homebuilders who will benefit significantly as they will no longer need to offer commissions for buyers' agents. Meaning, they can contract directly with the buyer and or work with the buyer's representative to contract the sale. If the builder is working with the buyer's agent or representative (could be an attorney or other professional) then the buyer would need to compensate them directly.
Media interested in speaking with Murdoch should contact Annie Korp, assistant director, News & Media Relations, at 215-571-4244 or amk522@drexel.edu.
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