Jackson Reiter, Daniel Popov
Apr 18, 2024
For decades (almost a century), when you sold a house, you were traditionally locked into paying a commission fee, split between your selling agent and the eventual buyer's agent, usually totaling around 5-6%. As of 2023, this figure hovered at about 5.5%. This system meant a significant chunk of your home sale's proceeds didn't end up in your pocket but were rather distributed as commissions to agents enabling the sale.
There is certainly a lot more to talk about when it comes to how these commissions in general hinder homeowners’ ability to save money in the long term, but we’ll save that for another time.
Background on the NAR Lawsuit
Cut to the end of 2023.
The National Association of Realtors (NAR), alongside some of the U.S.'s largest brokerages, finds themselves at the center of a legal storm. The biggest case among these, dubbed Sitzer-Burnett, demanded a staggering $5 billion on behalf of homeowners. The claim here being that the traditional required commission system was collusive and financially unfair to buyers and sellers who had no other option for access to the real estate market.
While several brokerages such as Anywhere Real Estate (who operate brands such as Coldwell Banker) settled relatively quickly for pennies on the dollar, fast forward to March 2024, and we see the NAR settling for a whopping $418 million. But this isn't just about the money. It's a pivotal moment that could redefine the entire real estate brokerage system. Under the new rules set in the settlement to take effect in July 2024, the traditional requirement for sellers to offer a set commission to the buyer's agent via MLS listings is out the window. This now soon-to-be-dead practice had only remained this long due to fears set on the sellers by their listing agents that if they did not offer the standard commission, buyer's agents would direct their clients away from that property, a process known as "steering."
There are many additional stipulations in the settlement beyond just cash, but the most important being that sellers will no longer be forced to offer or pay exorbitant commissions to buyers agents. Instead, they will be allowed to have an honest negotiation at the time a buyer comes through the door. This settlement marks the beginning of potential long-term changes in real estate industry practices. Most pressingly, we are about to see some rapid changes on the buy side of the equation.
The Immediate Impact on Buyers
1. Sharp Decline in Commissions
With buyer commissions now effectively decoupled from the listing itself, the first thing consumers are going to see is a dramatic drop in buyer's agent commissions. If part of the negotiation between buyer and seller now includes a discussion about how much the seller will pay for the buyer’s agent, many buyers will be worried about this might be a hill they lose the home over. At a macro level, this will put significant downward pressure on the rates buyer’s agents can expect.
As a former buyer's agent myself, I can attest that the industry has long viewed this role as an entry point for newcomers. Because of this, listing agents probably won’t lose much sleep nor go to bat to defend buyer agent commissions as they fall. This cumulative reduction in overall seller cost could, paradoxically, make the market more competitive for seller-focused agents, who can now tout lower overall costs as a selling point to list with them.
2. A Change in Commission Calculation
In a market where homes in general are increasingly less accessible to buyers due to rising costs and stagnating earnings, the added barrier of having to negotiate your own agent’s commission with a seller adds yet a deeper hurdle to homeownership. Some buyers, especially those with more financial flexibility, might opt to pay their agents directly, sidestepping the old commission model or further negotiations entirely. However, this is not a viable option for the majority of buyers, most of which are already struggling to save for a down payment as home prices continue to not find a peak.
A solution many buyers will look for, in this case, is to find agents that offer flat fee or hourly rates. This will offer buyers more control and potentially make the agent’s role more akin to other professional services where the value dictates the fee, not tradition. Think about the difference between doing your taxes online by paying a flat fee to TurboTax, compared to hiring a CPA who may take a significantly higher piece of your eventual return.
3. The Optional Nature of Buyers Agents
Beyond the immediate financial implications, the fallout from the NAR lawsuit ignites a broader debate on the necessity and role of buyers' agents in a digital age where most buyers scout their own properties online. With more information and resources than ever at their fingertips, buyers are empowered to navigate the real estate landscape with an unprecedented level of autonomy. This empowers them to make decisions that align with their best interests, not rigid NAR requirements or outdated agent demands. This shift could see realtors, specifically on the buy side, offering a spectrum of services, from basic to premium, tailored to the diverse needs of today's homebuyers.
So, with commissions now flexible in terms of hourly rate or flat fee, consumers are better informed than ever before, and buyers have more access to resources that empower their own position in the market; it begs the question: will buyer’s agents continue to exist? The answer is, probably, but in a much-reduced volume and capacity. We could potentially see a full pareto contraction in the number of buyer’s agents, with only the 20% operating in luxury, high-end, or specialty cases remaining (as they probably should).
The Future
This is all truly a profound transformation in how real estate transactions are conducted. The move towards optional buyer's agent services heralds a broader reevaluation of traditional roles in the industry, really putting the pressure on for realtors to redefine their value proposition.
As the industry grapples with these changes, it's clear that the role of technology and informed decision-making will only become more critical. There will certainly be a lot of pushback from the most traditional parts of the industry as subpar agents are pushed out, but as the dust settles, most people will realize the convenience of this new standard. Buyers will likely only need to rely on attorneys for the finer points of securing a property, as they largely already do when buying a house.
Additionally, with the prevalence of AI and online resources, buyers have access to a wealth of information and power at their fingertips, enabling them to make more informed decisions throughout the buying process. By embracing these new realities, buyers can confidently and easily navigate the real estate landscape, achieving their homeownership goals with never-before-seen autonomy.
If the reality is that technology and access to information can logically lead to buyers agents being phased out, how long will it be before we see a similar, or more dramatic shift on the sell side? Again, a topic for another time.
What Comes Next
So what does all this mean for your home journey?
This transition period in the real estate industry represents an opportunity for consumers to engage with the market on new terms, armed with more knowledge and better control. Whether you're buying, selling, or simply observing, the landscape is evolving rapidly. Embracing this change, leveraging new technologies, and staying informed will be crucial for anyone looking to navigate the future of real estate successfully. This is a time of challenge, but also of great opportunity.
The question now is, how will you adapt? For both buyers and sellers, this could mean more freedom and potentially higher profits. Not only that, but it opens up a world where self-representation is not just possible but the norm.
Those who embrace change and leverage new technologies and strategies will position themselves for success in the post-lawsuit market. This may seem like a new wild west in real estate, but through all of the chaos and disruption that is about to happen, it's a guarantee that gold will be found.
