Listen to this articleThe much-anticipated rule changes for residential real estate brokers are now in effect across the country, though their impact on commissions is still unclear.
The changes are a result of a $418 million settlement that the National Association of Realtors (NAR) agreed to in March to resolve several class-action lawsuits that challenged the industry’s cooperative compensation structure.
The lawsuits, filed by groups of home sellers, claimed that they were forced to pay artificially inflated commissions to agents in the sales of their homes, mostly due to part of the commissions going to compensate agents representing homebuyers. A jury ruled in favor of the plaintiffs last fall and ordered NAR and several major brokerage firms to pay $1.8 billion in damages.
As part of the settlement, NAR agreed to change some longstanding rules regarding commissions, specifically that listing brokers representing home sellers won’t be allowed to offer compensation to a buyer’s agent through multiple listing services affiliated with NAR. Traditionally, commissions have been split between listing brokers representing the seller and the broker that brings the buyer, which will continue, as buyer agents can still be compensated for their services in multiple ways, including a fixed-fee commission paid directly by consumers. However, agents who are multiple listing service participants representing buyers must now enter into written representation agreements upfront with buyers that details their services and what they’ll be paid, including whether it’s through a commission split with a seller’s agent.
The terms of the settlement have caused major confusion, with many claiming that home sale commissions are now negotiable, which, in fact, has always been the case. The changes took effect for members of the Long Island Board of Realtors (LIBOR) and OneKey MLS on August 8.
Kevin Leatherman, owner/broker of Rockville Centre-based Leatherman Homes and president of LIBOR, said there is still a lot of misinformation out there.
“You have every state legislature looking at their agency laws to see how they want this handled in their state,” he said. “This is far from over.”
Leatherman added that the U.S. Department of Justice (DOJ) still has to approve the NAR settlement this fall.
“I think the DOJ is going to come out with a sledgehammer, because they don’t like commission sharing,” he said.
In the meantime, LIBOR and brokerage firms have created new forms for their members and agents that reflect the new rules, with the LIBOR forms not only covering the settlement requirements, but also requiring de-coupling of commissions.
“Most people are doing what’s called roll-ins. The seller is not setting the rate of pay for the buyer’s agent, but they’re rolling it in with the offer so they’re including it in the purchase price,” Leatherman told LIBN. “So, it’s going to come out of the purchase proceeds, because the buyer is funding the broker fee through the purchase price.”
Leatherman said another compensation method is where the listing broker charges a total commission, and they share a portion of that with the buyer’s brokerage. He added that another misconception of the new rules is that the buyer must sign an agreement with a buyer broker before they can look at a property. Buyers can still go to an open house without a written agreement, or they make an appointment to see a property with the listing agent’s brokerage firm.
And despite media pronouncements about homebuyers saving money on commissions, Leatherman said it’s going to cost a buyer the same amount to buy a house and the same amount for the seller to sell a house.
“There’s no new money here. Our commissions will likely go higher. It is much more challenging right now and a lot more work to service the buyer correctly than it is to service the seller,” Leatherman said. “So, these buyer agents, when they’re negotiating their rate, trust me, it’s not going south, it’s going north. And a lot of agents are saying ‘if you’re not going to pay me what’s fair and reasonable, I’m going to walk.’ This island’s in for a rude awakening because when you listen to all the news media that says commissions will go down, they’re not. They’re going higher, because the skillset and job requirements for the agents has just increased.”
Though the NAR settlement covers most of the brokerage firms that are members of the trade group and releases them from liability from lawsuits, those firms that had gross sales of more than $2 billion in 2022, which includes a few major brokerage companies on Long Island, were not covered by the NAR settlement.
Several companies behind major brokerage brands, including Compass, Re/Max, Anywhere Real Estate, Home Services of America, Redfin and Keller Williams, have agreed to pay millions in their settlement agreements. Other brokerage firms that don’t make their own deals with the plaintiffs can join the NAR settlement by paying into the settlement fund, with the amounts determined by a percentage of the brokerages’ sales volume.
But those brokerage firms that didn’t participate in the NAR settlement or make their own agreements could be liable for future claims. Some law firms have already started advertising that they can recover money that sellers paid in commissions to brokerage firms in the past few years.