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The National Association of Realtors (NAR) agreed to a settlement last week that will eliminate its rules on sales commissions. The deal, if approved by the federal court, is likely to shake up the real estate market and could potentially decrease housing prices across the country.
Anthony Panebianco, a real estate attorney at Davis Malm Attorneys, told BiggerPockets that the settlement is unsurprising, as a judgment would have likely led to the NAR’s bankruptcy.
“The elimination of the mandatory cooperative compensation model was predicted before this settlement and now is guaranteed,” he added.
The NAR agreed to pay $418 million in damages and implement new rules by July that will change how real estate brokers are compensated. One rule would prohibit brokers from offering compensation on the multiple listing service (MLS), which critics say led to brokers pushing more expensive properties on buyers. Another rule would require buyer-brokers to enter into a written agreement with their buyers.
“It has always been our goal to preserve consumer choice and protect our members to the greatest extent possible. This settlement achieves both of those goals,” Nykia Wright, interim CEO of NAR, said in a statement.
An End to the Traditional Commission Model?
The change to NAR rules essentially means the end of the standard 6% commission rate for brokers, and commissions are expected to be cut by as much as half.
In turn, this could open opportunities for alternative selling models. These could include an increase in models that already exist, such as flat fees and discount brokerages, or even completely new models, Nick Narodny, founder and CEO at real estate startup Aalto, told BiggerPockets.
“They could be everything from subscription to flat just giving consumers more of a power of choice and the representation of buying,” he said.
With all the current issues facing the NAR, Panebianco said there would be traction if other groups were to try to step in and offer other models.
“Now would be a good time if an entity was so inclined to come up and say we’re different than the NAR, and we will lobby on your behalf and be able to better predict what the future holds,” he explained.
Some brokers feel the news could improve the industry, as less experienced brokers are likely to leave. And the decoupling will also mean more transparency in an often complicated commission system.
“Real estate investors will benefit from only the savviest agents remaining in the industry,” Michael Martirena, founder of the Ivan and Mike Team with Compass in Miami, told BiggerPockets.
Martirena said this will lead to a “collective leveling-up in terms of education, information, and client service,” as agents can help clients with no hidden costs. “The transparency will benefit investors as much as consumers,” he added.
What This All Means for Real Estate Investors
The NAR’s settlement isn’t the end of the compensation debate. While the NAR rules apply to just agency members, not all databases require membership. Other real estate companies, such as RE/MAX and Redfin, have gotten rid of requirements for agents to be part of the NAR in response to numerous lawsuits.
The Department of Justice (DOJ) is still continuing its investigation into the NAR, including its MLS, which it has questioned for stifling competition and potentially going against antitrust laws. In a statement of interest related to the commission lawsuit, the DOJ advocated for an end to cooperative compensation.
Narodny said he doesn’t see the DOJ allowing the settlement to stand. “They want commissions to be decoupled, not have the rules be changed,” he said. “I think we’ll see true change by this summer, and I think commission will be decoupled. This means buyers have to pay their own way, and potentially investors have to pay fees out-of-pocket.”
It’s widely believed that the changes will also help bring down the costs of financing or even overall home prices, which could be welcome news, as the market has been beset by record-high prices over the last few years. Some buyers may even opt to forgo an agent completely.
Brokers are likely to get paid somehow, even if the price structure changes. While the elimination of buyer’s broker fees should be seen in the purchase price, “I’m skeptical of that being a reality,” said Panebianco. “The market sets the price, rather than the machinations of how the industry conducts a deal.”
Final Thoughts
Still, industry experts are hopeful that in the long run, the NAR settlement will ultimately be a win for the real estate market.
“With the ability for buyers and investors to now favorably negotiate with their broker on commission fees as a result of the NAR settlement, we are likely to see an increase in the volume of deals, which has been generally on a decline for the past few years,” said Panebianco.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
