Will a settlement agreement between the National Association of Realtors and home-sellers precipitate sweeping changes to the industry or cause more modest adjustments?
After a Missouri court ruled last year that the NAR, Keller Williams Realty and Homeservices of America were liable for $1.8 billion in damages for conspiring to inflate commissions, the entities committed to changing their practices according to a CNN article. These groups decided to settle the case for $418 million earlier this month rather than appeal it to a higher court and agreed to make changes to their practices as part of that agreement.
Despite news articles framed around the end of the 6% commission and seismic changes to the industry, Lake Oswego real estate agents are optimistic they will weather the impact and confident that the quality of service they provide will keep business humming moving forward.
“Longterm, big picture wise, I believe this is going to be a benefit for our industry,” said Tony Kelly, the president of the Portland Metropolitan Association of Realtors.
A more competitive environment?
Kelly said that, along with the initial lawsuit, there had been close to 20 copycat lawsuits across the country. And he said that the settlement was a way for the NAR to put the issue to rest for the sake of its agents.
“As long as this was hanging over the industry’s head it exposed large brokerages, small brokerages to, ‘Are we going to be subject to a lawsuit and have to use personal funds to defend the lawsuit?’ I think NAR looked at the big picture and said, ‘We need to make this thing go away to protect our agents.’ It’s not necessarily an admission of guilt,” he said.
Norm Miller, professor emeritus of real estate at the University of San Diego, told CNN that the agreement could be the biggest change to the housing market in over a century and could lead to a decrease in housing prices. And some say the changes, like not allowing the buyer’s agent to post their commission on listing services and eliminating the mandate that the seller has to pay the buyer’s agent commission, could lead to a more competitive real estate environment and one that could lessen costs for customers.
According to the CNN article, the changes could cause some agents to offer a flat fee rate rather than collecting a percentage of the home sales price — or they could offer a discount to the typical 5-6% rate agents have become accustomed to earning.
However, Kelly, Justin Harnish of Harnish Properties and Terry Sprague of LUX Forbes Global Properties did not expect reverberations to be as seismic.
Kelly and the other real estate agents noted that there was never a fixed rate that agents had to charge and varied pricing was always possible. Kelly said he would see commissions up to 8% when he started in the industry decades ago but that they have generally fallen since then.
“There is no cartel where the NAR dictated, ‘This is what the commission is going to be.’ It’s a completely specious argument. I’ve never been privy to any conversations where anyone said, ‘Let’s fix our commissions,’” Kelly said.
Specific changes for a buyer’s agent
One of the main adjustments brought about by the agreement, according to an article in Vox, is that the commission of the buyer’s agent would not be allowed to be predetermined. Sonia Gilbukh, a real estate professor at City University of New York, told Vox this eliminates the power of the buyer’s agent to guarantee they get a certain percentage commission based on the possible threat they could withhold showing a seller’s property to their client.
Harnish also mentioned the elimination of buyer agent’s ability to show their commission on real estate listing services and noted that the seller will no longer automatically be the one to pay the buyer’s agent. A seller would also need to reach an agreement with an agent before a property is posted on real estate service, according to the agreement.
“Currently as a buyer’s agent you look at listings and find out what is best for your client and you see the advertised buyer’s agent commission — what you will earn if you sell this home,” Harnish said. “The advertisement of the buyer’s agent commission will go away. The buyer’s agent will still get compensated, but will it be by the buyer or the seller? That remains to be seen. That depends on how the listing agent and buyer agent negotiate with the seller.”
He also felt that dual agency, with the buyer and seller represented by the same person, may become more common.
Kelly, though, said that the supposed practice of the buyer’s agents only showing homes where they were guaranteed a high commission is not commonly done and is bad for business anyway.
“As a good agent you’re always driven by, ‘What is a home that is best for my client?’ Business comes from repeat business and referrals and that comes from doing an exceptional job for clients,” he said.
Paying more for better service?
Though rates were already negotiable, some have posited that these changes could lead to lower compensation for real estate agents and agents may be more greatly incentivized to lower fees to attract customers. Sprague and Harnish felt that those offering lower fees likely would provide a lessened quality of service and that people shouldn’t cheap out on purchasing services related to an investment so key to the finances of many families.
Sprague compared real estate to legal advice. While people could save money by using a service like LegalZoom, those who can afford it often opt for the best lawyers who charge higher rates.
“If there are brokers that want to work on a lower fee basis to represent you, this is a great opportunity to create that business model. I want those models to perform. For me, I am confident knowing that kind of model can’t duplicate the success I create for clients,” Sprague said, adding that he did not foresee lowering commission fees.
Other factors impacting industry
Harnish disagreed with the notion that the settlement will have a major effect on the real estate profession, saying that he’s already seeing people leave the industry due to interest rate increases that have cooled home sales.
“People will look at this (the agreement) and say this was the cause of it. But actually interest rates were the cause of it,” he said.
Kelly posited that some subpar buyer’s agents may leave but that those who do a good job will stay.
According to the CNN article, sellers pay more than $25,000 in commission for the average price of an American home, which is $417,000, and these fees prop up housing costs. Harnish and Sprague disagreed with the import of that notion. And Sprague added that fee rates likely would only decline a couple percentage points in certain places.
“To suggest that if you could eliminate 2-3% on the expense of housing (from agent fees) that’s going to dramatically shift the access to affordable housing or supply and demand, I don’t see it changing supply and demand at all,” he said.
Sprague also did not think home-sellers or buyers should take the agreement into significant consideration.
“I think nothing should change. I think you should evaluate your own personal circumstances and you should put together a strategy that will maximize the event (selling or buying a home) for you,” he said.
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