Real estate fees are changing. What that means for homeowners and buyers

After living nearly three decades in the Reno-Sparks area, Mark Waterman felt that the Biggest Little City was becoming a lot less little and a whole lot bigger.

“All the building and the traffic is getting hectic here,” Waterman said. “So we wanted to move to a little bit slower-paced town.”

After looking around, Waterman and his wife, Pamela, decided to move 300 miles east to Spring Creek, a rustic community just south of Elko. Waterman thought the town of about 15,000 people with its large stretches of brush and picturesque mountain backdrop was perfect.

“I’ve always liked that area,” he said. “I used to go deer hunting up at the Ruby Mountains over there.”

The Watermans soon found a house they liked. While going through the paperwork for the purchase, however, something caught Waterman’s eye. The contract indicated that they were on the hook for paying a commission.

Waterman balked at the idea.

When he bought his Sparks house 28 years ago, Waterman remembered the seller paying for both agents’ commissions. For his Spring Creek home purchase, Waterman also dealt with the seller’s agent directly and did not have a buyer agent that had to be paid.

“The Realtor said, ‘Oh, that was my mistake,’” Waterman said. “When you’re signing documents, you have to double check and make sure about what you’re reading.”

The clause informing buyers about paying for agent compensation is one of the effects of a legal brouhaha that has embroiled the residential real estate industry for the last five years.

On Aug. 17, the National Association of Realtors will implement changes that its members must follow as part of a sweeping $418 million settlement over its practices. The changes are in response to several class-action lawsuits and an antitrust case filed against NAR by the Department of Justice. A judge will still need to provide final approval to the settlement, which is expected in November.

The changes include “conspicuous disclosure” of how real estate agents will be compensated. The new written agreements must also inform consumers that broker fees and commissions are “fully negotiable.”

The changes are supposed to make the process of buying or selling a home more transparent. Critics, however, question if they go far enough and actually balance the scales for consumers.

One potential concern from the Consumer Federation of America is whether the new written agreements actually force buyers to become legally bound to pay for commissions, especially if they end up signing agreements that they do not fully understand.

“Everything is loaded in the industry’s favor in the contracts,” said Stephen Brobeck, a senior fellow at the Consumer Federation of America.

“No consumer has a chance. You don’t have a chance and I don’t have a chance.”

The NAR settlement and agent commissions

At the heart of the NAR settlement is the commission structure that served as the standard for agent compensation for decades.

The current structure, where the seller pays for both agents, became widely adopted starting in the 1990s, according to real estate professional Beau Keenan. Keenan is president and owner of Dickson Realty, a real estate company that operates in Northern Nevada and Northern California.

Before the current system gained acceptance, listing agents used to have sub-agents that looked for buyers, Keenan said. That approach proved to be problematic, however, because you essentially had the same agent representing both sides of the transaction, a situation known as “dual agency.”

“It’s a conflict because you can’t represent any one side with the best intentions knowing that the seller wants to get the most (for the price of home) and the buyer wants to get the least.” Keenan said.

In that sense, the current commission structure that separates the buyer's agent from the seller’s agent was a good evolution, according to Keenan. The seller would pay a percentage of the sale as commission, usually between 5% to 6%, which would then be divided between the buyer’s agent and the seller’s agent, typically in a 2.5% or 3% split.

The fact that the seller is paying for both agents, however, can still be seen as a problem, Keenan said.

The issue would come to bear in 2019 when Minnesota home seller Christopher Moehrl filed a lawsuit against the National Association of Realtors and four large real estate brokerage firms — Keller Williams, Home Services of America, Re/Max, and Anywhere Real Estate — over allegations about inflated commissions. A month later, home sellers Joshua Sitzer and Amy Winger would also file suit after they ended up paying the buyer’s agent more than their own agent. The lawsuit would become known in real estate circles as the infamous Sitzer-Burnett case.

Both cases would open up the floodgates to a string of class-action suits against the industry giants.

“(The lawsuits) essentially said, ‘We don’t like that model. We want the buyer’s agent to be directly paid by the buyer,’” Keenan said.

The idea was to decouple the buyer and seller commissions from each other and make consumers more aware about how an agent can get paid and what part of the transaction was negotiable, according to Keenan.

Re/Max, Keller Williams and Anywhere Real Estate, which also operates Coldwell Banker, Century 21 and Sotheby’s, settled their cases for a total of $208.5 million. NAR would follow with its own settlement agreement while Home Services of America would settle last for $250 million.

Under the terms of the agreement, people who sold a home through a multiple listing service or MLS during a specific time frame are eligible to receive compensation.

The Consumer Federation of America's Brobeck called the settlements a good first step in addressing the industry’s issues.

One of the biggest effects of the lawsuits and ensuing settlements is that they caught the attention of the average person, according to Brobeck. It put commissions on people’s radar.

“When consumers don’t know what’s going on, unethical agents get away with murder,” Brobeck said.

National Association of Realtors pushes back against collusion allegations

NAR pushed back against claims that the settlements were proof of nefarious deeds within the industry.

Each of the settlements included a statement that they were not an admission of liability by NAR and the other real estate firms.

Earlier this year, the association criticized reporting about 6% commissions being standard as misinformation . It also disputed President Joe Biden’s comments about commissions being negotiable for the first time following the settlement.

The Reno Gazette Journal reached out to NAR, which initially agreed to answer questions about the settlements and claims from critics about the organization’s practices. NAR changed its mind, however, and recommended talking to a local member agent instead.

The association’s cautiousness is not surprising, said Ryan Elliott, chief operating officer for Reno-based national discount real estate company Assist2Sell and also a NAR member.

“NAR is very hesitant to speak on this topic for obvious reasons,” Elliott said. “NAR got slapped around pretty good in court and then had to go back hat in hand to their membership saying, ‘We have to settle this case for (nearly) half a billion dollars.’”

“And it was all their rules and regulations that caused this lawsuit in the first place,” Elliott added.

NAR contended that it never set 6% as a standard rate for commissions. Consumers also were never prevented from asking for a lower rate.

“NAR does not set commissions, and commissions were negotiable long before this settlement,” NAR said in a statement posted on its website in March. “They are and will remain entirely negotiable between brokers and their clients."

Consumer advocates such as the CFA, however, countered that if compensation was always negotiable, then why are the majority of commissions at the higher end of the spectrum — essentially always above 5%?

Two separate 2024 surveys by real estate companies Clever and FastExpert , which connect buyers and sellers with agents, confirmed the higher rates for commissions. Both surveys found that the average commission rate in the United States is about 5.5%.

“When rates are the same, that’s strong evidence of collusion,” Brobeck said.

Brobeck also pointed to a 2019 study he did for CFA that surveyed more than 200 agents in 20 cities in the U.S . The majority — 73% — responded that they will not agree to lower their standard commission rate.

Even if NAR does not explicitly set commissions at 5% or 6%, there are other ways to ensure that agents receive that amount of compensation, according to critics.

Elliott accused the National Association of Realtors of hiding behind the excuse that commissions have always been negotiable for consumers. He noted that there is no pressure on buyers to push for lower commissions, because they were not paying for them. Instead, it was sellers who typically paid the commissions for their agents and the buyers’ agents.

Sellers, however, are in a tough position when negotiating for lower commissions. They risk the chance of their home not being marketed as strongly as other properties, a practice known as “steering.” NAR-affiliated multiple listing service or MLS organizations also dominate the home listing space nationwide and there’s pressure to abide by the status quo when it comes to compensation.

Agents who accept lower commissions risk being ostracized by their peers as well because they are seen as pulling down everyone else’s earnings potential, according to Elliott

“If I put the listing up for less than that normal standard, people are going to say, well, I get (a higher) commission on this (other) listing so why am I going to sell yours for less?” Elliott said.

NAR’s code of ethics explicitly prohibits steering buyers away from a property because of lower compensation. The organization also reaffirmed that steering prohibition in its settlement over the lawsuits.

Just because NAR prohibits steering, however, does not mean it never happens, according to Brobeck. Many times, even just the threat of steering is enough to pressure people to agree to paying a higher commission, he said.

“If they’re unethical, not only will the agent not promote your house unless a buyer really wants to see it, they can also badmouth your house,” Brobeck said. “So consumers are stuck with paying the going rate because if they don’t, there’s that potential threat of the buyer agent steering buyers away from the property.”

Real estate industry warns of unintended consequences

Meanwhile, the changes being espoused by NAR, which can potentially lead to lower commissions, are not sitting well with many member agents, according to Assist2Sell's Elliott.

There is also a good amount of confusion among agents about the changes, including whether it will limit their options in listing properties or if the changes will be even enough to satisfy the terms of the settlement and the Department of Justice.

For a good number of agents, the initial reaction to the settlement was to figure out a way to maintain the status quo with the higher compensation, Elliott said.

“Across the board, most Realtors don’t know how to react quite yet,” Elliott said. “There’s a lot of pushback" to the changes.

One potential impact is a decrease in demand for buyer agents, especially if more sellers opt not to pay for their compensation and buyers refuse to shoulder that cost instead. Elliott does not think this is necessarily a bad thing.

Assist2Sell’s discount model is predicated on charging a flat $4,995 fee to represent the seller as opposed to percent-based commission. In cases where the buyer has an agent, the seller will then need to pay the buyer’s representative, too, which ends up being much higher than the flat fee. If that agent asks for a 2.5% commission on a $500,000 sale, for example, the commission equals $12,500.

“The benefit to the seller if they come to us directly is that they save a chunk of change,” Elliott said. “And if the buyer comes to us directly and doesn’t have to pay an outside agent, that’s incredible value.”

Not having representation as a buyer, however, can come with risks, according to Keenan.

One issue is that your average homebuyer is not well-versed about real estate transactions and can “get in over their head,” Keenan warned.

Having a representative who is familiar with the process becomes especially important if a transaction closes and the buyer notices something is wrong, he said. Otherwise, the buyer is left on their own to deal with any problems, including legal issues they may not be knowledgeable about.

Sellers, meanwhile, can still choose to pay for both agents just like before, Keenan added. For sellers who decide not to pay for the buyer’s agent, however, it might limit their property’s exposure to the market. If a buyer with an agent finds out they have to pay for their own representative because the seller refuses to, they might look at other options instead.

“It will still go on the MLS and be exposed to the market but not to buyers with representation who they have to pay,” Keenan said. “The majority of buyers still want to have representation.”

For Brobeck and Elliott, the scenario Keenan cites is the exact issue with the current listing and compensation system that is dominated by NAR and its various MLS partners.

Both allege that the system is set up to watch out for the interests of the industry and maximize the compensation it can get. This goes against real estate professionals’ fiduciary duty to place their clients’ interests above their own.

Brobeck suggests that hiring a lawyer might actually be cheaper than going with an agent in some cases.

“If an agent won’t engage (due to a lower commission offer) and you can’t find another agent, just go to a lawyer,” Brobeck said. “The average lawyer knows more about contracts than the average Realtor does.”

Even the changes that NAR is pushing as being consumer-focused still benefit the industry more, the CFA claimed.

Brobeck cited the new contracts from the California Association of Realtors, which were done in response to NAR requiring agents to obtain buyer signatures on buyer representation contracts starting in August. In addition to being written in a way that is hard to understand, the changes being initiated in California essentially obligate the buyer to pay the buyer agent, Brobeck said.

“Everything is loaded in the industry’s favor in the contracts,” Brobeck said. “They’re terrible and we’re recommending consumers not sign them.”

The contracts also triggered an inquiry from the Department of Justice.

Instead, Brobeck touted the new, simpler contract from eXp Realty that consumers can understand and is more in line with the spirit of the settlement.

“The difference is like night and day,” Brobeck said. “I can’t believe they’re contracts for the same thing.”

Will changes from NAR settlement lead to a culling of the industry?

One thing that all sides agree on is that changes from the settlement could potentially shake the industry, particularly when it comes to the number of agents.

Keenan pointed to the Reno-Sparks real estate sector as an example.

The area was averaging about 500 home sales a month until the pandemic, when the average shot up to 700 a month as more people started to work from home. Once interest rates rose, however, the average dropped to 300 per month, which is far too low for the number of real estate agents working in the market.

It is an issue occurring across the country. Last year, just over 4 million homes were sold in the U.S. — the lowest since 1995, according to NAR. Meanwhile, the total number of real estate agents is more than 1.5 million, according to the association.

Assuming each sale has two sides with one seller agent and one buyer agent, that averages out to 5 home sale transactions available per agent.

In Reno-Sparks, the ratio of agents to available homes for sale is even tighter. Last year, the area saw about 4200 home sales, according to Keenan. In contrast, the market has about 3,200 real estate agents. Assuming that each home sale uses two agents as well, it translates to less than three homes per agent.

The commission that agents get also shrink further when factoring in compensation for their brokers plus referral fees from real estate services such as Zillow, Redfin or OpCity that can siphon between 25% to 35% of their commission.

“You need to sell 10 to 12 homes a year to make a living out of it,” Keenan said. “So that just goes to show you how many people are not making a living (with real estate).”

Keenan’s concerns about the number of agents vs. the number of homes available for sale are valid, according to Brobeck.

Recently, Brobeck surveyed 2,000 agents who worked for big companies as part of a CFA report that was released in January . Half of them had either one sale or no sales at all in the past year, Brobeck found.

“There’s a huge glut of agents,” Brobeck said. “They’re desperate for clients and sales.”

Should the changes from the settlement end up lowering commissions, that would put a lot of pressure on agents competing for a shrinking piece of the real estate pie.

One plus for consumers is that agents might be more motivated to negotiate in order to get business. Although the industry has its share of issues, there are still ethical and competent agents out there who are willing to lower their rate if asked, Brobeck said.

Another potential result is that more agents will leave the industry. Although that might be bad for NAR membership dues, it could also weed out the less experienced or less competent agents from the system.

A NAR report in 2015 cited the large number of moonlighting agents who lack training and have questionable ethics as one of the major threats to the industry’s credibility.

“The report acknowledges that a large number of agents are dishonest and incompetent,” Brobeck said.

“Nothing is more damning than that. There are a lot of good people in the industry who are really concerned about this. They just don’t know what to do.”

Keenan believes that the changes could be an opportunity for more skilled real estate professionals to distinguish themselves from the rest of the competition.

“Our barrier to entry always felt too low,” Keenan said. “What I really like about (the changes from the settlement) is that it forces real estate agents to really look and think, ‘Am I providing enough value?’”

Buyer agents will especially need to prove that they can open doors and earn their keep, he said.

Elliott, meanwhile, is excited about new business models that can potentially arise because of the settlement. Examples include providing more fixed fees for service instead of percentage-based commissions. Agents will likely do more value-added services to justify their compensation as well.

Elliott noted that the changes from the settlement do not mean that sellers can no longer pay the buyer agent’s commission. They still can and likely will in many cases, he said.

What the settlement does, however, is that it finally makes the process for things like compensation “truly negotiable,” according to Elliott.

“Ultimately, at the end of all this when the dust settles whether that’s a year, two or five years from now, I  think you’re going to see a more competitive landscape,” Elliott said.

“Let the free market decide.”

One person who already has been testing out the free market is Waterman.

Waterman interviewed three real estate companies to represent him in the sale of his Sparks home. One wanted 6% while another wanted 3%. Waterman opted to go with real estate agent Amanda McNeely of Assist2Sell due to the company’s flat $4,995 fee.

Waterman also negotiated a lower commission for the buyer’s agent. Waterman made it clear that he was not going to pay the other agent substantially more than what he paid McNeely and Assist2Sell.

“The buyer’s Realtor wanted 2% and I said, ‘No F-in way,’” Waterman said. “So they redid it and offered 1%.”

Waterman sounded quite proud of his ability to drive a hard bargain.

“He tried to pull a fast one on me,” Waterman said before chuckling.

“It didn’t work.”

This article originally appeared on Reno Gazette Journal: Real estate fees are changing. What that means for homeowners and buyers