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The National Association of Realtors announced Friday that it has reached a nationwide settlement alleging the industry conspired to keep brokerage fees high, marking the biggest change in decades to how Americans buy and sell homes. announced that it would bring.
The $418 million agreement will make it easier for homebuyers to negotiate commissions with their agents, potentially leading more buyers to cut out agents altogether, resulting in lower commission rates and fewer Hundreds of thousands of agents could leave the industry.
The National Association of Realtors reached a settlement. (Lauren Elliott/Bloomberg via Getty Images/Getty Images)
NAR agreed to repeal a long-standing industry rule that required most home sales to include an upfront offer telling the buyer’s agent how much they would be paid. Under the system that has been in place for a generation, sellers have typically set buyer agent fees. Consumer advocacy groups say the arrangement prevents buyers from negotiating cost savings and leaves U.S. fees higher than in most countries around the world.
The association said the current model helps buyers benefit from an agent’s advice even if they cannot afford to pay the agent out of pocket.
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If the settlement is approved by a federal court, home listings for sale in most parts of the country will no longer include upfront offers to buyers’ agents starting in mid-July, and buyers will be compensated upfront with their agents. be able to negotiate. The settlement money will be distributed to home sellers nationwide.
Buyers may consider price more important when choosing an agent, choosing to save money by not using an agent at all or by paying the agent a small commission in exchange for limited services. There is likely to be. For example, buyers can pay an agent to put together an offer or review an inspection report, but not to accompany them on a home tour.
A close-up of the National Association of Realtors logo on a billboard in a suburban area of San Ramon, California, on October 14, 2020. (The Smith Collection/Gado/Getty Images/Getty Images)
The agreement is the answer to months of uncertainty and growing legal threats to the residential real estate industry. The NAR, one of the most powerful trade associations in the United States, has been in the midst of a devastating $1.8 billion verdict in October against the organization and two national brokerages by a jury in Kansas City, Missouri. facing antitrust liability. The jury found that industry rules regarding how buyer agents are paid keep commission rates artificially high. This and similar lawsuits were filed by home sellers who claim they paid inflated costs.
The settlement resolves a wide range of legal exposure for an industry facing a series of antitrust lawsuits similar to the Kansas City case. A separate case in Chicago is expected to go to trial later this year and could award more than $40 billion in damages. State and local real estate agent associations, some brokerage firms, and real estate agent-owned multiple listing services are covered by this agreement.
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“Buyers were almost completely excluded from bargaining committees; “They will be invited under the tent.”
NAR Interim CEO Nikia Wright said the association “has worked for many years to resolve this litigation in a manner that benefits our members and U.S. consumers, preserving consumer choice.” “It has always been our goal to protect our members as much as possible.”
NAR was at risk of bankruptcy if its antitrust problems continued. The company’s management has made a series of decisions over the past year that have drawn pushback from some industry leaders. That included refusing to bend the rules too early and gambling on whether they would win the case.
‘For Sale’ outside a home in Hercules, California, USA on Tuesday, May 31, 2022. (Photographer: David Paul Morris/Bloomberg via Getty Images/Getty Images)
The cost of this contract, to be paid by NAR over four years, is significant to the association. NAR had net income of about $23 million in 2022 and net assets of about $750 million, according to its tax filings. NAR said it continues to deny wrongdoing.
The rule change makes the industry newly vulnerable to the forces of technological change that drive down fees for travel agents and brokers. Current standard commissions of 5% to 6% of the purchase price (split 50-50 between seller and buyer agents) are among the highest in the world.
The changes will also require many real estate agents working with buyers to enter into contracts with their clients about what services they will provide and how much they will pay.
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If fewer buyers use their own agents, some agents may be forced out of the industry, potentially leading to a decline in NAR membership. NAR has 1.5 million members, known as Realtors. Ryan Tomasello, a real estate industry analyst at Keefe, Bruyette & Woods, said the lawsuit could ultimately result in a 30% reduction in the $100 billion Americans pay in annual real estate commissions and a reduction in real estate agent employees. It is predicted that the number of employees could decline by more than 20%. half.
The new fee structure could be a challenge for first-time buyers or those struggling to save up for a down payment. Buyer’s agent commissions have long been built into the sales price, allowing buyers to cover the cost over the life of their mortgage instead of paying it upfront at the closing table.
Sellers will still be able to offer indemnification to buyer’s agents, but in most markets they won’t be able to post such offers on residential listings. If the buyer doesn’t want to pay for an agent out of pocket, they can ask the seller to cover the buyer’s agent’s costs. But in a hot housing market, sellers are unlikely to agree to that.
Many sellers are accustomed to including purchasing agent fees in the sales price, so it may make little difference to consumers in the short term. However, over time, new intermediary business models may emerge that make it easier for buyers to choose lower-cost options.
In recent years, well-funded disruptive companies have struggled across the board, including UK-based Purplebricks and Rex, co-founded by a longtime Goldman Sachs partner. Executives at these companies said industry rules make it difficult for their companies to grow. Sellers were afraid to offer buyers’ agents lower commissions lest they drive customers away from their homes. Buyers who saw little direct savings had little incentive to use a low-cost company.
Friday, July 1, 2022 at Harris Ranch Community Homes in Boise, Idaho, USA. (Jeremy Erickson/Bloomberg via Getty Images/Getty Images)
“I don’t think this is going to be a perfectly competitive market by any means,” said Stephen Brobeck, a senior fellow at the Consumer Federation of America. However, under the current system, “there is no price competitiveness at all.”
This agreement resolves the most dire threat to NAR’s existence, but the problem is far from over. Some industry executives are furious with association leaders for being forced into settlement negotiations from a vulnerable position.
The settlement agreement does not include HomeServices of America, a subsidiary of Warren Buffett’s Berkshire Hathaway. The company is the final defendant in the Kansas City lawsuit that did not settle.
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“HomeServices intends to vigorously appeal the jury’s findings and damages on multiple grounds,” Berkshire said in its annual report.
Anywhere Real Estate and Re-Max Holdings settled the same claims for a combined total of about $140 million before the Kansas City trial. Keller Williams Realty reached a $70 million settlement in February.
News Corp, owner of The Wall Street Journal, operates Realtor.com under license from NAR.
