The Future of Real Estate Commissions

January 19, 2024 admin No Comments

The Future of Real Estate Commissions

The recent court decision against the National Association of Realtors (NAR) and several top brokerage firms, including Homeservices of America and Keller Williams Realty, has significant implications for the real estate industry⁴⁵. The jury found these entities liable for nearly $1.8 billion in damages, determining that they conspired to keep commissions for home sales artificially high.

Whenever a home is up for sale, the seller offers their broker a set commission. For decades, the commission has consistently been around 6% of the sale price, usually with a 3% split for the buyer’s and seller’s agent. Although the NAR argues that real estate commissions are negotiable, in reality if your agent agrees to less that 6%, they and their other counterpart agents will put your house at the bottom of the list preferring to show houses that offer a full commission first.

In a competitive market, the cost of the buyer’s agent’s commission would not be paid by the seller, but by the buyer who received the service. The sellers said that the buyers should be able to negotiate the fee with their agent, and that the sellers should not be on the hook for paying it.

This verdict could potentially change the way homes are bought and sold. The lawsuit covered home sales that took place between April 2015 to June 2022⁵. The plaintiffs successfully argued that the NAR’s rule curtails competition and leads to higher prices.

As for the impact on future real estate transactions, industry experts suggest that this verdict could eventually reduce real estate agents’ fees and lower costs for home buyers and sellers. Greater transparency is also expected, which has long been a source of confusion and frustration for consumers about where their money goes in real estate transactions. If this verdict stands, buyers would have to pay for representation out of pocket since the buyers agent would not be able to split a commission with the seller agent. This will work out really well for companies like Redfin who pay a salary to their real estate agents as buyer representatives. On the flip side, the seller would have to pay a much lower commission since there is no split with the buyer’s agent.

The judge presiding over the case will have to decide the scope of the injunction, which could end up amounting to minor tweaks to the current commission-sharing system⁶. However, if the judge issues an injunction prohibiting preset commission rates and shared commissions between buyers and sellers, it could bring a significant change in the industry.

Despite the verdict, the matter is still far from being resolved. The defendants have vowed to appeal the ruling. The appeals process could take up to three years. In the meantime, NAR and the brokerages will ask the court to reduce the damages awarded by the jury.

This verdict is just one of several lawsuits currently filed against NAR, which is also facing scrutiny from the US Department of Justice. Changes to the payment structure for agents could cut the $100 billion annual commission pool for 1.6 million realtors by 30%.  So, the real estate industry is likely to see some significant changes in the coming years.