NAR’s $418 million settlement will cut commissions and save money for sellers and buyers

California homeowners could enjoy a significant drop in the cost of selling their homes after a national trade association agreed to a $418 million class-action settlement, ending a years-long battle over the decades-long practice of 6% commissions.

The National Association of Realtors, the nation’s largest trade association with 1.5 million members, announced the settlement Friday (March 15) and a federal judge could approve the terms within the next few months. Home sellers could start saving thousands or even tens of thousands of dollars starting this summer.

The agreement will dramatically change the almost century-old practice of commission home sales, where real estate agents and brokers list and sell homes for generally 4% to 6% of the price – or about $32,000 to $48,000 for an $800,000 property. In other countries, commission rates are much lower, often in the 1% to 3% range.



‘ALWAYS OUR GOAL TO PRESERVE CONSUMER CHOICE’

Real estate experts say that the NAR settlement will force real estate brokers to embrace a new business model, detailing the services provided and outlining the cost – and likely leading to savings for sellers and buyers. Analysts say commission rates, and revenue, could decline 30% to 40%.

“NAR has worked hard for years to resolve this litigation in a manner that benefits our members and American consumers,” says Nykia Wright, interim CEO of NAR. “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.”

In spring 2019, a group of Missouri home sellers filed a lawsuit against the National Association of Realtors and several brokerage companies, claiming they had violated antitrust laws by requiring sellers’ agents to make payments –  often half of the commission received – to the buyers’ real estate representative. They claim the practice greatly increases commissions and, in turn, home prices. The lawsuit also said agents often led home shoppers to higher-priced houses to increase their paydays.

Last fall, a court awarded a $1.8 billion verdict to the home sellers in Missouri. Because of the antitrust violations, the award could have been tripled to $5.4 billion. 

“NAR has worked hard for years to resolve this litigation in a manner that benefits our members and American consumers.”

Interim NAR CEO Nykia Wright

PLAYING IT SAFE WITH THE SETTLEMENT

Rather than risking a multibillion-dollar payout and possible bankruptcy, NAR reached the $418 million settlement, ending the dark cloud that has been hanging over the organization. An estimated 50 million home sellers will receive settlement money.

But NAR and affiliated statewide associations, such as the California Association of Realtors, could still see some stormy days – and years.

NAR and its members will need to find a new business model to generate revenue, especially in real estate-crazy California. Commissions are the primary – and quite often the only – source of revenue for agents and brokerages. Commissions will drop following the verdict, and agents could be forced to offer home sellers an a la carte package of services, from listing the property online to negotiating the final purchase price. Home buyers could also hire their own agents and reach separate deals on payment.

Real estate attorneys may also become a larger part of transactions, reviewing paperwork for legal pitfalls.

“For far too long, home sellers have faced a system recognized by many as blatantly unfair,” says Robert Braun, a partner for Cohen Milstein, the law firm representing the home sellers. “Individual sellers often feel powerless to negotiate a better deal for themselves given the risk that offering lower commissions will cause brokers to steer buyers to other properties. This class action and settlement provide justice for our clients and will require important changes that help future home sellers.”



CALIFORNIA HAS THE SECOND-LOWEST COMMISSION RATE

CAR did not comment on the lawsuit. CAR is facing at least two copycat lawsuits related to commissions.

But, to be fair, California agents and home sellers have often negotiated lower-percentage commission rates, breaking away from many other states’ commission practices. California has the second-lowest commission rate at 4.92%, according to Home Bay.  

“For far too long, home sellers have faced a system recognized by many as blatantly unfair.”

robert braun, partner for cohen milstein

However, many homeowners are not aware that commission rates are negotiable, according to a recent LendingTree report. About two of every three home sellers who ask for a lower commission rate are successful.

With the NAR settlement, how brokers and sales agents get compensated for their efforts will become more transparent – and likely lead to smaller paydays and could even lower home prices slightly, real estate experts say. The industry could lose hundreds of thousands of agents, as commissions and income decline. NAR membership has already dropped in recent quarters with fewer home sales during the past two years.

A DIFFERENT INDUSTRY THAN TWO DECADES AGO

The real estate industry has changed dramatically in the age of the internet and smartphones. A few decades ago, agents would carry Multiple Listing Service books that featured homes for sale and their features, and daily newspaper and glossy magazines would showcase listings.

But with the internet, advertising and marketing homes has become much easier, especially with websites such as Realtor.com, Redfin and Zillow. Home shoppers can see what’s available, enjoy eye-catching photos and learn the details of listings, including comparable home prices nearby. 

Today, real estate agents counsel buyers about the process, find new listings as soon as they become available, and walk them through the paperwork-heavy transaction.

Part counselor, deal maker and detail checker. Now, those services will likely come at a lower cost.

But less uncertainty for agents and the industry.

“Ultimately, continuing to litigate would have hurt members and their small businesses,” said Wright of the NAR. “While there could be no perfect outcome, this agreement is the best outcome we could achieve in the circumstances.