The National Association of Realtors (NAR) announced Friday that it finally reached a settlement with homeowner groups that had been embroiled in lawsuits with the association since 2019. The $418 million settlement effectively ends the current NAR broker commission model, which the homeowners’ claimants alleged forced them to pay excessive commission fees.
If a federal court approves the landmark case’s outcome, as expected, it could give the housing market its biggest shake-up yet. The commission rule changes the NAR has agreed to could restructure the entire process of buying and selling real estate and could also deliver potential home price declines across the country.
Here are the changes at a glance and what they could mean for investors and agents alike.
The End of the 6% Commission-Sharing Structure
The most sweeping change introduced by the settlement is the elimination of the current NAR commission-sharing structure.
Here’s how it’s always worked: Real estate agents who are Realtors are required to offer a share of commission with the buyer’s agent in a transaction, if present. Given the NAR’s dominance on agent designations throughout the United States, this effectively created an industry-standard commission, thus violating antitrust laws, as the plaintiffs alleged.
NAR guidelines clearly state that the commission rate is negotiable and that “commission rates are set by the market.” But in practice, commission rates are always set by listing agents and almost always at a rate of 5% to 6%. For homes selling for $400,000, this can amount to a commission payout of $24,000.
Because the sellers pay the commissions, the key argument is that it inflates the prices of homes to make up for it. Seemingly, now that the settlement has gone through, we could very well see a reduction in home prices.
Ultimately, listing agents will no longer be required to offer commission to buyer agents, which will bring more competition amongst agents as sellers search for the lowest commission offerings.
It’s anyone’s guess how much commission real estate agents will now charge, but some economists think that we will see a reduction of up to 30%.
The End of the MLS Subscription Requirement
This brings us to the second sweeping change introduced by the ruling: Real estate agents will no longer be required to sign up for their regional Multiple Listing Service (MLS). The MLS itself will no longer include any information about the commission offered on a sale. This change would end the practice of “steering,” where buyer agents select properties that are more expensive and pay a higher commission. In addition, the new rules abolish the requirement that Realtors subscribe to an MLS in order to perform their services.
This doesn’t mean that real estate investors will no longer need to have relationships with local agents. Agents will compile their own databases of homes for sale—which still will be an important resource for investors, and which agents will likely still charge for. But with the element of open competition thrown into the process, it’s also likely that agents will work harder to scout out properties they know buyers and investors will want to buy.
One question that remains unanswered is how all these new broker-buyer relationships will be regulated, if at all. The NAR settlement will require any MLS-subscribing broker to enter into a written agreement with a buyer so that they “understand exactly what services and value will be provided, and for how much.” We can only speculate whether buyer-broker agreements will become the norm where there is no MLS access involved.
Kevin Sears, NAR president, said in a statement: “NAR exists to serve our members and American consumers, and while the settlement comes at a significant cost, we believe the benefits it will provide to our industry are worth that cost.”
These changes, if approved by the federal court, will come into effect in July 2024.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
