It was huge news at the time: the National Association of Realtors (NAR) agreed in March to pay $418 million and make changes to how the home-buying process works in order to settle a class-action lawsuit that alleged the industry conspired to make agent commissions higher than they needed to be.
The provisions of the settlement go into effect on Aug. 17. For now, what consumers can expect is more paperwork, and potentially more confusion.
“This is a grand social experiment,” says Leo Pareja, the CEO of exp Realty, one of the biggest real-estate brokerages in the country. “None of us know what’s about to happen.”
Buyers now have to sign a contract
Here’s how the process used to work: a seller’s agent would list a home on an MLS, or multiple listing service, which is a database of properties for sale. Those listings would state that the seller of a home would pay a certain amount to compensate the buyer’s agent. This compensation was often about 3% of the sales price, which was also about what the seller’s agent would get from the seller. (The average amount ranges between jurisdictions and even from sale to sale; some agents were also paid flat fees.)
Technically, those fees were negotiable. But most homeowners either didn’t know that or feel they could negotiate. In addition, home sellers allege, real-estate agents would sometimes “steer” buyers to specific homes based on the amount of compensation they could receive. As of Aug. 17, real-estate agents cannot list any sort of agent compensation when they put a house on multiple listing services, a change designed to eliminate steering.
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In addition, both buyers and sellers are now required to sign a written agreement with their agent before the agent shows them a property or assists with a transaction. The buyer’s side of this is more consequential—most sellers have signed these contracts in the past, but few buyers did. In the new buyers’ contract, sometimes called an “exclusive representation agreement,” the buyer agrees to work with the agent for a certain period of time. Most importantly, the buyer and agent also agree on how the agent will be compensated, whether through a flat fee, a specific share of the purchase price, or another method. Agents must also make clear in this contract that broker commissions are fully negotiable, a change that consumer advocates hope will drive commissions—and prices—down.
Many real-estate agents say the changes are positive, including Jennifer Stevenson, a real-estate agent in upstate New York and a regional vice president for the National Association of Realtors. “This makes the process better,” she says. “Clients are going to understand exactly what is expected of me and what I am offering them as a service.”
But others aren’t so sure that the changes will be positive for consumers. Realtor associations across the country have been releasing drafts of contracts that are extremely lengthy and written in legal terms that are difficult to understand, says Tanya Monestier, a law professor at the University of Buffalo. The draft buyer agreement from the North Carolina Association of Realtors, for instance, is seven pages long.
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Monestier analyzed the draft agreement by the California Association of Realtors (CAR) for the Consumer Federation of America, and issued a report criticizing the agreement for being opaque—so opaque, in fact, that Monestier says she had trouble getting through the document. “No seller will read this monster of a document—much less be able to understand it,” she concluded.
Not all new buyer forms are so dense. Monestier says she reviewed a few forms that were clear; those from Exp Realty, for instance, are just two pages long and explicitly spell out buyer and seller responsibilities. Exp has made these forms available to any company that wants to use them, says Pareja, the CEO.
Compensation may be changing
Before the NAR settlement, it was standard for the seller to pay for both the seller and the buyer’s agents. That may not be the case going forward.
In tight housing markets, sellers could refuse to pay for the buyer’s agent because they have so much interest in their home. Instead, agent’s fees may become a bigger part of the negotiation when people are buying homes. If a buyer really wants a house, for instance, they could offer to pay the seller’s agent fees, and include that provision in their offer letter. Conversely, if a seller in a slow market is desperate to unload their home, they could offer to pay the buyer’s agent fees—though the agent could not disclose that on the listing.
Monestier says she also expects there will be more buyers who choose not to have an agent at all, because they don’t want to be on the hook for the agent’s fee. That could lead to less potential work for many of the real-estate agents out there.
Most of all, the settlement could lower compensation for both buyer’s and seller’s agents. Academic papers have predicted that fees could decline by 30-50% as a result, which would end up lowering home prices as well.
Of course, it’s possible that old habits are hard to break, and that not much will change at all. Sellers are accustomed to paying for buyers’ broker fees, and they may continue to do so. Even if everyone involved knows they can negotiate.