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For Realtors, 2% will be the new 6%

Real Estate Commissions

The National Association of Realtors (NAR) settled a major lawsuit last week with the DOJ (Department of Justice) in which they agreed to pay $418 million in damages and eliminate their current rules on commissions. Currently realtor commissions on selling a property hover between 5%-6% of the sales price of a residential home.

I’m going to unpack what went down and what to expect moving forward.

  • How the 6% commission worked
  • The Missouri Lawsuit
  • The Settlement
  • Winner and Losers
  • What I’m seeing as a CPA

How the 6% Commission Worked

When someone has a home to sell, in order to get it in front of people they put it on the MLS (multiple listing service.) In order to do that, you need to use a realtor (or online broker like Zillow).

When they meet with their realtor, they sign a listing agreement and, in that agreement, they determine the commissions that they are offering to both the buyer and seller real estate agents. The commission is based on the gross sales price of the property and is normally 2.5%- 3% to each side (i.e. 5%-6% total).

This was very beneficial to the buyer, since the buyer would not have to come out of pocket to pay someone to represent them in the transaction. In fact, some buyer’s agents would tell the buyer that their representation service was “free” since the seller was paying the commission.

You can see from the seller perspective, why this is unfair. Honestly ask yourself, when was the last time you went into a contract negotiation or dispute, and one side pays for the other sides legal representation? Usually in most legal transactions, when neither side knows each other, each side pays for their own representation.

Enter the Missouri Lawsuit last November.

The Missouri Lawsuit

Last November, a lawsuit in Missouri was brought on by home sellers (the plaintiffs) that alleged NAR (National Association of Realtors) and a couple real estate brokers (Keller Williams and HomeServices of America) were keeping realtor commissions artificially high. The NAR argued that this wasn’t the case since they had anti-trust rules in place.

After a two-week trial, it only took the jury 3 hours to come back and find the NAR guilty.

The plaintiffs were awarded $1.8 billion in damages, and because of potential punitive damages referred to as “treble damages” that number could’ve tripled to $5.4 billion.

This was such a bad decision for the NAR that the president of the organization resigned almost immediately (Honestly, I’ve never thought of going to Missouri before, but I’m thinking of visiting to pay homage.)

The Settlement

Even though the NAR originally said they were going to appeal the decision, however multiple other lawsuits crept up immediately after the decision. The fear of losing $5.4 billion set in (which may have bankrupted the NAR), and so they tapped out.

The settlement had two major takeaways:

First, the NAR agrees to pay $418 million in damages to the DOJ (that’s nice, but it doesn’t affect you or me.)

The second, and more important is – starting in July – sellers will no longer have to list any commission for buyer’s agent on the MLS.

The takeaways are: if you’re a realtor, you are probably freaking out. And if you own property, you are thrilled!

Winners and Losers

There are a lot of players in real estate, so I want to give you some perspective of some of the winners and losers of this settlement.

Department of Justice – Winner – the DOJ doesn’t have to continue this case, they won $418 million, and can chalk this up as an easy win in a case that only took 2 weeks in court.

Owners of Real Estate and Investors – Winner – if you already own real estate, you will end up paying less when you sell your property, and thereby keep more money in your pocket.

Realtors and Small Brokerages – Loser – Agents and Brokerages will have to come up with new ways to market their services to buyers. They used to tell buyers that their services were “free” since the seller would pay the commission. Those days are gone.

Big-Time Brokerages – Hard To Say – some are saying they are going to be hurt too, but others are saying they are in the best position to offer flat fee commissions to first time home buyers and that they will come out ahead. Only time will tell.

First Time Home Buyers – Loser – probably biggest losers. If you don’t have experience purchasing property, you may get taken advantage of on your first home closing. Or not be able to come up with the funds to buy the home and pay the buyer’s agent commission.

Overall Consumers – Winners – overall this is a win for consumers. Eliminating or lowering “middle-men” costs from transactions almost always helps the consumer. Ask yourself, when was the last time you used a travel agent to book a trip, or stockbroker to buy shares of a stock? I’m sure some of you still do, but most people don’t use travel agents or stockbrokers anymore.

The Future for Home Buying

Disruption like this always creates new opportunities. I’m positive there are tech companies out there right now that are excited about the change, and they are going to capitalize on it.

If fact, one brokerage in Iowa called “3% Listing Co.” created a new brokerage at that immediately took advantage of what was going on, back last November. They are way ahead of the curve when it comes to how to handle this change.

What I’m Seeing

It’s a very busy time of tax season right now, so I am meeting with a lot of people. Every client I have talked to, that is not in the business of real estate, is overly joyed about this decision. People online are saying this is a win for home sellers (which is true!) and they estimate that realtor commissions will drop by as much as 30%.

On the realtor side, they are trying to find ways to downplay the effects. I’ll read people say that the settlement is overblown, or you could always negotiate the commissions. I can’t really say that’s true. You could always negotiate your seller’s side commission, but in my experience if you didn’t offer a large enough buyer side commission, buying agents wouldn’t be as eager to show your home – after all they would make less money.

In future I think buyer’s side agents will just have to settle with making less money, and that side of the transaction will probably go the way of rental listings (currently the average is $400 flat fee on the MLS). Some buyer’s agents (or big brokers) will offer a small flat fee (a few thousand dollars) to represent a buyer.

And quite honestly, I’m with most everyone else, it’s about time.