How We Buy and Sell Homes Probably Just Changed Forever

This is a subject a bit out of my wheelhouse, but since real estate involves some of the largest financial transactions we make in life, it seemed appropriate to address the recent landmark settlement that will change how we buy and sell homes forever.

Last week, the National Association of Realtors (NAR) agreed to settle a major lawsuit that will change the way real estate agents get paid – from effectively a standard commission to something negotiable. This settlement was years in the making (brought on by sellers in a class action) and beyond the scope of this article.

Why it Matters

This settlement will strike a blow to an established standard of residential real estate: the 6 percent sales commission.

It also will change who pays it.

In most real estate transactions, both the seller and buyer have an agent representing them. The traditional standard for paying these agents is: a commission of between 5% and 6% of the home’s sale price, covered by the seller and split between the two agents.

Historically, most home-sale listings include an upfront offer telling buyers’ agents how much they will get paid. So, sellers have typically set buyers’ agents’ fees. As part of this settlement, the NAR has agreed to abandon this requirement.

Consumer advocates say the old arrangement has prevented buyers from negotiating to save money and kept commissions in the U.S. higher than in most of the world.

The NAR has argued the current model helps buyers benefit from a real estate agent’s advice even if they can’t afford to pay an agent out of pocket.

I think both arguments have merit.

If Sellers no Longer Cover Buyers’ Agents’ Commissions, How do They Get Paid?

• Flat fee out of buyer’s pocket
• Percentage of the sale price to the broker
• Hourly rate to broker
• Skip having a broker at all
• Seller could still cover buyer agent’s fee, but that would have to be negotiated later on in the deal.

These are all hypothetical scenarios, of course, but you can see that things may get a lot more complicated.

A Few Takeaways

There is much to be worked out from this settlement, and the earliest we might see this in real life would be sometime this summer.

Here are some final thoughts:

• I think future home sellers could be the clear winners here. It’s hard to imagine selling costs not coming down because of this ruling.
• For buyers… maybe not so much. I could see this being a potentially much larger problem for first-time home buyers – who do not have the cash set aside for out-of-pocket real estate agent expenses.
• Even if costs come down, buyers and sellers have a lot more to think about and negotiate now. Real estate transactions may get a lot more complicated – I didn’t think that was possible! 😉
• Beware the unintended consequences. In my experience, blowing up long-held industry practices does not come without severe consequences, some positive and some negative. And some completely unexpected. Be careful what you wish for.

Only time will tell how this all plays out. But it’s likely we’ll all have our own experience with it soon enough.

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