- Real Estate
- 7 mins
In a significant development for the real estate industry, the National Association of Realtors (NAR), which represents over 1.5 million real estate agents across the country, agreed to settle a series of class action lawsuits brought by sellers in multiple states that will reshape the landscape of real estate transactions in the country going forward.
The settlement will impact buyers, sellers, and commissions on real estate and will have broad-reaching implications in all real estate transactions in Massachusetts beginning in July 2024 (pending Court approval).
Background on the Settlement
On March 15, 2024, the NAR reached a settlement agreement resolving multiple class action lawsuits that alleged anti-competitive practices related to buyer agent commissions in real estate transactions. The lawsuit focused on NAR's rules requiring properties listed on Multiple Listing Services (MLS) to include a predetermined buyer agent commission, which was seen as limiting competition and driving up costs for consumers.
Today, when a seller lists their house, they will usually hire a real estate broker to represent their interests and oversee the entire sale of their property. In exchange, the seller agrees to pay the broker a percentage of the sale price. In Massachusetts this is typically around 5-6%.
Buyers will also hire their own real estate agent to represent their interests throughout the purchase process. Buyers however have not had any obligation to pay their real estate broker directly. The reason for this is because NAR, the country's largest trade association, requires home sellers to determine a commission before listing homes on its property database, the MLS. This commission rate historically has been paid by the seller. The commission then gets split between the seller’s broker agent and the buyer’s broker agent.
To use an example, let’s say a seller hires a broker to list their home and it ultimately sells for $1,000,000. Let’s say before the home was listed on MLS, the seller agreed to a 6% commission rate with their broker. That equates to $60,000 (6% of the $1 million sale price) in broker fees that are taken out of the sellers proceeds and given to the broker as a commission. Let’s also imagine that the buyer of the home was using a real estate broker to help them during the house hunt. Now that $60,000 commission will be split between the seller’s agent and the buyer’s agent ($30,000 to each broker).
To zoom out on this concept – the seller will ultimately end up paying the buyer’s agent $30,000 out of their own pocket for the sale of their $1 million dollar home. Meaning the seller ends up paying the buyer’s agent that is working against them in the negotiation of their sale price. This is what stemmed the class action lawsuits popping up around the country. As sellers were growing aggravated that they were being forced to pay the party representing the other side of the transaction.
Key Changes Resulting from the Settlement
As part of the settlement, NAR agreed to implement several changes aimed at increasing transparency and promoting competition in the real estate market. These changes include:
- Disclosure of Buyer Agent Commissions: Real estate agents are now required to disclose to buyers the amount of compensation they will receive from the seller's listing agent. This disclosure aims to provide buyers with more information about the costs associated with real estate transactions and empower them to make more informed decisions. In doing so, agents must disclose to their clients that commissions are negotiable.
- Prohibition on Buyer Agent Steering: NAR agreed to prohibit practices that steer buyers toward properties with higher commissions for buyer agents. This measure aims to ensure that buyers receive unbiased guidance from their agents and are not influenced by financial incentives.
- The End of Commissions as We Know Them: The key takeaway is that both buyers and sellers can now negotiate their respective commissions. Under the NAR settlement, the seller will no longer be required to pay the buyer’s broker their commission. Leaving the seller responsible for negotiating the commission with their own broker for helping to sell their house, and the buyer responsible for negotiating their commission with their own broker for helping them to buy their new house.
Impact on Buyers and Sellers
The NAR settlement is expected to have several implications for buyers and sellers in real estate transactions:
- Increased Transparency: Buyers will have greater transparency into the costs associated with purchasing a home, including buyer agent commissions. This information will help buyers better understand the financial aspects of the transaction and make more informed decisions.
- Fair Competition: Sellers may benefit from increased competition among real estate agents, as the settlement aims to promote fair competition and prevent anti-competitive practices. This could lead to more competitive commission rates and better service for sellers.
- Negotiation Opportunities: With greater transparency and awareness of commissions, buyers and sellers may have more opportunities to negotiate terms and fees with their real estate agents. This could result in more flexible arrangements that better align with their needs and preferences. This also creates more flexibility in choosing your potential broker, and allows consumers to hold their own interviews to ensure they make the right choice in selecting the agent who will best represent their interests.
What to Expect Going Forward
As of February 2024, the Median home price across Massachusetts was $576k, up 9.7% year-over-year compared to February of 2023. Under the old model, that is a $34,560 dollar commission (6%) being paid out of the seller’s pocket. Under the new model, the seller will have the opportunity to negotiate this commission down. Since this commission will no longer be split with the buyer’s agent, sellers will most likely pay their broker half of the standard commission model or 3% of the sale price. This brings the overall commission down to $17,280 from $34,560. This represents a substantial savings for all sellers of real estate going forward. This also opens the door for sellers to propose a flat fee arrangement rather than the typically commission structure. While real estate brokerages across the country are still responding to how they will structure their fees in the future, one thing remains certain: commission structures going forward will provide for greater transparency and competition.
Buyers going forward will have to be prepared to pay their real estate broker beginning in mid-July. This is also an area where buyers can try to secure a flat fee for their representation rather than a commission tied to the purchase price. This is especially true when considering the evolution of how the home buying process has changed in the last decade. Buyers no longer rely solely on their agents to share listings with them and take them through open houses. Buyers today can leverage real estate apps such as Redfin, Zillow, etc. to find properties that they like and attend open houses on their own. With technology making property listings more accessible and the housing market still being highly competitive, many buyers are already conducing the majority of this search on their own. With this shift it is certainly possible that buyers look to negotiate flat fees with brokers in exchange only for assistance with writing up on Offer to Purchase (OTP) rather than for paying an agent to navigate the entire search on the buyer’s behalf. For more information about the OTP, the purchase and sale agreement (P&S), or the real estate buying process, check out our full guide here. Massachusetts state law also requires that a closing attorney, such as the experienced closing attorneys at Lane, Lane & Kelly, not only be present for the purchase but they must also take "substantive participation" in all residential real estate transactions. As such, it is entirely possible that buyers go straight to an attorney to help them navigate the entire sale process, from making an offer all the way through the closing.
On the flip side however, buyers may now have slightly less buying power when it comes to the overall sale price of their future home. Since buyers will now be responsible for paying their agent’s commission, buyers now have less money in their pockets to put towards a down payment or the purchase of a new property. With this in mind, the buyer’s selection of a good real estate agent will be even more important. As a good broker can make all the difference in the buying process when it comes to finding viable inventory, arranging open houses, finding proper comps (comparison sales) in nearby neighborhoods and towns, and providing recommendations for inspectors or closing attorneys.
Commissions only make up part of the picture, however. While this is a big change to real estate transactions, it should have limited effects on the overall pricing of houses going forward despite many consumers being concerned that this will inflate housing prices even further, and some experts believing this will lower home prices. This is because housing prices are driven by supply and demand, not by broker commissions. Additionally, mortgage rates across the United States still remain high, leaving many potential buyers and sellers patiently waiting on the sidelines. Home prices and mortgage rates play a much larger role in consumers homebuying choices as compared to how much they will pay in broker fees.
When Will This Change Become Official?
The NAR settlement is still subject to Federal Court approval. The DOJ has also been heavily involved in the oversight of these class-action lawsuits. Including the DOJ’s direct involvement in the proposed settlement of the Nosalek case in Massachusetts involving a similar lawsuit against the MLS Network. There, the DOJ stepped in and urged the Massachusetts District Court to reject a proposed settlement. Should the NAR settlement be approved, the Nosalek and other cases nationwide would conclude and this commission change would become effective nationwide in mid-July.
The NAR settlement represents a significant milestone in the real estate industry, ushering in changes that prioritize transparency, competition, and consumer empowerment. As these changes take effect, buyers and sellers can expect a more transparent and competitive real estate market, with increased opportunities for informed decision-making and negotiation. Lane, Lane & Kelly will keep you updated with the implications to buyers and sellers alike in the future of real estate transactions in the Commonwealth as this story continues to unfold.
**As of April 24, 2024, the aforementioned NAR settlement has officially been approved by a Federal Judge and is set to take effect in July of 2024.
If you have any questions at all or would like to speak to a real estate attorney for any questions regarding the future purchase or sale of property, please call 781-848-0040 or contact our office by clicking the button below.
This blog is made available for educational purposes only as well as to give you general information and a general understanding of the law, not to provide specific legal advice. By reading this blog you understand that there is no attorney client relationship between you and Lane, Lane & Kelly, LLP.
