Commissions Changing? What the NAR Judgment Means

In a game-changing verdict, a federal jury ruled the National Association of Realtors (NAR) and other large brokerages owed $1.8 billion in damages because they artificially inflated commissions paid to real estate agents. The decision affects how real estate is transacted in the United States. 

How Real Estate Commissions Work

Real estate is a sales-performance-based industry, meaning the agents and brokers are only paid once a real estate sale is closed. In most real estate transactions, agents are compensated through commissions, usually a percentage of the property’s sale price. 

The typical commission rate is around 5% to 6%, but it can vary and is negotiable. The real estate commission structure refers to the compensation arrangement between real estate agents or brokers and their clients. The total commission is often split between the listing agent and the buyer’s agent. For example, suppose the commission is 6%. In that case, the listing agent might receive 3%, and the buyer’s agent might receive the other 3%.

Buyer’s agents are usually not compensated for their work until their client buys a property. 

What the Verdict Says

The NAR rule stipulates the home seller pays the home buyer’s agent. In the case, the plaintiffs argued this resulted in excessive fees paid to the agents and led brokerages to enforce a “collaborative compensation rule.” When agents upload the listing into a Multiple Listing Service (MLS), they state a unilateral offer of compensation to other MLS participants.

The ruling against the NAR and brokerages Keller Williams, RE/MAX, Home Services of America, and Anywhere (formerly Realogy) would instead stop the practice of sellers paying the buyer’s broker commission. Agents would be freed to set their own commission rates.

The NAR has already stated it plans to appeal the verdict. This process will add to the time before any significant deadline to change. The NAR is the real estate industry’s largest lobbying group.

Meanwhile, a settlement agreement was in the works with RE/MAX and Anywhere, with the court giving preliminary approval of the changes and terms.

Why this lawsuit now

“You have an industry that is based on a percentage. [Agents] get paid a percentage of the sales price, and sales prices have only gone up compounding over COVID 20% a year, 30% a year…every real estate agent got a raise per transaction,” said Nick McLean, co-founder of the Reside Platform. “People outside the industry have been licking their chops for decades to get their hands on this commission, and now there’s more than ever. So, the incentive was there for this lawsuit.” 

Implications of the lawsuit

In the days that followed the verdict, real estate agents and brokers posed multiple questions about the impact on their commissions. These conversations about commissions changing center around who should be responsible for paying the buyer’s agent. Will that now come from the buyer? And what should that look like–a set fee, a commission paid by the buyer at closing?

Some organizations are making changes now. For example, the Real Estate Board of New York (REBNY)announced seller agents cannot offer compensation to a buyer’s agent. The seller will negotiate and pay any payment to the buyer’s agent directly. 

As McLean and the other co-founders go on to discuss, the most immediate short-term fallout is not a change to how real estate brokers do business but in copycat lawsuits. Class-action suits have been filed in South Carolina, Texas, Missouri, and other states.

Another change, EZ Home Search founder Preston Guyton points out, is that agents who are scared to talk about compensation with their clients must have it right away early in the relationship. In some states, like South Carolina, that discussion is already required. But for others, can you, as a real estate agent, explain the value you bring to the transaction? Is that agreed upon before you start representing the client and showing properties?

Something else to consider is how the MLS works. When a professional joins the MLS, they also have to be a member of the NAR and adhere to the organization’s industry rules, including the commission split. There is no “opt-out.” But what if the new ruling gives agents that power? How does that shake up the industry?

We’ll know soon, as that preliminary RE/MAX and Anywhere settlement includes allowing its real estate agents to not be NAR members, follow its Code of Ethics, or the MLS Handbook. The firms hope for finalized approval early in 2024. 

How it works elsewhere

US real estate agents have higher commission rates than most other real estate agents in countries worldwide. Over in the UK, they earn 1.3% commission.

But there are trade-offs. Most licensed real estate agents work part-time or as a side hustle in the US. Case in point, the average US agent closed about 12 transactions. The total is closer to 40-50 a year in other countries.

Internationally, services often are presented as more a la carte than in the US. Staging, marketing on specific platforms, open houses…all these features wrapped into the US commission fee run extra elsewhere.

Ten of the 21 countries listed here have the buyer’s and seller’s commission rates split. The buyer pays their agent a commission or set fee, and the seller pays their agent a commission or fixed fee.

Commissions for real estate agents changing

Regardless of what the final outcome will be, clearly, some change is on the way to how real estate agents are compensated. Watch what happens with the verdicts and how opting out of NAR will impact home sales for real estate professionals and their clients.