Home buying and real estate commissions are about to change significantly

A recent jury verdict against the National Association of Realtors and large residential brokerages could disrupt the residential real estate sector.

The real estate compensation model is at the heart of the problem. The plaintiffs claim that commission rates are too high, that buyer brokers are overpaid, and that NAR rules, as well as the practices of the defendant companies, lead to fixed prices. In contrast, NAR says the rules promote competition and efficient, transparent and fair local broker markets.

NAR, whose CEO left shortly after the historic legal loss, is attractive jury verdict of $1.8 billion, so it could be several years before the case — which covers the Missouri markets of Kansas City, St. Louis, Springfield and Columbia — is resolved. But coupled with similar lawsuits pending, the potential for policy changes that could impact real estate agents’ wallets is palpable.

The impact on the market continues to expand. Actions of Re/Max Holdingsfor example, were down more than 8% Tuesday on litigation fears, even though they had settled with plaintiffs before the recent NAR case verdict.

Here’s what real estate agents, buyers and sellers need to know about potential changes in the residential real estate economy.

Bad time for bad news in real estate

The jury’s verdict comes at a time when many real estate agents are already feeling a pang in their hearts.

Rapidly rising interest rates driven by the Federal Reserve’s fight against inflation recently led the average rate on 30-year fixed mortgages to exceed 8%, exacerbating an existing affordability crisis in the market American real estate. Potential sellers don’t want to move if they have to look at a mortgage rate as much or more than double their current rate, while millions of potential buyers can’t make the monthly payment and are currently priced out of the market.

Existing home sales recently fell to their lowest level since 2010. According to an October report According to Mike DelPrete, scholar in residence at the University of Colorado Boulder, existing home sales are on track for 4.15 million transactions this year, based on NAR data, which would be down from more than 6 million in 2021 and 5 million in 2022.

At a time when home sales are already under pressure, “this lawsuit is just another punch in the gut to real estate franchises,” said Bill Gross, an independent real estate broker associate in California at eXp Realty.

So far, the lawsuits have had little or no trickle-down effect for individual brokers and agents, but that may not be the case forever, depending on how legal battles, taking place on several fronts, train yourself. An analysis by Ryan Tomasello, an analyst at Keefe, Bruyette & Woods, published last month, before the jury’s verdict was rendered, estimates a 30% reduction of the $100 billion paid in real estate commissions each year and up to 1.6 million agents lose their source of income.

Pressure on transaction fees will increase

Pricing has generally been under pressure for several years, as technology leads to more transparency and recent court battles intensify industry pressure.

Additionally, as housing prices rise, fees are more apparent relative to the size of the transaction, said Gilbert J. Schipani, founder of Tempus Fugit Law, which represents buyers, sellers, real estate agents , lenders and businesses in commercial and residential real estate transactions. .

Lawsuits focused on fees reinforce the general trend of trying to reduce fees in the real estate market, Schipani said.

“This is another step in the direction we have been following for 10 years,” he said.

As the trials progress, there will likely be more disclosures regarding fees in the future, for transparency purposes, he said.

As Glenn Kelman, CEO of tech real estate brokerage Redfin, recently wrote“In the weeks leading up to the verdict, the National Association of Realtors has already updated its guidelines to allow agents to list homes that do not offer a commission to the buyer’s agent… .Traditional brokerages will no doubt now train their agents to welcome conversations about fees….It’s the way it should be.

Red endand another technology-focused real estate brokerage, Compassare among the targets added to the new legal challenges.

Buyers’ agents could be the biggest losers

The plaintiffs argue that buyers, not sellers, should foot the buyer’s agent bill, but this could have an unwelcome impact on the ease with which buyers’ agents are used.

“If plaintiffs could get what they wanted, homebuyer representation would be a thing of the past in what is for many the largest and most complex purchase they will make in their lives,” the door said. NAR spokesperson Mantill Williams in an email.

If the courts force current standards to change, more buyers will likely try to find a property on their own to save money and negotiate with listing agents, thinking they will get a discount on fees since the latter are already compensated by the seller, Gross. said.

Not all real estate professionals will agree to work on both sides of a deal because of “inherent bias,” but that could happen more often depending on how the market evolves, Gross said. It’s also possible that new court-imposed rules will prohibit real estate professionals from working on both sides of a deal, Schipani said.

Kelman noted in his post-verdict analysis that if buyers continue to hire a buyer’s agent, they will likely negotiate lower fees given the increased attention paid to them and because they may no longer be part of the price of the house, which made it possible to finance it with a mortgage.

It also suggests that new agents may be less likely to enter the sector, according to Gavin Myers, managing partner at Prudence, a venture capital firm that invests in the real estate sector. Most new agents start on the buyer’s side and there is risk when trying to break into the industry. If there are questions about how they’ll be paid, or if they’ll be paid, people might not want to work on the buy side, or you might not find high-quality people, Myers said.

Changes in the local housing market will be key

Local market rules could change depending on what happens in court or broader changes in the market.

For example, the Real Estate Board of New York (REBNY), which is not affiliated with NAR, recently announced upcoming changes to its rules, in a stated effort to promote transparency and consumer confidence in the market residential. The changes, in the works for months, were voted on in October.

Starting January 1, compensation offers to buyer brokers must come from the seller/owner, according to the change. Listing brokers will no longer be allowed to offer compensation to the buying broker, even on behalf of the seller. Additionally, listing brokers will no longer pay buyer-side compensation. Instead, the buyer’s broker will be paid directly by the seller or owner of the exclusive property, which is expected to occur at closing, as is customary in the New York area, said the group.

“Decoupling buyer-side compensation represents the future of how residential real estate transactions are conducted, and we expect other listing services to follow suit,” REBNY said. in an FAQ on its website discuss changes.

Commissions are already negotiable

Right now, real estate professionals don’t need to change the way they do business as legal challenges continue. But NAR strongly recommends the use of buyer representation agreements for clarity and understanding. NAR also urges its members to continue to tell their clients that commissions are negotiable and set between brokers and their clients.

A separate lawsuit against NAR and the brokerages, involving multiple exchanges, could go to trial next year, and there is also another recently filed nationwide lawsuit to contend with.

“No matter what happens with the Missouri judge, or in any other courtroom, one thing is certain: There is no going back to the way things were,” wrote Kelman, whose the company left NAR before the verdict, in its recent message.

Real estate professionals should stay tuned.

“Now is the time to read the fine print and stay as informed as possible, both for the sake of your business as an agent and for the best interest of your client,” said real estate broker Vickey Barron licensed associate at Compass in New York. .