A powerful group of real estate agents agreed to settle a lawsuit that alleged the group’s commission rules forced homeowners to pay higher fees when they sold their houses.
A federal judge granted preliminary approval to the settlement terms in March, and as part of it, the group, National Association of Realtors®, is expected to pay $418 million in damages.
Key changes to the process of buying or selling a home will be made, as well, to account for more transparency and encourage market competition.
Before the settlement, broker commissions were typically paid by sellers. The seller’s agent usually agreed to split the commission with the buyer’s agent. These commissions typically range from 5% to 6% of the total cost of the home — an industry-wide standard that is much higher than in other countries.
But buyers are not always made aware of the full cost of purchasing a home, particularly when it comes to the broker’s commission. The same goes for sellers. Homeowners sued the NAR, alleging the organization fixed broker commissions at high rates and discouraged clients from seeking better terms, which cost them more money.
The lawsuit also argued that the trade group violated antitrust laws by mandating that the seller’s agent make an offer of payment to the buyer’s agent. As it stands, the settlement will end the practice of sharing commission rates on the Multiple Listing Service (which is only accessible to agents) and theoretically make the process of negotiating compensation more transparent.
What this means for West Side buyers, sellers
Beginning in late July 2024, agents will require prospective homebuyers to sign an agreement that discloses their broker’s commission — how much the buyer will compensate their agent if they go through with the purchase — and who will pay it. A contract must be signed before a Realtor® can represent a client and show them properties.
Agreeing on the terms before viewing properties provides clarity for buyers on what services they can expect from their agent, experts say. It also guarantees buyer’s agents will get paid for their work.
For some, the process won’t change much. Commissions were technically always negotiable, even before the proposed settlement. Many Realtors® already used buyer-agent agreements, although they were not previously required in Illinois.
There is now no option for agents to show a house to a buyer without a written agreement, said Michelle Flores, a Chicago-area Realtor® who represents both buyers and sellers.
The agreement will state how much the buyer is willing to pay the agent to represent them, with the understanding that when they want to view a house, the agent will first try to negotiate for the agreed-upon compensation on the listing side, Flores said.
“But in the event that I don’t receive compensation from the listing side, the buyer is responsible to pay the buyer’s agent,” she said.
On the seller’s side, the settlement bans advertising a commission for the buyer’s agent on the MLS, the online listing platform that only real estate agents have access to.
“Instead of me offering compensation on the MLS to the buyer’s agent, the buyer’s agent has to come to me and say, ‘Hey, Michelle, I see a listing. I have a potential buyer, I would like to show that listing to the potential buyer. Are you offering compensation?’” Flores said.
She would respond with the compensation for that particular unit, she said. Then, the buyer’s agent will say, “Great, that works for us!” Or say no, because the compensation is outside the amount they agreed upon with their buyer client.
The main widespread effect of the settlement will likely be lower commission fees for sellers, as agents try to compete for business.
Flores said one potential downside of the settlement is that it could put lower-income buyers or those who don’t have a lot of cash at a disadvantage.
“If sellers are adamant about not paying a buyer agent commission, then who’s going to pay the buyer agent?” she said. “Buyers who don’t have the funds will fall in that category of not being able to buy — we already know which demographic is going to suffer.”
Flores also said this might make the home-buying process take longer or seem more daunting to prospective homeowners.
Realtors® say the details of how the settlement will play out haven’t been determined. And although a federal judge granted preliminary approval to the settlement in March, the final approval hearing won’t be until late November of this year. It is widely expected to be approved.