The National Association of Realtors (NAR) is the country’s largest trade association, representing over 1.5 million members. In response to several class action lawsuits, NAR recently reached a settlement that will likely reshape residential real estate transactions across the country. The original Sitzer-Burnett lawsuit was filed in Missouri by a small group of home sellers and challenged long-standing industry practices, particularly around listing and commission structures. The suit alleged that buyer’s agents were being paid too much and real estate agents conspired to inflate brokerage commissions paid by sellers.
Central to the lawsuit were the rules around multiple listing services, the sharing of commissions, and the lack of transparency in agent compensation. In California, real estate commissions are negotiable, with sellers typically paying 5-6% of the purchase price, and those commissions are normally split equally between the buyer’s agent and the seller’s agent. However, in Missouri the plaintiffs argued there was not enough transparency and that the buyer’s agent’s commission should not be the responsibility of the seller. Rather, it should be the buyer’s responsibility to compensate their agent.
Key elements of the proposed settlement include modifications to how commissions are disclosed and shared, and a requirement that buyers enter into buyer representation agreements with their agents. Buyer representation agreements typically require the buyer to compensate their agent unless the seller chooses to do so. If the settlement is approved, sellers can continue to offer compensation to buyer’s agents, but that compensation cannot be advertised in the multiple listing service.
While some argue the proposed rules will lead to more sellers willing to put their homes on the market for a lower price due to increased savings, others argue the proposed rules will lower the buyer’s purchasing power and therefore limit the number of buyers able to purchase a home. If it becomes incumbent upon buyers to pay their own agent’s commission, it will be more expensive for them to purchase a home, and they may opt to proceed without appropriate representation.
The direct effects of the settlement on buyers and sellers in our area are multifaceted, with both agents and principals being forced to adapt to this new environment. With nearly two million single-family residential sales occurring annually, Los Angeles is a high-stakes, complex market. Negotiations, bidding wars, home inspection issues and unforeseen legal problems are commonplace, and the need for balanced and independent representation will likely continue to be critical to the home sale process.
Nevertheless, the NAR settlement marks a pivotal moment for agents and consumers, transforming how properties are listed and marketed. Will sellers continue to compensate buyer’s agents? Will first time homebuyers be able to afford independent representation out of pocket or go unrepresented? Will buyers seek out representation from seller’s agents? Will sellers reduce the asking price of their properties to pass along the commission savings to buyers? As these changes unfold, all parties will need to stay informed and agile, ready to navigate the evolving landscape.
Regardless of how agent commissions are paid and recognizing the vast majority of services provided by seller’s agents and buyer’s agents cannot be automated, I expect local real estate professionals will continue to be integral to real estate transactions and serve as trusted resources in the home sale process.