How the recent Realtor settlement could change the way Americans buy and sell homes

By Anna Bahney, CNN

Washington, DC (CNN) — A settlement announced by the National Association of Realtors on Friday, which ended its litigation with some homesellers, could fundamentally change how Americans buy and sell their homes.

The agreement will effectively destroy the rules that many critics say help drive home prices higher. The new rules are likely to be fairer for home buyers and sellers who’ve been saddled with the most unaffordable housing market in a generation.

But even after the $418 million settlement goes into effect in July after court approval, some things will remain familiar.

Commissions aren’t disappearing, and they’ll still be negotiable. And sellers’ and buyers’ agents will still be able to split commissions.

Here’s what the changes mean for you.

How does this change the current rules?

One new rule prohibits agents’ compensation from being included on listings on local portals known as multiple listing services. Critics say doing that in the past led some brokers to steer their clients toward properties that could earn heftier commissions.

Another change is requirements that brokers subscribe to multiple listing services — many of which are owned by NAR subsidiaries.

A separate new rule will require buyers’ brokers to enter into written agreements with their buyers.

The changes in the commission structure are expected to reduce commissions by 25% to 50%, according to TD Cowan, a financial services research firm. They also may lead some brokerages to offer pared-down services at a discount or, on the other end, become white-glove, we-do-it-all boutiques.

I want to buy a home. Will I pay my own agent now?

Homebuyers haven’t typically had to pay their agents out of pocket. While that’s now more likely, it’s still not required.

According to the settlement, which needs court approval, sellers can still pay both their own agents and buyers’ agents.

While home listings where the sellers pay both agents’ commissions might look like they’re saving buyers from upfront costs, the commission fees are often baked into the home prices. That winds up making things more expensive after all.

Now, however, sellers won’t be required to pay the buyer’s agent as well on MLS systems. In fact, sellers won’t even be allowed to say how much they’re paying their own agents on those centralized listing systems.

This means buyers will need to negotiate terms with their agents and include that in a buyers representation agreement.

This agreement will specify what the buyer’s agent will do and how they‘ll get paid. The agreement may need to have wording that says that if a seller doesn’t agree to pay the buyer’s agent commission, the buyer is on the hook for that money.

I want to sell my home. Do I still need to pay a commission?

Yes. But once the changes go into effect you won’t be required to pay a commission to the buyer’s agent anymore, as has been the case on some MLS systems.

Commissions are still negotiable, as they have been since the US Supreme Court put a stop to NAR’s rate-setting in 1950, and that negotiation might be even more important than before.

As a seller you can still stick with the typical standard commission structure, typically split evenly between buyer’s and seller’s brokers if you want. The commonly held standard has been 6%, but in many places the typical rate is lower.

But under the new rules, you don’t have to use that structure; you can negotiate different options.

In addition, the settlement prohibits disclosing the commission on the MLS at all. That’s to help keep agents from just focusing on properties where they’ll take home bigger paychecks instead of on homes that actually make sense for their clients.

The NAR has long said having sellers pay the buyer’s broker as well makes it cheaper in terms of upfront costs and more accessible for homebuyers to hire an agent.

If you see paying a 6% fee as the cost of doing business and getting the home seen and would like to market your home by offering to pay the buyer’s broker fee – as is typical now – you can still do that. Or you could offer 3% total with a smaller split between the two. However, that information is no longer allowed to appear on the MLS and will need to be communicated to buyers’ brokers and agents separately.

How will the market change?

While everyone is still figuring out how things will work now, the changes could transform the real estate business, changing how transactions operate and pushing costs down.

“Even if the letter of the settlement allows for cooperation, how the settlement is perceived may still re-shape agent attitudes about cooperation, and consumer attitudes about fees,” said Glenn Kelman, the CEO of brokerage firm Redfin, in a statement. “The result could be that agent-to-agent cooperation on fees is weakened but not killed.”

Kelman wrote that he thinks the settlement will drive commission fees down.

“When the consumer who hires an agent pays that agent, that consumer is much more careful about fees,” he said.

While there are a variety of lower-cost models out there, including flat rate brokers or discount brokers, they typically haven’t had a very large share of the market.

It could be that buyers and sellers prefer the traditional way of doing business. But for those who are looking for alternatives, new options should present themselves.

A recent study by the Federal Reserve Bank of Richmond found that using a cost-based commission model – in which buyers’ agents earn money only per house showing and not from a percentage of the sale itself – could save consumers more than $30 billion a year.

The researchers found that a commission cap would help reduce prices for homebuyers and sellers, but at the same time, a commission floor would be needed to support low-value housing sales.

The new rules also raise concerns about how first-time and lower-income buyers will be impacted.

While the changes could slice real estate agent’s commissions, some agents are celebrating the new rules.

“This is the best news ever for professional real estate agents,” said Michael Downer, a broker associate with Coldwell Banker Realty based in Naples. “It will be difficult for people who have a license in name only and who don’t understand it to demonstrate their value to buyers or sellers to stay in business.”

He anticipates the market will be pushed to two extremes: low-cost low-service agents and higher-cost, higher-service providers.

“I don’t think there is going to be any middle ground,” he said. “There will be people who provide almost no value – they slap it on the MLS and that’s it. And people who provide limousine service. The general public doesn’t see value in the buyer agent right now.”

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