Home buyers and sellers could get a break this spring thanks to a new legal settlement that promises to upend a decades-old real estate commission system.
The National Association of Realtors (NAR), one of the largest real estate trade associations, has agreed to settle a series of lawsuits centered on who should pay commissions when a home is sold. As part of today’s settlement, NAR agreed to pay $418 million in damages over four years.
In addition to payment, NAR agreed to change the cooperative compensation model rule, which required agents using the multiple listing system, or MLS, to include offering a buyer’s agent commission on home listings .
The main conclusion is that buyers and sellers will have more freedom regarding commission decisions. As a result, the standard 6% real estate commission could disappear and both buyers and sellers could end up saving money in the transaction. The agreement, if approved, will come into force in mid-July.
Last October, a legal decision in a case known as Sitzer/Burnett shook the real estate industry. A jury has decided that commission sharing – a common practice among real estate agents – unnecessarily increased transaction costs for buyers and sellers. In that case the plaintiffs received nearly $2 billion in damages.
Today’s settlement covers all lawsuits involving NAR and most of its members, including Sitzer/Burnett.
What does NAR settlement mean for home buyers and sellers?
The part of the deal that has the biggest impact on buyers and sellers is the change to the rules regarding agent compensation. Once the agreement comes into effect, each party to the transaction will be responsible for paying their representative.
Traditionally, it is the seller of the home who is responsible for paying commissions for their agent and the buyer’s agent. The level of compensation paid by the seller is posted on the MLS as part of the listing information.
Nationally, the commission paid on a real estate deal averages about 6% of the home’s sales price, split equally between the two real estate agents. For example, the commission on a $400,000 home is $24,000 from the seller’s takeaway, with $12,000 paid to each agent.
Under the new agreement, NAR will remove the agent commission field from the MLS and prohibit its members from offering broker compensation when listing a home on the service.
The new rules allow sellers to decide whether or not to pay the buyer’s agent. If the seller chooses not to pay a commission, he can reduce the amount paid to sell his home by half. If the seller decides to pay a commission, he can negotiate the amount and type of compensation, from offering a flat fee to a percentage of the sales price.
As a result of the new rule, some buyers will likely have to pay the commission to their agent and may be able to negotiate the amount. In another rule change, the NAR will now require members representing buyers to enter into written contracts (or buyer agreements) that specify the services they will offer and how much those services will cost the buyer.
For buyers and sellers looking to purchase a home this year, finding a knowledgeable, trustworthy agent is more important than ever. Depending on your experience level and track record, “you can have a very different experience with every single person you might work with,” says Bret Weinstein, CEO and founder of Guide Real Estate in Colorado.
Buyers may also decide not to hire an agent and avoid having to pay any commissions. But for those who prefer to have the help of a professional, a little research could go a long way in making the home buying process easier.
Weinstein recommends asking targeted questions about their experience and knowledge of the local market, the services they provide, strategies for deciding list prices (or offers) and obtaining concessions, and why you should choose them as an agent in general. And then decide if it’s worth it.
“If you’re going to pay a fee for a service, there actually has to be a return,” Weinstein says.
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