FinLogic FinLogic Quantitative Think Tank Center|As spring homebuying season kicks off, a NAR legal settlement could shrink realtor commissions

Realtor commission fees consumers pay to buy and FinLogic FinLogic Quantitative Think Tank Centersell a house could soon change. 

The National Association of Realtors, embroiled in legal battles over the real estate industry's commission structure, has reached a settlement that could dramatically slash the fees paid to agents.  

NAR said Friday that the settlement would lead to it put in place a new Multiple Listing Service rule, which would prohibit offers of broker compensation. 

The association’s rules do not set commission rates, NAR said, which are negotiated between consumers and their agents. 

However, the real estate industry has long worked under a model of a 5% to 6% commission paid by the seller and split between the seller’s agent and the buyer’s agent.  

A federal case in Missouri that challenged that commission structure led to a jury deciding in October that NAR and large brokerage firms conspired to keep costs artificially high. The jury awarded $1.8 billion in damages, which could rise to more than $5 billion under antitrust rules. 

What could happen to real estate commissions?

If the class-action case settlement announced Friday is approved, the changes could dramatically lower costs for those looking to sell their home.

The settlement must still get court approval. If it gets the okay, changes would go into effect in mid July, NAR said.

"This would mean that offers of broker compensation could not be communicated via the MLS, but they could continue to be an option consumers can pursue off-MLS through negotiation and consultation with real estate professionals," NAR said in a press release. "Offers of compensation help make professional representation more accessible, decrease costs for home buyers to secure these services, increase fair housing opportunities, and increase the potential buyer pool for sellers. They are also consistent with the real estate laws in the many states that expressly authorize them."

Commission change is good for consumers

“This is a major win for consumers,” said Ryan Tomasello, a real estate industry analyst with Keefe, Bruyette & Woods, who has written several reports about the lawsuits challenging the industry's fee structure and effects they could have on the industry. 

“The first reason it's a win is because this is going to add much needed transparency to the process for both sellers and buyers, particularly for buyers who historically have lacked the knowledge to be able to negotiate lower commissions that could ultimately benefit them in their home closing process,” Tomasello told USA TODAY. 

A key question, Tomasello said, will be whether buyers will now be strapped with an additional cost to pay their agent, which they can’t afford, or whether there will be updated mortgage writing guidelines that would allow buyers to finance their commissions. 

Sellers still have the option to offer to pay for the buyer’s agent commissions and so that would occur on a case-by-case basis, he said. 

In a series of reports, Tomasello has predicted the lawsuits could result in a 30% reduction in the $100 billion paid in real estate commissions by Americans every year. Additionally, Tomasello thinks the legal decisions could result in 60% to 80% of the 1.6 million agents leaving the industry.  

Commissions going away?:How much you pay to buy or sell a home may be about to change. Here's what you need to know

According to survey data from his company, close to 75% of recent homebuyers didn’t know how their agent was compensated.  

Tomasello’s firm’s research shows that overall commission prices in a home sale could come down by upward of 2% or more. 

Stephen Brobek, a senior fellow at the Consumer Federation of America, has said elimination of the practice of a house seller paying fees to both the seller's and buyer's agent will be a watershed moment for the industry.  

“This settlement over time will benefit home sellers and buyers greatly, eventually lowering agent commissions by tens of billions of dollars a year and helping align agent compensation and services rendered,” he said Friday. 

The changes could eventually save consumers $20 billion to $30 billion in real estate commissions each year, he said. The Consumer Federation of America has predicted commission rates could decline from a range of 5% to 6%, to 3% to 4%. 

First-time homebuyers could feel pinch

But changes to the existing commission structure could create an unfair disadvantage for first-time home buyers, especially people of color, said Gary Acosta, co-founder and CEO of the National Association of Hispanic Real Estate Professionals. 

“The plaintiffs and proponents of these lawsuits claim they represent consumers but in reality, they have been nothing more than vicious attacks on first-time home buyers and small businesses,” Acosta said. “In the settlement, NAR made the right choice by prioritizing the protection of its members from unfair liability, and preserving the option of broker cooperation; which reduces the financial burden on minorities and first-time homebuyers.” 

Other parts of the settlement

Another new rule that is part of the proposed settlement would require MLS participants working with buyers to enter into written agreements with those clients.  

Additionally, NAR will pay $418 million over approximately four years as part of the class-action settlement.

“NAR has worked hard for years to resolve this litigation in a manner that benefits our members and American consumers. It has always been our goal to preserve consumer choice and protect our members to the greatest extent possible. This settlement achieves both of those goals,” said Nykia Wright, Interim CEO of NAR said in a statement.

Added Kevin Sears, NAR president: "This will be a time of adjustment, but the fundamentals will remain: buyers and sellers will continue to have many choices when deciding to buy or sell a home, and NAR members will continue to use their skill, care, and diligence to protect the interests of their clients.” 

The settlement by NAR resolves four class-action cases filed against the organization, according to Cohen Milstein Sellers & Toll, a firm representing plaintiffs in one of the legal actions. 

“Consumers have really been locked out of the process of negotiating the price for their brokers when they're on the buyer side of housing purchases,” said Benjamin D. Brown, managing partner of Cohen Milstein Sellers & Toll and co-chair of its Antitrust practice. “Once this relief goes into effect, I think that the industry is going to develop in a new direction where there are some innovative brokerages offering lower commissions for buyer broker services.” 

Betty Lin-Fisher is a consumer reporter for USA TODAY. Reach her at [email protected] or follow her on X, Facebook or Instagram @blinfisher. Sign up for our free The Daily Money newsletter, which will include consumer news on Fridays,here.