A verdict in a $1.8 billion lawsuit against the real estate trade group National Association of Realtors (NAR) has some analysts expecting a revolution in how the traditional real estate commission system works.
However, many working real estate agents don’t believe the verdict will move the needle for buyers and sellers. They feel the problem the lawsuit intended to address stems as much from a broken system as from a lack of consumer education.
The verdict, handed down in a Missouri court in October, concluded that NAR colluded with brokerages to keep commissions artificially high. If the judgment is upheld on appeal, as many expect, the most significant and most likely change is that sellers will likely no longer be expected to pay the commission of the buyer’s agent — an offering currently required to get a home listed on the MLS, the leading directory of home listings in the United States.
Since the typical real estate commission is currently about 6%, this change means sellers would potentially save about half that percentage on their home sale. This would bring the U.S. real estate commission system more in line with other countries, where the average commission is closer to 2%.
A big difference, or none at all?
Although this change could save sellers thousands, many agents think overthrowing the commission system could lead to unexpected consequences — or perhaps no changes at all.
Cindi Hagley, a Realtor based in California’s Bay Area, thinks the market would quickly adapt.
“If (a) buyer falls in love with a home offering zero commission — meaning the buyer is responsible for paying their agent — I would negotiate a decrease in the price to cover that fee, or I would make paying the buyer’s agent commission part of the purchase offer,” Hagley says.
Brett Rosenthal, a Philadelphia-based Realtor, agrees. “Buyers would negotiate low, knowing they may be paying their buyer agent a commission,” Rosenthal says. “And thus, sellers will get a similar price, or possibly even less.”
In other words, while sellers would no longer be responsible for paying 3% of the sale price to the buyer’s agent, their final sale price might be 3% lower since the buyer is now incorporating the expense of their agent’s commission into their offer.
In a buyer’s market, they may even demand that the seller pay the buyer’s agent commission, as buyers routinely ask for concessions or repairs when they have leverage.
Of course, sellers could always refuse this demand, but then they risk losing the buyer. Although the U.S. housing market currently favors sellers, that could change quickly.
How the lawsuit could hurt sellers in the long run
Many agents believe that changing the commission system will lead to fewer buyers. This move would dramatically dilute seller leverage. Rosenthal said that after post-lawsuit sellers try to sell without offering a buyer’s agent commission, they’ll quickly return to the old way.
“Once sellers see (fewer) buyers coming to their home,” Rosenthal explains, “I see it reverting back.”
This prediction gestures at how the buyer’s agent commission actually works. While many anti-commission sellers seem to think they’re paying the buyer’s agent to negotiate against them, the reality is somewhat different. In practice, a buyer’s agent commission is an enticement for buyer’s agents to bring their clients to see a home.
The more buyer’s agents competing for that 3%, the more exposure a home gets, and the higher the eventual price could rise. Take that 3% enticement away, and sellers could suddenly find themselves with half-full open houses and offers below the listing price.
Plus, some potential buyers would stay out of the market simply because they couldn’t afford to pay an agent 3% on top of the purchase price.
Relief for buyers
Could a deconstructed commission system lower home prices? After interest rates meant to cool the housing market, home prices in many areas remain close to all-time highs.
Even a slight decline in home prices could be a boon to buyers struggling to afford a home.
Insight from real estate agents suggests this will depend heavily on the market.
“In the Bay Area where there is a shortage of homes, I do not feel that any changes to how commissions are paid would lower home prices,” Hagley points out. “In my area, it’s supply and demand.”
Rosenthal, however, thinks buyers could see a slight decline. “My guess is that home prices would come down slightly because the buyer who won’t use an agent won’t get into these homes or find them like an agent would.”
It might not be as bad as sellers think
Home sellers hate paying real estate commissions. According to Clever Real Estate, almost a third of sellers (31%) resent the commission so much that they’d leave money on the table and sell for less than the market rate to avoid paying the agent commission. But a closer look reveals that much of that hostility might be misplaced.
Before the lawsuit, commissions were already on a steady decline. A 2023 survey of 625 agents found that the average U.S. commission sits at 5.49%, with listing agents receiving 2.83% on average and buyer’s agents receiving 2.66%.
These figures are likely due to a market that’s given sellers the leverage to negotiate down their commission and brokerages like Clever Real Estate that offer a full-service agent experience at a discounted rate. Even without the court’s intercession, commissions would probably continue to drop.
What Americans get wrong about commission
Complicating matters is the fact that many consumers simply don’t know how much commission they’re paying. About 62% of Americans mistakenly believe buyers typically pay their agent’s commission.
Even among active sellers, 42% don’t realize they’ll be expected to pay the buyer’s agent’s commission. Only 1 in 9 Americans knows the average commission is about 6% of the home’s price.
This all suggests that Americans didn’t hate the commission system, as much as they just didn’t understand it. After explaining the commission structure to them, 69% of Americans said it seemed fair.
Still, if this recent verdict is upheld, significant changes could be coming to the commission system — or not. Despite dramatic headlines, agents just don’t see substantial changes in the industry’s future.
“I feel that commissions will effectively remain the same,” Hagley says. “They may just be renamed or approached from a different angle.”
Ultimately, the U.S. housing market is a massive, complicated system, and it will take more than a change in commission to upend the status quo.
This article was produced by Clever Real Estate and syndicated by Wealth of Geeks, via Associated Press.
