The changes coming to the Realtor commission model upend decades of legal and political wrangling to protect the standard 5%-6% rate on home sales.
New York CNN —
Buying a house — the most expensive purchase of your life — fundamentally sucks.
The industry that facilitates real estate transactions is far more vast and opaque than most people expect when they decide to begin the buying process. And you don’t have any choice but to enter the labyrinth if you want to unlock that ultimate badge of adulthood, homeownership. It is emotional and full of paperwork and tends to making buyers feel, undeservedly, stupid.
Much of that is by design, reinforced by the National Association of Realtors, a mega trade group with monopoly-like control over US real estate.
There’s good news and bad news on the horizon, though.
The good news, by some accounts, is that antitrust authorities have forced NAR (pronounced “nahr” by folks in the industry) to loosen its grip on agent commissions, which should, eventually, reduce the costs buyers and sellers have to pay. It could also introduce new methods of home buying and selling that bypass traditional agents.
Starting this Saturday, the days of the standard 6% commission — two to three times what agents make in other developed economies — are effectively over.
Sellers, who historically have paid both the listing agent and the buyer’s Realtor, will be on the hook for their agent’s fee. Buyers and their agents will negotiate a compensation plan upfront.
“It’s a partial deregulation of a marketplace that was regulated not by government, but by the industry,” said Stephen Brobeck, senior fellow at the Consumer Federation of America, a nonprofit advocacy group. “In the long run, it’s going to be a very good thing.”
But it will take time to unwind the system that the NAR spent decades building — a system that keeps commission information largely out of public view — and fighting in court to protect.
Disruption-resistant
In an era when the internet has made it much easier for buyers and sellers to find one another, the 6% commission persists. Real estate, more than almost any other industry, has resisted the disruption that’s made it much easier for consumers to, say, book a trip without paying a travel agent, or trade stocks without a broker.
That is largely thanks to the NAR, which represents more than 1.5 million dues-paying Realtors and is among the most powerful lobbies in Washington (that capital R is not a typo — the group trademarked the term, and non-members who try to use it are advised to have a very good lawyer on their side).
While NAR has long stated that the 5% to 6% fee was always negotiable, in practice, that’s just not happening.
Imagine that you’re selling your home and expecting to pay 6% of the sale price to the brokers. You ask your parents and find that, yes, they also paid out 6% and look that’s just the way it’s done. But say you put a lot of work into the home and believe it will sell quickly with minimal effort by an agent. You might be tempted to negotiate with your listing agent, whom you need to get your house listed on the local MLS, to keep more of the proceeds for yourself. But in doing so, you’re inviting buyer brokers to steer their clients toward properties offering a bigger commission.
That’s not some hypothetical thought experiment, either. One recent national studyfound that “buyer agents do in fact steer clients away from properties that offer low buyer agent commissions,” and that those properties take longer to sell, if they sell at all.
NAR has existed in one form or another for more than a century,
More often than not, though, buyers and sellers often don’t realize they’re allowed to negotiate in the first place, and that is also by design.
“Effectively, there’s an industry-wide gag rule on…marketing that talks about commissions,” Brobeck says, citing a 2021 study.
The changes to the commission model upend decades of legal and political wrangling to maintain Realtors power in American real estate. The Department of Justice has sued the organization at least 10 times, and its antitrust investigations into whether its MLS system continue.
In a statement to CNN Tuesday, a NAR spokesperson reiterated that agent commissions have always been and will remain “fully negotiable.”
“NAR does not have a commission structure,” the spokesperson said, adding that the group requires Realtors “to have candid and transparent conversations with consumers about compensation—consistent with their obligations under the Code of Ethics.”
The changes announced in the March settlement with home sellers are coming into effect at the end of a tumultuous year for NAR internally.
A year ago, its former president, Kenny Parcell, resigned after theNew York Times published an articledetailing complaints from employees that included improper touching and sending lewd photos and texts — allegations Parcell denied. In October, a jury ruled against NAR in the landmark case that challenged its commission model, and its CEO announced early retirement two days later. The woman who replaced Parcell stepped down in January, citing blackmail threats.
Industry experts say that while the change to commissions is seismic, NAR retains a serious grip on the market, thanks to millions of dollars spent on lobbying and marketing over the years.
“They’ve kept it as a black box, and they’ve been able to do that by gag rules … [and] on confusing terminology,” Brobeck tells me.
Brobeck is quick to note he doesn’t blame Realtors for the industry’s problems, or NAR’s.
“They’re good people,” he says. “They’re in a rotten system.”
