Earlier this year, the National Association of Realtors reached a settlement in a class action lawsuit related to commissions paid to real estate agents. This settlement, and related litigation, raised questions about how these cases impact new-home transactions.
Under the settlement, sellers’ agents are banned from setting commissions for buyer’s agents in Multiple Listing Service (MLS) listings. The terms of the settlement go into effect on August 17, 2024.
BACKGROUND
On March 15, the National Association of Realtors reached a settlement in Burnett v. National Association of Realtors et al., a class action lawsuit over commissions. At issue in the lawsuit were “cooperative compensation” agreements in which sellers’ agents make a “blanket unilateral offer of compensation” to buyer’s agents when listing a home on the MLS.
The settlement ends the practice of requiring commissions offered to buyers’ agents to be set by the seller’s agent when a home is listed on the MLS.
Going forward, buyers and their agents need to explicitly agree on the services the agents will provide and the fees to be paid by Buyer for such services. Online MLS databases will no longer display commission rates, and the National Association of Realtors will be required to allow real estate agents to receive payment without subscribing to an MLS.
Not all states have regulated real estate commissions the same. In Minnesota and Wisconsin, the practice was essentially unregulated, allowing commission splits to be set in advance.
Note: The National Association of Realtors admitted no wrongdoing in the settlement. There are more than 20 related or similar cases involving real estate brokerages across the country and the settlement ends the National Realtor Association’s participation in the remaining cases.
AFFORDABILITY & ACCESS CONCERNS
For years, there have been concerns over the cost of these commissions, especially in new home purchases. Additionally, questions over the cost of the service and the value provided in new construction sales vs. existing home sales, as new home buyers often engage directly with the homebuilder and not through the buyer’s agent.
From an access standpoint, a 2017 report published in the American Economic Journal highlighted concerns over the practice of “steering” in which buyers’ agents steer their clients to homes with higher commissions paid to the buyer’s agent.
According to the report, listings offering buyer’s agents less than a 2.5% commission had a 5% lower chance of being sold and stayed on the market 8 days longer than homes with higher commissions for buyer’s agents.
INDUSTRY GUIDANCE
With the settlement approved by a Federal judge, Housing First Minnesota is able to present guidance to its members. This guidance reflects the Federal Court settlement and is in line with Federal anti-trust regulations.
Notes:
1. Going forward, commissions paid to the buyer’s agent will be set by the buyer, not the seller’s agent. These can be structured in a variety of ways. Sellers of new homes are under no obligation to pay commissions to the buyer’s agents unless that is part of their purchase agreement with the buyer.
2. Agreements between buyers and sellers and their agreements with their respective real estate agent or sales agent are private contracts. As such, these contracts are fully-negotiable and can be structured in a variety of ways, so long as they comply with all existing laws and regulations.
3. Housing First Minnesota identifies the following options for new home sellers, but this is not to say that these are the only options available to you. No matter how you structure your sales transactions, it is important that you inform your buyers upfront about how your organization approaches the topic of buyer commissions.
Option 1: Buyers Pay Buyer Agent Commissions
Under this Option, you need to inform your buyer that they are responsible for paying the commission for their agent if they are working with one. Under this option, the builder pays nothing.
Option 2: Pay A Fixed Amount
Under this Option, you need to establish a fixed dollar amount that you will pay (or contribute towards paying) a buyer’s agent if the buyer is represented by one. The buyer is required to pay the remaining amount if there is a gap between the fixed amount your company is paying and what the buyer agreed to pay their agent. You may choose to add this charge as a line item on top of the home’s list price.
Option 3: Pay A Fixed Percentage
Under this Option, you need to establish a fixed percentage of a home’s price that you will pay (or contribute towards paying) a buyer’s agent if the buyer is represented by one. The buyer is required to pay the remaining amount if there is a gap between the amount your company is paying and what the buyer agreed to pay their agent. You may choose to add this charge as a line item on top of the home’s list price.
Members with questions about this topic should contact Nick Erickson for more information.
