The residential real estate business just got a makeover

New rules from a lawsuit settlement that went into effect last weekend will have a significant impact on costs for both buyers and sellers

Photo by Tierra Mallorca on Unsplash

Last Saturday, new rules went into effect as a result of a class action lawsuit involving Missouri home sellers, the National Association of Realtors, and the “four largest national real estate broker franchisors.”

Two significant changes came from the settlement on March 15:

1. Sellers are no longer responsible for buyers’ commissions unless they choose to cover them.

2. Proposed commission splits are prohibited from being advertised on the so-called Major Listing Service (“MLS").

“The biggest change is that buyers and their agents will need to negotiate compensation directly before viewing homes,” said Jen Routon, president of the Denver Metro Association of Realtors. “If a seller is not offering compensation to the buyer’s agent, the buyer will pay their agent directly.”

Sellers can decide not to compensate the buyer’s agent at all.

And both sides of the exchange will have more room to negotiate with their own agents who can no longer count on huge paychecks just by landing a listing or relying on the seller’s agent to have already secured a hefty commission for an agent who brought a buyer to the table—something that’s become easier to do as the housing market gets tighter and tighter, with the housing market reportedly now short 4.5 million homes.

If you’ve ever bought or sold a home or thought about doing it, this is a pretty big deal.

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What does this case mean for people in the housing market?

Well, for property sellers, costs will likely go down. Buyers will probably have to start paying some sort of fee for any third party used in the sale, such as an agent or broker. And agents and brokers might have to settle for lower fees in general.

Consider that in Maryland, sellers pay an average of 5.49% of the home’s sale price in realtor fees. The average home price in Maryland is around $420,000, which means that $18,258 of the sale price will go to real estate agents.

(I’m speaking here from experience and not as an expert in real estate.)

But it seems to me that in the old days, before smartphones and the internet, hiring a real estate agent was the best way to let other people know that your house was for sale. Realtors would publish the listing in a book that was shared within the industry to let other agents know about your home. They would also spend their own money to create glossy brochures to pass out to passers-by and otherwise market your property to maximize its sale value. These days, sites like Zillow and Realtor.com make that kind of information available to anyone—for free. In a tight housing market, realtors can make the same huge commissions with relatively little effort. Compare that to other professions—even lawyering—that charge by the hour for their labor.

Although sellers bore the full cost of that commission, the contract engaging the agent provided that half of that fee would go to the buyer’s agent, as well. So, if sellers wanted a real estate agent to help them sell their house, there was very little they could do other than agree to a 5-7% agent fee.

The lawsuit and settlement seem to have changed all of that.

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Let’s break down the lawsuit, the settlement, and what this means for buyers, sellers, and agents in the residential real estate market.