End of 6% real estate commissions could mean lower home prices

National settlement to end typical compensation practices for real estate agents

An unprecedented deal that eliminates the standard 6% sales commission in millions of home sales could dramatically change the way the home market works, slashing pay for agents and costs for consumers — sparking debate about whether the change will mean lower home prices.

In settling a series of lawsuits, the National Association of Realtors agreed early Friday to pay $418 million in damages and abolish its rules on the share of sales price that is paid to agents and brokers.

The news was reported first by the New York Times, which obtained a copy of the document before its release. The deal will still need confirmation by a federal court, the Times said.

Even so, speculation about the impact of the deal was rampant, said John Ryan, chief marketing officer at Georgia Multiple Listing Services, which lists most of the homes sold in the state for more than 52,000 dues-paying real estate agents.

“Brokers and agents know there will be changes in how their fees and services are negotiated up front,” he said. “It is going to be a deeper conversation. There are concerns.”

Although home prices have been steadily rising, the number of home sales has been dropping. That means bigger paychecks for each agent who is in on a sale, but far fewer paychecks overall. Typically, a seller and buyer each have agents and they split the commission.

The long-term consequences of cutting the sales commission are hard to forecast, Ryan said. “I firmly believe the industry will be able to adapt to changes in the marketplace, but they will have to change how they do business.”

Sales commissions have been generally set at 5% or 6% of the home price. It is generally the buyer who pays the fee, although it is understood that the seller’s price includes the commission.

Critics say that means a windfall that is dependent on the sales price, not the work involved. For example, a 6% commission on the recent $19.8 million sale of a Buckhead mansion could result in a payday of nearly $1.19 million — albeit split two ways.

A 6% fee on a $500,000 home sale would mean the buyer pays $30,000. For a $1 million sale, the commission would be twice that. American commissions are generally much higher than those charged in home markets elsewhere. In sum, commissions amount to about $100 billion a year, the Times reported.

Plaintiffs in the suit against NAR argued that if commissions are slashed, prices will fall, too. And many consumers have complained that it’s also a matter of fairness, charging that some agents pick up a hefty check without much effort.

Yet the dynamic depends on the kind of housing market, said long-time housing expert Eugene James, co-owner and broker at Atlanta Real Estate Consultants.

“Yes, when the market was hot, I thought it was ridiculous to have a fixed commission when the agents are basically just order takers,” he said.

On the other hand, when sales are slow, a smaller commission reduces the financial reason for an agent to work extra hard to find buyers, James said. “You are lowering the incentive (for the agent). It reduces the costs for sellers, true, but will that house see as many eyeballs as possible?”

Moreover, home prices might not fall just because commissions become a competitive market, he said. “I don’t see it. Prices really are independent. They are all about inventory and there is still so much more demand than supply.”

Many buyers, especially first-timers, make a downpayment for a house, but borrow most of the money needed. If fees are negotiated and paid separately, that could hurt younger and less affluent buyers, said Bill Adams, president of Adams Realtors in Atlanta.

The NAR was a defendant in a lawsuit filed in 2019 by some Missouri home sellers who were awarded $1.8 billion in damages last fall. Big real estate agencies Re/Max and Keller Williams have already settled. But the NAR verdict was followed by a number of similar suits filed around the nation, and not all those defendants have settled, including Berkshire Hathaway, which is owned by Warren Buffett.

In a statement, NAR’s interim chief executive said that the group tried to resolve the Missouri 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,” said Nykia Wright, Interim CEO of NAR. “This settlement achieves both of those goals.”

Problems for the NAR are not over. The association, which critics have said operates as an outsized and unfair presence, has also been in the sights of the Justice Department’s anti-trust division, according to the New York Times.