Rule changes for real estate commissions fueling brokerage industry confusion

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Residential real estate brokers and sales agents on Long Island and across the country suddenly find themselves in unchartered territory, after a landmark settlement is changing some of the rules they’ve long been operating under. 

The changes are a result of a $418 million settlement that the National Association of Realtors agreed to this month to resolve several class-action lawsuits that challenged the industry’s cooperative compensation structure. 

The lawsuits, filed by groups of home sellers, claimed that they were forced to pay artificially inflated commissions to agents in the sales of their homes, mostly due to part of the commissions going to compensate agents representing homebuyers. A jury ruled in favor of the plaintiffs last fall and ordered NAR and several major brokerage firms to pay $1.8 billion in damages. 

The NAR settlement, which still awaits court approval, covers most of the brokerage firms that are members of the trade group and releases them from liability from the lawsuits, however, those firms that had gross sales of more than $2 billion in 2022, which includes several major brokerage companies on Long Island, are not covered by the NAR settlement.  

Four companies named in the lawsuit, including Compass, Re/Max, Anywhere and Keller Williams, have agreed to pay a combined $266 million in their settlement agreements, according to published reports. Other brokerage firms that don’t make their own deals with the plaintiffs can join the NAR settlement by paying into the settlement fund, with the amounts determined by a percentage of the brokerages’ sales volume. 

Besides agreeing to pay $418 million in the settlement, NAR agreed to change some longstanding rules regarding commissions, specifically that listing brokers representing home sellers won’t be allowed to offer compensation to a buyer’s agent through multiple listing services affiliated with NAR once the rule change takes effect in July.  

However, buyer agents can still be compensated for their services in multiple ways, including a fixed-fee commission paid directly by consumers. Another change from the settlement mandates that agents who are multiple listing service participants working with buyers must enter into written representation agreements with those buyers. 

The terms of the settlement have caused major confusion, with many claiming that home sale commissions are now negotiable, which, in fact, has always been the case. In recent remarks on the government’s efforts to lower housing costs, even President Joe Biden echoed that misconception, prompting a response by NAR President Kevin Sears. 

“While the National Association of Realtors appreciates President Biden’s continued focus on the affordable housing crisis, the president unfortunately repeated incorrect claims that the recently announced settlement agreement allows Americans to negotiate commissions for the first time,” Sears said in a written statement. “Commissions were already negotiable before this resolution was reached and will continue to be negotiable as they have been.” 

Kevin Leatherman

Kevin Leatherman, owner/broker of Rockville Centre-based Leatherman Homes and president of the Long Island Board of Realtors, said that “a tremendous amount of misinformation” is creating massive confusion and echoed the fact that commissions have always been and still are negotiable. 

Leatherman added that brokers and agents who work with homebuyers will still be paid for their services 

“The NAR settlement did not do away with sellers offering cooperating broker compensation. It appears this message is being misinterpreted,” he said. “Starting in mid-July the settlement requires offers of compensation to no longer be posted on the MLS, but the compensation offers will likely be posted on the listing broker and listing agent websites or the realtors will negotiate directly with each other.” 

Leatherman recommends that buyers and sellers consult with a knowledgeable LIBOR member so they can make fully informed decisions that are best for themselves. And he said there’s still a price that needs to be paid for enlisting an accomplished, full-service brokerage in the home selling process. 

“Real estate brokerages are operating businesses, and they have significant operating costs,” he said. “Realtors charge professional service fees (commissions) just like all other professionals and there is an economic minimum cost of doing business.” 

Though the full impact of the settlement and related lawsuits will likely take a while, even years, to realize, industry observers say there could be significant shifts in the longstanding real estate brokerage compensation model. Many predict the fallout from the legal challenges, more of which may still be forthcoming, may result in a rise of more discount and flat-fee brokers, creating price competition that could potentially lower overall commission costs for consumers. 

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