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For decades, the National Association of Realtors (NAR), a trade association with over 1.3 million members, has established guidelines for structuring compensation for realtors representing homebuyers and sellers during most home sales in the United States,
However, on August 17th, 2024, new NAR practices went into effect following a settlement between the NAR and a class of plaintiffs across the United States. In the antitrust lawsuit, plaintiffs asserted that the NAR’s guidelines for compensating realtors were anticompetitive and increased home prices through compensation structures that shared commissions between the realtors of homebuyers and home sellers.
How have NAR practices changed?
NAR guidelines originally detailed a compensation system for its members. Realtors for home sellers listed clients’ homes on Multiple Listing Services (systems managed by local realtor associations often affiliated with the NAR). In each listing, the seller offered compensation to the realtor representing the homebuyer. This compensation was structured as a commission of 5 to 6% of the home price to be split between both realtors. These commissions totaled approximately $100 billion per year.
Realtors for homebuyers could earn higher commissions by encouraging clients to purchase expensive homes.
In the lawsuit, the plaintiffs asserted that this compensation system incentivized realtors to act against the interests of their clients. Realtors for homebuyers could earn higher commissions by encouraging clients to purchase expensive homes. Plaintiffs also argued that sellers were pressured to offer the 5 to 6% commission out of fear that realtors would not bring buyers to their homes if they offered a lower commission. The NAR maintained that commissions have always been negotiable, argued that commissions did not raise the price of housing for buyers, and admitted no wrongdoing as a condition of the settlement.
Following the settlement, two major changes to realtor compensation have been enacted. First, homebuyers and their realtors must create formal compensation agreements specifying the rate of pay for the realtor before beginning the homebuying process. The seller can still offer to compensate the buyer’s realtor, but these offers cannot be included in home listings on the MLS.
How will these changes affect home prices?
When sellers are the ones who compensate the buyer’s realtor, sellers will often pass that typical 2.5 to 3% commission onto the buyer by proportionally increasing the asking price of the home. By paying the increased price, the buyer indirectly compensates their realtor but has little negotiating power over the commission.
Under the new rules, homebuyers decide compensation directly with their realtors, so buyers have an opportunity to negotiate lower commissions. This process could reduce home costs if buyers negotiate rates of pay with their realtors that are less expensive than the 2.5 to 3% commission typically added to the home price by the seller.
The NAR is now concerned that direct realtor compensation will present a financial barrier to lower-income homebuyers. When sellers compensate the buyer’s realtor but increase the price of the home to offload the cost, homebuyers can finance that cost over time via a mortgage. However, direct compensation from buyers to their realtors is paid in full at the conclusion of the sale. Buyers with less cash on hand may not be able to afford these immediate payments, which could discourage homebuyers from accessing the expertise of a realtor.
How do these changes affect realtors?
The NAR changes mean realtors may receive less compensation and serve a narrower role for buyers. Currently, when realtors are compensated by the seller, realtors guide the buyer through the entire homebuying process. Under the new rules, buyers and their realtors must agree on the specific set of services that the realtor will provide and detail those services in the compensation agreement.
These changes could decrease the number of realtors nationwide and minimize the number of profit-making opportunities for the realtors remaining.
Some buyers who want to reduce their homebuying costs may utilize realtors for a narrower range of tasks, or skip using realtors altogether. For example, a buyer may only compensate a realtor to write an offer for a home. These changes could decrease the number of realtors nationwide and minimize the number of profit-making opportunities for the realtors remaining.
How do these changes affect real estate development in Nashville?
Vanderbilt students witness construction in Nashville constantly. In fact, downtown Nashville is currently undertaking development projects worth $16 billion. To understand the effect of the NAR settlement on developers, we asked Professor Martin Heflin (VU 1980) and Charlie Evans (VU 1981, VU MBA 1991). Professor Heflin is the Real Estate Coordinator of Vanderbilt’s Owen Graduate School of Management and an experienced developer in Nashville. Mr. Evans is a licensed realtor and Professor Heflin’s partner in development projects.
What is the relationship between developers and realtors?
Professor Heflin detailed the close relationship between realtors and developers at all stages of development, explaining, “When I have developed a ‘for sale’ project, realtors have been a critical part of the process from design through completion and final sale. They help guide our underwriting, in terms of sales prices and velocity – they are a key member of the development team.”
Mr. Evans emphasized that development projects benefit from the guidance provided by realtors by explaining, “Realtors play a critical role in bringing buyers together with developers. The information they provide to their buyers about home options serves a vital role in educating the marketplace, including providing both buyer and sellers information about pricing and current market valuations. Developers are well-served by involving agents early on in a project in order to gain their insights about design, home attributes and what likely sales prices might be.” Clearly, realtors are highly involved in development markets.
How will the NAR commission changes affect development in Nashville?
Mr. Evans suggested that the changes have not yet altered the relationship between developers and realtors. He commented, “Thus far, many developers are still willing to pay the buyer’s broker, largely out of concern for alienating the brokerage community and virtue of this being customary. Developers are either offering to pay the commission on the front end, or they are signaling in their listings that buyers can request in a contract that developers pay their agent.”
“If buyers paying their broker becomes more mainstream, it has the ability to increase developers’ margins by eliminating or reducing the payment of the 3% commission that has been baked into deals for years.”
Charlie Evans, Real Estate Professional
However, Mr. Evans also noted that, if buyers are willing to pay their realtors directly, the new rules could affect negotiations between buyers and developers. Mr. Evans explained, “If buyers paying their broker becomes more mainstream, it has the ability to increase developers’ margins by eliminating or reducing the payment of the 3% commission that has been baked into deals for years. It also gives developers more flexibility in pricing by giving them more room to negotiate a sale, thus possibly lowering purchase prices for buyers.”
When asked if the NAR changes will affect the Nashville development industry, Professor Heflin explained, “My sense is it’s still too early to tell. Developers will continue to need realtor services to move product and Nashville’s realtor market is very well connected so developers will not want to risk getting a reputation of being stingy with brokerage fees. Prohibiting offers of broker compensation on the MLS will not stop the practice, it just won’t be so obvious. I am fine with that. That compensation makes professional representation in a sales transaction more accessible and could potentially lower housing prices.”
How should Vanderbilt students interested in entering the real estate industry respond to these changes?
Professor Heflin emphasized that the different aspects of the real estate market provide many opportunities to interested students. He commented, “The real estate industry is a very broad field. Historically, becoming a realtor was a path into the industry that was pretty easily achieved. But there are numerous other vectors – financial analysis, construction and development management, property management. I suspect the decision may cut down on the number of realtors, but if you develop your skills and get good at it, the compensation will follow.”
Conclusion
The restructuring of compensation for realtors after the NAR settlement could redefine the role of a realtor, reduce home prices, and eliminate possible conflicts of interest for the realtor of a homebuyer. However, this overhaul could also reduce access to realtor services for low-income homebuyers and decrease demand for realtors.
On the development side of the real estate market, the close relationships between developers and realtors in Nashville have encouraged developers to continue paying broker fees thus far. If buyers begin paying their realtors directly, developers may gain more negotiating power in their property sales and the services provided by realtors could become more flexible.
The real estate market has fundamentally changed as a result of the NAR settlement. Being informed on the rule changes and staying up to date on the settlement’s fall out is key for anyone looking to interact with the real estate market in the coming years.
