Business People and Community

Real estate commission change shakes industry’s foundation

The new settlement on real estate commissions heralds a seismic shift for the industry. A University of Miami business expert explains the implications for millions of home sales across the country.
Real estate commissions

On Friday, the National Association of Realtors (NAR) announced a settlement with groups of home sellers, agreeing to end landmark antitrust lawsuits by paying $418 million in damages and eliminating rules on commissions, according to media reports. 

Andrea Heuson, finance professor and academic director of Real Estate Programs at the University of Miami Patti and Allan Herbert Business School, explored the rules changes that the NAR have put in place as part of the settlement. 

Q: The 6 percent commission has been in place for years; what does this settlement with the National Association of Realtors mean to the average home seller and buyer? 

Heuson: The standard commission rate was 6 percent. If you assume that was implicitly shared by the buyer and the seller, then each should get a benefit of about 3 percent of the selling price of a home, but it won’t be that much because there will still be a cost for the information that brings the buyer and seller together. It is just that eventually, that cost will be much less than 6 percent. 

It is very similar to the impact of the removal of fixed commission charges when buying and selling stocks. It took some time, but now we have discount brokers who charge commissions that are basically zero while their customers have to do their own research and handle their own tax reporting, etc. Much more work on a personal basis offsets the cheaper transactions costs. 

People who are not interested in doing that still use the full-service broker. 

Q: What drove this change? 

Heuson: People have known about the issue for years, and individual brokers have cut their commission rates below what is set in the listing agreement in order to make a deal happen. But that was on a case-by-case basis, and not formalized in the listing agreement where the seller agreed to pay a 6 percent commission. 

A group of sellers who had the cooperation of talented litigators banded together to try to break the information monopoly of the Multiple Listing Service (MLS) database, and they had the staying power to make it work. 

Q: How was the commission previously structured, and how do you think it will be moving forward?

Heuson: Before, sellers agreed in a contract to pay a commission of 6 percent of the sale price that was split between the broker who worked for the seller to find the person who purchased the house, and the broker who brought the buyer into the transaction. There are/were also “buyers brokers” who actually worked for buyers helping them find houses. 

Those roles will probably fade away formally, and all brokers will work towards getting a deal done. I expect commissions will be paid by each party to the licensed professional that helped them and that the percentages will fall. There will be much more interest in online sites that offer both current listings and historical information (the historical data of the sales prices of similar houses is the most valuable part of the MLS data). 

Q: Besides home sellers and buyers, who else will possibly benefit from this new commission structure? 

Heuson: Anyone in the business of helping a transaction close—mortgage brokers, title insurance companies, property inspection firms, etc. 

Q: Are there other areas, or other advice, a home seller or buyer should be aware of that can help them to reduce personal costs of buying or selling a home? 

Heuson: Shop around for the services that need to be provided to close a loan by a lender, e.g. inspections, a title policy, mortgage brokerage fees, etc. And don’t use firms that do not have good ratings from earlier customers.