How the big real estate settlement will change homebuying and selling

The powerful National Association of Realtors last week agreed to settle a big lawsuit and change the way real estate agents get paid — from effectively a standard commission to something truly negotiable.

Why it matters: The deal could open up a tightly controlled market to genuine competition, and create opportunities for new players and business models in a relatively old-fashioned world.

• It could do for real estate what the internet did for stock trading — bring down broker fees.

The impact: That’ll likely mean lower costs for sellers, who brought the lawsuit as a class action. The impact on buyers is more complicated.

How it works now: Sellers pay a 5%-6% commission on the sale price of their home.

• Typically, the seller’s agent and buyer’s agent split the commission.
• It effectively means the buyer’s agent is working for the seller — a conflict of interest. (Agents, of course, dispute this characterization and say their reputations depend on them doing a good job for buyers.)

Under NAR rules sellers are required to advertise the buyer agent commission on the Multiple Listing Service, the database where real estate agents put homes for sale.

• There’s even a specific box just for this number.
• Homebuyers don’t see the number, but their agents do. The risk is that agents are incentivized to steer clients to the higher-fee deals — putting their interest in a higher fee above the buyer’s interest in finding a good house.

That box goes away if the court approves this settlement. Sellers could no longer promise a commission to buyers’ agents.

• It seems like a bureaucratic little detail — a box! — but the implications are massive.

Key question: How will buyer agents get paid? A few possibilities:

• A flat fee out of the buyer’s pocket.
• Buyer agrees to pay a percentage of the sale price to the broker or pays an hourly rate. Maybe they skip having a broker at all.
• The real estate industry is emphasizing that a seller could still actually cover the buyer agent’s fee. But that would have to be negotiated later on in the deal process — as a concession. Just as now sellers sometimes offer a cash credit on a deal to cover repairs or other things.

• Another potential winner: Online and discount real estate brokerages that offer lower commission rates, per a note from TD Cowen.
• “You’ll probably see a cottage industry of no-frills Realtors,” says Marty Green, a real estate lawyer based in Dallas.

Yes, but: The picture for first-time buyers and those with tight budgets is murkier.

• They’ll no longer get a real estate agent for free — and might wind up paying out of pocket for the service, depleting cash they need for that down payment and other fees. And it’s not clear if they can roll an agent’s fee into a mortgage. That may require regulatory changes.
• But were buyers ever getting a free agent?

The bottom line: Most observers believe commissions will fall — a lot. Possibly to as low as 1%-1.5% per agent on each side, says Steve Brobeck, a senior fellow at the Consumer Federation of America.

What’s next: The settlement could go into effect as early as July, but the big changes won’t happen fast.

• “It’ll take a long time for a truly competitive marketplace to emerge,” says Brobeck, who’s pushed for reforms like this for decades. “The industry will resist this.”With the breakup of the NAR cartel, the biggest potential disruption in the real estate industry is if buyers’ brokers are replaced by AI bots.