What the NAR Commissions Settlement Means for Home Builders
On March 15, 2024, the National Association of Realtors (NAR) proposed a $418 million settlement to end multiple lawsuits and investigations into its home-sale commission policies and practices. The deal was a surprise reversal of the trade group's previously defiant stance in the litigation battle over sales commissions and has since spawned much speculation about how it will play out, assuming the terms of the settlement are accepted and go into effect on July 15.
While most of the attention is being paid to the resale housing market—historically, and for obvious reasons, the primary type of transaction between home sellers and buyers and their real estate agents—the settlement also has important ramifications for new-home builders (sellers) and their relationship with buyers and buyers' agents.
Alleged Violations (and Changes to Come) From the NAR Commissions Settlement
Lawsuits filed against the National Association of Realtors, namely a Department of Justice (DOJ) antitrust suit, are changing the status quo of the buyer-agent relationship in a home sale quickly and potentially with great impact.
The DOJ case and proposed legal settlement involve a series of alleged violations regarding real estate commission arrangements and consumer disclosure requirements—an issue the industry has been grappling with for decades.
For home builders, the most significant of those violations involves what I call “parachute” or “backdoor” sales in which outside agents refer to themselves as “buyer’s agents” but do not meet the criteria of operating in that capacity. Specifically, such agents do not properly register the customer as a client and—more importantly—are not the “procuring cause” of a new-home purchase as defined by the NAR Code of Ethics … and yet seek to earn a commission in that capacity from the seller (builder).
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This practice of swooping in to serve as (or claim to be) a homebuyer’s representative in a new-home sales transaction is a prominent example of what I call a “silent profit leak” for builders as they capitulate to the practice—and pay commissions out of their profits—to avoid getting blackballed by agents.
The proposed NAR settlement would significantly tighten (in fact, it would reestablish) the rules around such practices, effectively ending them and helping builders retain profits without fear of risking their reputation in the marketplace.
What Are the Origins of the Real Estate Commissions Settlement?
Established in the early 1990s as a method of consumer protection, the National Association of Realtors' policies determined that a seller listing a home with a Realtor* or broker agrees to pay a commission to the listing broker out of the sales price.
When listing the home via a multiple listing service (MLS) to attract attention to the home's availability, the Realtor would then show a “split” of that commission to a buyer’s agent as the procuring cause of sale.
Often a seller’s broker would also represent themselves as a buyer’s agent but without the required agreement signed by the buyer. Under the concept of buyer’s broker representation, that role is to “work in the best interests of the buyer to look for the best properties and negotiating to ensure the best price,” a clear but enabled conflict of interest when the same agency or agent is acting in both roles (and usually in the best interests of its initial client, the seller).
Then a class-action lawsuit regarding NAR's agent compensation policies was filed in 2019 on behalf of 500,000 home sellers in Missouri. The plaintiffs argued that an NAR rule that requires home sellers to pay commissions to their agents and the agents of their buyers leads to inflated fees and price fixing. The suit also called into question another NAR rule that requires agents to list homes on NAR-affiliated databases in order to sell them. In October 2023 a jury agreed that both practices are anticompetitive and NAR was found liable for $1.8 billion in damages.
For home builders, the most significant of those violations involves what I call “parachute” or “backdoor” sales in which outside agents refer to themselves as “buyer’s agents” but do not meet the criteria of operating in that capacity.
Following that case, there were more than a dozen copycat cases accusing NAR of stifling competition and violating antitrust laws. Now, with the March 15 settlement agreement, NAR will pay $418 million in damages over approximately four years. However, more important than that, the trade association has agreed to rewrite several of its rules; rules that have long been central to the way homes are bought and sold in the U.S.
How Will the Commissions Settlement Change Homebuying?
As a part of the March 15 settlement, sellers and their real estate agents won’t be allowed to offer a commission to a buyer’s agent within the MLS listing. If buyers wish to have representation, they will be required to sign a formal written agreement with an agent to represent them in a real estate transaction and agree to a percentage of the sale as a commission for that advocacy—just as a seller does.
For home builders, a typical pre-settlement scenario previously looked like this: A prospective buyer shows up unaccompanied by an agent at a builder's sales office where a salesperson then develops them into a buyer, perhaps even to the point of completing a sale.
But before close of escrow—and without any previous contact—the home builder's salesperson or sales manager gets a call or email from a real estate agent claiming to have represented that unaccompanied buyer in some capacity, and that agent is seeking a commission from the sale. Or else.
These predatory agents use persuasive statements to entice new-home shoppers—even those who have signed a contract—to employ their services as “protection” from a builder’s sales tactics. Examples include helping homebuyers obtain better financing, negotiating a lower price on the home or options, and representing buyers in “walk through” inspections—and all for “free” based on the premise that the home builder will pay a co-op sales commission that reimburses the agent for such services.
The good news is that another aspect of the proposed NAR commissions settlement stipulates that real estate agents can no longer tell homebuyers that they represent them for free. Agents must instead negotiate a commission with homebuyers up front and it must be stated in a formal, signed agreement.
Fundamental Changes (for the Better) From the NAR Commissions Settlement
Nearly all home builders rely to some extent on co-op sales with the local real estate community to help move product, a practice that eats what I estimate to be 15% to 25% of a builder’s profit from each home sale.
But if you’re concerned or confused about how your relationship with real estate agents will change as a result of the NAR commissions settlement, consider what happened in the airline industry nearly 30 years ago under similar circumstances.
On Feb. 9, 1995, Delta Air Lines capped base commissions for travel agents at 5% (down from 10%, as set by the agency industry)—the first salvo of commission caps and cuts. That shift ultimately led to the demise of base airline commissions across the travel agency industry and a fundamental restructuring of that industry as it opened the door to alternative and self-help travel services and platforms (think Kayak, Expedia, and Priceline), as well as those by the airlines themselves.
As disruptive as it was at the time, both sides pivoted and came out for the better—and so will home builders and real estate agents.
This summer, the competition to represent home sellers and buyers will have agents scrambling to adjust to the new rules. Builders can (and should) take advantage of the situation by positioning themselves collectively as the largest consistently available source of homes for sale with the potential to keep agents busy and to generate sustainable income.
Consider a metro market of 2,000 annual housing starts at an average sales price of $400,000. If half of those homes are sold through a broker co-op sale at a guaranteed (and formally agreed) 3% commission, that’s a pool of $12 million in collective earnings potential.
Find me an agent—even under the new rules—who wouldn't be attracted by that potential.
FAQ
Is a real estate agent the same thing as a Realtor?
A real estate agent is anyone who is licensed to help people buy and sell property. A Realtor is a real estate agent who is an active member of the National Association of Realtors (NAR), a trade association. According to NAR, the term "Realtor" (a trademark owned by NAR) should never be used as a substitute for "real estate agent."
How much commission do most real estate agents charge?
The exact terms of an agent’s commission will vary from sale to sale and may depend on the region and the company the agent works for, but under the current commissions model, real estate agent commissions are typically somewhere between 5% and 6% of the home's sale price. The commission is then split evenly between the agent who is representing the buyer and the agent representing the seller.
According to a survey of active agents across the U.S. conducted by Clever Real Estate during Q1 2024, the average real estate agent commission rate in 2024 is 5.49%, but ranges from a low of 4.78% to 6.67%. Of that 5.49%, about 2.83% goes to the seller's agent and 2.66% goes to the buyer's agent.
Only a small portion of agents work on salary; working on commission is far more common among agents.
How many real estate agents in the U.S. are members of the National Association of Realtors?
Data from NAR's membership analysis show there were 1,515,837 Realtors (members of the National Association of Realtors) at the end of January 2024 among an estimated 2 million real estate agents (agents who are licensed but are not members of NAR) nationally.
How has the lawsuit settlement affected NAR?
By the end of 2023, NAR had seen a 1.67% year-over-year decline in membership, its first drop in annual membership since 2012. NAR ended 2023 with 1,554,604 members, according to data from the trade organization. And January 2024 saw NAR membership decline by 2.5% from the month prior to 1,515,837 members. But NAR membership numbers vary seasonally, and experts say slower housing market conditions are expected to weigh more heavily on NAR membership numbers than the lawsuit verdict. However, several large brokerages, including Coldwell Banker, Century 21 Real Estate, Sotheby's International Realty, Re/Max and Redfin have cut ties to the trade group.
Will this real estate commissions settlement have wider ramifications?
The NAR home-sale commissions settlement does have wider ramifications for the real estate industry and could lower the commissions all real estate agents receive as part of a home sale, which, in turn, could lower the cost of buying a home for consumers. It also may mean that more homebuyers directly pay their agents, as opposed to the traditional model where the home seller pays the buyer’s agent.
And because NAR home-sales practices have dominated the U.S. real estate market, with almost 90% of all homes sold being listed through an MLS, the commissions settlement agreement could significantly change how Americans buy and sell homes. Also, given the size of the housing market, the settlement has the potential to affect the U.S. economy more broadly.
