NerdWallet's Smart Money Podcast - A Landmark Legal Settlement Could Make Home Buying and Selling More Complicated

Episode Date: March 20, 2024

Discover how a historic change in the way real estate agents are paid could impact prices for home buyers and sellers. Will housing costs become cheaper under new real estate commission rules? How will the recent settlement by the National Association of Realtors impact home buyers and sellers? Hosts Sean Pyles and Anna Helhoski delve into the details of the $418 million settlement by the National Association of Realtors, discussing its potential implications on the home buying and selling process. NerdWallet mortgage writer Holden Lewis joins the conversation to break down the changes and their possible effects on home prices. From understanding the intricacies of commission negotiations to potential ripple effects on the housing market, this episode equips you with the knowledge to navigate the evolving real estate industry. Whether you're a first-time buyer or a seasoned seller, you'll gain valuable perspectives on optimizing your real estate transactions and making informed financial decisions. In their conversation, the Nerds discuss: real estate commissions, home buyers, home sellers, National Association of Realtors, real estate industry, realtor commissions, housing market, real estate agents, buyer agents, seller agents, real estate negotiations, real estate lawsuit, buyer negotiation, seller negotiation, home prices, home sales, NAR settlement, real estate news, commission structures, buyer-seller negotiations, and real estate commission changes. To send the Nerds your money questions, call or text the Nerd hotline at 901-730-6373 or email [e-mail]. Like what you hear? Please leave us a review and tell a friend.

Welcome to NerdWallet's Smart Money Podcast. I'm Sean Piles. And I'm Anna Helhosky. And this is our weekly money news roundup, where we break down the latest in the world of finance to help you be smarter with your money. Today, we're diving into some huge news for American homeowners.

To settle more than a dozen lawsuits over inflated commissions, the National Association of Realtors has agreed to change the way real estate agents are paid. Back in October, a federal jury in Kansas City said that the NAR violated antitrust laws by having rules that inflated commissions. The jury verdict was $1.8 billion against the real estate industry. A new $418 million settlement means that agents' commissions might fall in coming years. The trade-off is that

real estate negotiations might become more complicated, and buyers without a lot of cash, especially first-time buyers, might be disadvantaged. A federal court will have to approve the settlement before it goes into effect, but this is a big deal for homebuyers and sellers. Today, we have NerdWallet mortgage writer Holden Lewis

to walk us through what this all means. That's up next after the break. Holden Lewis, glad to have you back on the show. Oh, I'm glad to be here. We gave listeners some background on this before the break, but Holden, I'm hoping that you can tell us what exactly this changes in terms of the process of buying and selling a home. What does the settlement do? All right. So to describe the change, let's describe how things work right now. So for decades, for at least 30 years, home sellers have had to set the commission rates for the agents on both

sides of the negotiating table. So as a seller, you're obliged to disclose how much you're going to pay the buyer's agent. And that's before you even know who the buyer's agent is going to be, how effective they are, how experienced they are. And so under the new rules, the sellers, they're going to continue to decide how much to pay their own agents, the listing agent who's actually trying to sell the home. But buyers are going to have to decide how much their agents will be paid. And the whole goal of this is to foster competition and innovation. Okay, let's give listeners a real world example. For easy math purposes, let's say you have a home that's on the market for $100,000. This is clearly not in a coastal city. What do the buyer

and seller commissions as they operate currently do to the price or within the price of that home? Who pays and how does that happen? And then we'll talk about how this all might change. You've probably heard of the 6% commission. And in this country, commissions are negotiable. They're not just handed down from the real estate industry. There's not like a requirement that the commission be 6%, but it's usually around 6%. Okay, so I just wanted to make sure that that's clear. let's say you sell a $100,000 house and there's a 6% commission. That means that usually the two agents split it evenly. So 3% or $3,000 goes to the listing agent, the seller's agent, and then 3% or $3,000 goes to the buyer agent. And so the seller collects that $100,000 for the house and then distributes that money, $6,000. So the seller gets $94,000 after paying those commissions. Okay. So then let's look at that same home that's for sale, but now the new rules shake out. What potentially happens to the price and the process by which people pay realtors? All right. So from the seller standpoint, let's say they sell the house

for $100,000. So the seller owes around 3% or $3,000 to that listing agent. The buyer is going to be responsible for paying their agent. The most likely thing that's going to happen is the buyer is going to ask the seller for that money, either out of the proceeds of the home sale, or they might just say, hey, I know we agreed that I'd pay $100,000 for the house. Let's bump that up to $103,000. And then at closing, you'll give $3,000 to my agent, the buyer's agent. That's a likely outcome of this. It might not happen immediately. These rules are supposed to go into effect in July if the court approves it. And what's going to be happening in, say, June and July, that's really unknown. It's really going to be interesting to see what happens at closings this summer.

So it seems like the really big change here is that there'll now be negotiating room for how much you're going to pay a realtor for their services. Is that right? That's exactly right. And that's what these lawsuits were about. And the Department of Justice has been kind of putting its thumb on the scales also with the goal of increasing competition, increasing innovation, and requiring negotiation on both ends. And ultimately, what these plaintiffs in these lawsuits want and what the Department of Justice wants is for real commissions to go down. You know, they average somewhere between 5% and 6% in the United States. It's a lot lower than that, maybe a third of that in the United Kingdom. We're probably not going to get that low, but we probably will see commissions go down one or two percentage points. And doesn't it also potentially affect when and how you pay for a realtor service?

If it's not wrapped up in the price of the house, then are you going to have to pay up front, pay cash instead of wrapping it into your mortgage? I've also heard that agents might go to a fee-based model. That is one of the big unknowns. And this is just going to be fascinating to see what happens. In most cases, buyers are going to be able to just basically add the agent's paycheck to the home price and then just include that in the mortgage. But some buyer agents, they might want all or some of the money up front and then be reimbursed at closing. You know, we might see buyers agents charge, say, a fee to write an offer or charge a fee for each home visit that they accompany the buyer on,

or maybe just a flat fee for the entire process. If buyer agents do ask for money upfront, that really is going to put first-time home buyers and just generally people with not a whole lot of cash, it's gonna put them at a disadvantage. And we just don't know how that's gonna shake out. If you're selling a starter home, you're probably just gonna have to go into the process knowing that you're probably just going to have to go into the process knowing that you're going to end up somehow helping that buyer pay their agent.

Holden, one of the knocks against the current system has been that it encourages something in the industry known as steering. Would this new era tamp down on that? Okay, well, I'm glad you bring that up because steering was a big, big part of these lawsuits. What steering means is that the buyer's agent steers the buyer toward the house that has a higher commission, you know, not necessarily a higher price. So real estate agents are trained essentially to scare sellers into offering high commissions to the buyer agents. If you look online, you can see this training session that this real estate agent in California has. In this YouTube video, he is making this presentation to two homeowners. He's trying to get them to list

a home with him. This is done in front of an auditorium full of real estate agents. And what he does is he says, okay, here's a pile of papers. These are people who offer two and a half percent to the buyer agent. And here's another pile of papers offering 3% to the buyer's agent. And he says, you don't want to be in this two and a half percent pile. And then he picks up the pieces of paper and wads them up and throws them away. He says, if you don't pay the buyer agent the full commission, then that's the kiss of death. So that's what steering is. It's instilling that fear in sellers that buyer agents won't show their house unless they offer a really big commission or at least, you know, kind of the going rate commission in that area. If the new rules work as planned, steering will

mostly go away. All right. And this certainly doesn't seem like good news for real estate agents judging by the change in how and how much they might be paid. And they're already facing other threats from companies like Redfin that have tried to disrupt the process. Does this settlement potentially make it easier to buy or sell a home without an agent? So sellers, yeah, they're going to use agents, especially because the process is just going to be a little bit more complex for sellers because they're going to have to negotiate the payment for the buyer agent. Now, some buyers, they're going to forego hiring an agent because they're going to worry that they're going to have to shell out some money up front, whether or not they really will have to do that. So that might put them at a disadvantage, especially like when

they're assessing comparable home values and they're negotiating. Personally, I don't think it's a good idea to just go in unrepresented and start negotiating with the seller's real estate agent. You might be outgunned there, but that's probably going to happen quite often. Well, hopefully people don't forego inspections like we saw a couple of years back. That could be a bad situation for homebuyers. They better not. Holden, what are some other ripple effects we might see out of this settlement, especially those that would affect homebuyers and sellers? Over time, buyer agents are probably going to be paid less than the current two and a half percent to three percent. And so when that happens, it might put downward pressure on the commissions

for listing agents, too. It won't happen immediately. And there's one other thing. I don't really know how this is going to affect buyers who plan to get mortgages guaranteed by the Department of Veterans Affairs or Federal Housing Administration, so VA loans and FHA loans. Those types of mortgages have some kind of tricky rules on how fees can be paid out of clothing. So especially with VA loans, it's unclear right now if when you close, you can just have the seller pay the buyer's agent. The VA might have to change its rules to accommodate that. Another thing that might happen is that the biggest brokerages in each market, you know, we're talking one, two, three really big brokerages, the ones that dominate

the market, they might bypass the multiple listing service and just post listings to their own websites because the new rules seem to indicate that you can advertise how much you'll pay the buyer agent if it's not on the multiple listing service. And that can make it harder to find properties that don't appear on the multiple listing service. So we're going to have to see how that shakes out. Is it possible to say how this might affect the overall housing market? We've already got higher interest rates and low inventory. How does this change in the commission structure play into all that? I'm kind of hopeful about this because, frankly, under these new rules, I think sellers are going to keep more of the proceeds of the home sale. As I pointed out earlier, like you sell a house for $100,000 today and after paying the commissions, you're getting $94,000.

Whereas under the new rules, maybe you're going to keep closer to $97,000, right? So if you get to keep more of the money from the sale, then you're more likely to sell. I think we have a problem. Well, I know we have a problem right now. There are not enough homes for sale. And a lot of that is because people have these low interest rates and they just don't want to give them up. Well, if they're able to keep more of the proceeds of the sale by paying less in commissions, they're just simply more likely to bite the bullet and go ahead and sell that house. And that means people living in appropriate houses. For example, you bought a house when you had one kid and now you have three kids and you want a bigger house. Well, you know, now maybe you're more likely to go ahead and sell that house because

you're going to keep more of the proceeds to buy a bigger house. Or the opposite might happen with empty nesters. Oh, OK. Well, you know, if we sell the house, now we have to pay less commission. So let's go ahead and sell the house. So I just think that this is going to encourage mobility and home sales. Holden Lewis, thank you so much for helping us out today. You're welcome. My pleasure. And that's it for this week's money news. We always welcome your

money questions and comments. Turn to the nerds and call or text your questions to 901-730-6373. That's 901-730-NERD. Or send us a voice memo at podcast at nerdwallet.com. And remember to follow, rate, and review us wherever you're getting this podcast. Today's episode was produced by Tess Vigeland and edited by Mary Makarushka. Sarah Brink mixed our audio. Here's our brief disclaimer. We are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances. And with that said, until next time, turn to the nerds.