NerdWallet's Smart Money Podcast - Realtor Roulette: How to Spin the New Commission Rules in Your Favor

Starting point is 00:00:00 Welcome to NerdWallet's Smart Money Podcast. I'm Sean Piles. And I'm Anna Hilhoski. 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 talking about new real estate commissions rules that went into effect last month. That's right. Last October, a federal jury found the National Association of Realtors guilty of conspiring to inflate commissions. It resulted in a $418 million settlement and some new rules for sales commissions, including an end to the

Starting point is 00:00:37 way commissions have been paid for decades. In a moment, we'll be joined by NerdWallet's home and mortgages expert Holden Lewis, who will walk us through the new rules and explain what they mean for home buyers and sellers right now. Stay with us. Holden Lewis, welcome back to Smart Money. It is my pleasure. So can you explain how the lawsuit against the National Association of Realtors or NAR unfolded? Some people who had sold houses in Missouri filed a federal antitrust lawsuit a few years ago. They said that the National Association of Realtors and big brokerages had conspired to inflate real estate commissions. They targeted what's known

Starting point is 00:01:25 as the cooperating compensation rule. And that rule required sellers to decide how much to pay not only their own agent, but how much to pay the agent on the other side of the table, the agent representing the buyer. And they had to advertise the buyer's agent's commission on the multiple listing service, which is the regional database of properties for sale. The plaintiffs said that they felt pressure to offer big commissions to buyer's agents. If they offered smaller than customary commissions, then buyer's agents might badmouth those properties to the clients or otherwise steer their clients to homes that paid higher commissions. And the jury agreed with the plaintiffs. The jury said that it was a violation of antitrust law to require home sellers to establish commissions for the buyer's agents. They imposed $1.8 billion in damages, which could have been tripled. The realtors couldn't afford

Starting point is 00:02:17 that, so they settled for a smaller amount, that $418 million, and they agreed to changes in the way agents are paid. So other than that big chunk of change that NAR has to pay off over the next four years, what changes were made to commission's rules as a result of the settlement? For homebuyers and sellers, the biggest change is that each side will set their own agent's commission. The seller will decide how much to pay their agent, and the buyer will decide how much to pay their agent. I mean, it's just common sense for each side to negotiate how much to pay their agent, and the buyer will decide how much to pay their agent. I mean, it's just common sense for each side to negotiate how much to pay their own agent, but for 30 years, we had a system where the seller decided both.

Starting point is 00:02:55 In addition to that change, there is a change in the rules governing the multiple listing service. That's that database of homes for sale. Licensed agents have access to the MLS, but consumers don't. When you browse Zillow, you're not seeing everything about that property that real estate agents see on the MLS. And specifically, before this rule change, your agent could look at the MLS and see the commission that the seller was offering, but that commission was not disclosed to you, the buyer. So under the old

Starting point is 00:03:25 rules, imagine that a seller was offering, say, a 2% commission to the buyer's agent when most sellers were offering 3%. As a buyer, you didn't know that the seller was offering less, but your agent did because that information was on the MLS. So let's say you, the buyer, you find five houses online and you ask your agent to show them to you. And the agent could discourage you from buying the house that was paying the low commission by, for example, exaggerating problems with the house or saying the seller was uncooperative. Because of those potential problems, the legal settlement required MLSs to delete the field that told buyer's agents how much the seller was willing to pay. Now, are buyer's agents that shady? Most aren't, but you know what? It doesn't really matter. In the lawsuit, the home seller said that they paid buyer's agents inflated commissions because

Starting point is 00:04:16 they feared that unethical buyer's agents would steer their clients away. So the new rule is designed to remove that incentive for buyer' agents to steer their clients toward properties offering higher commissions. So those rules went into effect on August 17th, but it seems like NAR is potentially trying to find a loophole. This is a clip of Kevin Sears, president of NAR, from an official video messaged on the NAR website talking about the new rule barring the offer of cooperating compensation on the Multiple Listing Service, or MLS. Please hear me clearly. You will still be able to offer compensation

Starting point is 00:04:53 to a buyer broker. It just cannot be conveyed on the MLS. And if there's one thing I know about members, they will figure out how to efficiently communicate the information to see if there will be any cooperating compensation. So Holden, is he saying what I think he's saying? You know, this doesn't bug me. I mean, there's really nothing underhanded about it. He's saying

Starting point is 00:05:14 that listing agents can still publicize how much their clients are willing to pay buyers agents, but it has to be in text messages or phone calls or their own websites or heck, even on yard signs, just not on the MLS. And I don't think that matters in the long run. And here's why. First, buyers will negotiate their own agent's commission. And under the new rules, the buyer's agent has to stick with that. So what I mean by that is a buyer's agent agrees to accept a two and a half percent commission. The client buys a house or the seller was willing to pay up to three percent. The buyer's agent has to accept the two and a half percent that they negotiated with their client. They can't just collect more because the seller was offering more. But there's a more subtle point to make,

Starting point is 00:06:01 which is that under these new rules, I think sellers are weakening their bargaining power if they preemptively offer to pay the buyer's agent. Why not just remain silent about that and wait for the buyer to ask you to pay their agent? Because that's a stronger negotiating position. So I think this issue of sellers publicizing how much they're willing to pay to compensate buyer's agents, I think it won't last long. It's just simply going to be understood that most sellers will be willing to negotiate the payment of the buyer's commission. One thing I want to note for listeners is that fewer than half of all real estate agencies in the US belong to NAR. That means that this settlement won't apply to all real estate agents. But Holden, do you think there will still be

Starting point is 00:06:42 reverberating effects in the industry? The rules apply to MLSs and to the agents who use the MLSs, and that's the vast majority of agents. There's at least one MLS that has not agreed to these rule changes, and that's the one that's based in Seattle. It covers much of Washington and one county in Oregon. But most agents, they have to operate under these new rules. Now, as far as far-reaching effects, I think overall commissions will go down in the long run, maybe not dramatically, but buyer's agents will experiment with compensation models such as flat fees or hourly rates. We'll see greater competition, and that should force commissions downward eventually. And that seems like good news for consumers in the long run,

Starting point is 00:07:27 but it seems like people can expect a bumpy road ahead. Let's jump to what these changes mean for regular people. First off, how will home sellers be affected? Sellers are going to have to negotiate their own agent's commission, but thankfully, probably not the commission for the buyer's agent. And they can expect most buyers to ask them to pay their agent. That'll just be another thing to negotiate. Okay.

Starting point is 00:07:50 So what about home buyers then? There's a change that I haven't mentioned yet, and it's a biggie, and it affects buyers. You've been holding out on us, Holden. Before an agent shows you a home, you'll have to enter into a written agreement with that agent. Generally speaking, that agreement will establish how much the agent will be paid, when the agreement will expire, and what geographic area it covers. And this will make the process of hiring a buyer's agent similar to the process of hiring an agent to sell a home.

Starting point is 00:08:20 If you've ever sold a home, you know the agent crafts a pitch. They show you a slideshow on a laptop. They describe the services they offer and the experience they have in your market. And we can see buyer's agents kind of doing the same type of thing. And then another issue is coming up with the money to pay the buyer's agent. As a buyer, you could pay the commission out of pocket if you have the cash. More likely, you'll ask the seller to pay it as a concession. And the seller might agree to that. Or they might make a counteroffer.

Starting point is 00:08:51 For example, saying, if you want me to pay your agent $10,000, then raise your offer by $10,000. It's one more element to negotiate. We're probably going to see negotiations last one or two rounds longer because of this. And just to be clear, these changes only apply to real estate agents, home sellers, and buyers, right? Not to renters? That's right. So Holden, as far as the settlement, can home sellers expect to receive any part of that payout?

Starting point is 00:09:16 Eventually. I don't know how long that's going to take. The NAR and major brokerages have agreed to pay a total of more than $900 million. After the lawyers get their cut, the money will be split among tens of millions of home sellers. So individual payouts won't be much. Good to know. Holden, thank you so much for joining us today. You're welcome. Listeners, we threw a lot of information at you and buying a house is already a pretty complicated process.

Starting point is 00:09:51 So if you're listening and you need help crunching the numbers, I'll remind you that NerdWallet has a mortgage calculator that we'll link to in today's show notes. Or just search online for NerdWallet Mortgage Calculator. 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 us your questions at 901-730-6373. That's 901-730-NERD. Or send us a voice memo at podcast at nerdwallet.com. And remember, you can follow the show on your favorite podcast app, including Spotify, Apple Podcasts, and iHeart Radio to automatically download new episodes. Today's episode was produced by Tess Figlin and myself and edited by Rick VanderKneife.

Starting point is 00:10:24 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.

NerdWallet's Smart Money Podcast - Realtor Roulette: How to Spin the New Commission Rules in Your Favor

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