Buyers’ Brokers Will Have to Work Harder After $418 Million Settlement, Realtor Says

A 'For Sale' sign is posted on the lawn in front of a home in Miami on March 15, 2024. Joe Raedle/Getty Images

While the $418 million settlement in the long-running lawsuit against the National Association of Realtors (NAR) has come in for heavy criticism from many real estate players, who fear the market will devolve into chaos if it abandons the multiple listing service (MLS) and the 6 percent commissions that have long been standard, it will ultimately promote transparency and weed out brokers who do not offer value to customers.

That’s the view of Michael Downer, a broker at Coldwell Banker Realty in Naples, Florida.

“I think that the settlement is great news for both realtors and the public. It adds a level of transparency that has been lacking,” Mr. Downer told The Epoch Times.

The settlement attempted to resolve the NAR’s appeal of the Oct. 31, 2023, verdict against the organization handed down in a Missouri federal court in the case of Sitzer/Burnett v. NAR Commission. The NAR agreed to pay $418 million to the plaintiffs and cease the long-running industry practice of sellers charging commissions of 5–6 percent in real estate deals.

The $418 million to which the NAR agreed is markedly lower than the $1.79 billion or possibly as high as $5 billion that the NAR would be on the hook for if its appeal failed.

Yet since the NAR announced the settlement on March 15, it has been mired in heated controversy, with some in favor and others calling it a blow to the industry, and it faces a high hurdle as the Department of Justice (DOJ) prepares to review it in July.

“We won’t know until July if the DOJ accepts it. Assuming it goes through ‘as is,’ it will require realtors to demonstrate value to buyers and require buyers to actually want to hire them,” Mr. Downer said.

Pros and Cons

Some industry professionals have raised serious concerns about the consequences of abandoning the transactional model that the MLS helped enshrine and encouraging buyers to work directly with sellers’ agents, whose entrenched relationships with their own clients may lead to conflicts of interest.

Nevertheless, in the view of Mr. Downer and others, the settlement, as written, will help clear up misperceptions that have long dogged buyers and sellers but especially buyers.

Under the longstanding system, brokers on the buyer side were able to project an image of working for free, even in transactions in which they had a deep vested interest, he said.

The seller paid the 6 percent commission at closing, half of which then went to the buyer’s broker. This allowed the latter to not be transparent about the transactional dynamics and may have made buyers feel that since their brokers were acting essentially pro bono, he or she offered tremendous value to the buyer, whether or not that was the case.

The buyer may have felt reluctant to hold the broker to any expectations in the way of facilitating the sale, providing access to cleaners, renovators, and other contractors to help make the property ready to live in, and acting as a liaison among agents, lawyers, sellers, buyers, inspectors, and appraisers.

Without reliance on the MLS system, buy-side brokers will have to negotiate their fees with clients they take on in a manner far more susceptible to rigorous cost-benefit analysis. Buyers will have a clearer sense of what their brokers are receiving and providing to them.

Pedestrians walk by an empty retail space in San Francisco on May 29, 2023. San Francisco's downtown has an estimated 18.4 million square feet of available real estate.

Industries Change

To illustrate his point, Mr. Downer used the analogy of travel agents. Three decades ago, he said, the internet was not ubiquitous in people’s lives, and it was common for people to go to travel agents’ brick-and-mortar offices even for something as routine as booking a flight from New York to Chicago.

“Now, you would just go online, all the information is there, you can look up 50 different options to get from New York to Chicago. There’s no value to a travel agent there,” Mr. Downer said.

Today, most people would never think of pursuing such an approach when the internet puts schedules and fares at their fingertips. If they are going to enlist the services of a travel agent, they will usually have a highly specific reason for doing so, he said. The agent may have connections who can help make specialized arrangements on a cruise ship or a holiday package.

The scuttling of the old model has been salutary, helping competent travel agents who offer real value to build their positions in the market while letting those who served a redundant function fade out, and the same is true in real estate, Mr. Downer believes.

“It thinned out the herd, just as it will in real estate. Those buyers’ brokers who aren’t providing any value. They’re basically a taxi service; they drive you around to see properties. But a professional agent will provide access to vendors you might not know about. The negotiation skills of those agents might save you money when they reach out to people who aren’t even on the market,” he said.

“A good buyer’s agent will provide value that might actually save you money in some cases.”

Mr. Downer views the settlement as a win-win for buyers’ agents and their clients.

“In this case, Christmas came early for professional realtors, because it’s the best thing that has happened to the industry in a long time,” he said.

While the DOJ still needs to complete its review, Mr. Downer said he sees no factors holding up its approval and implementation.

“I believe that the middle ground will go away—the mediocre side—and you’ll either get very good, professional realtors or entry-level service,” he said.

The NAR didn’t reply by press time to a request for comment.