A powerful real estate trade group has agreed to do away with policies that for decades helped set agent commissions, moving to resolve lawsuits that claim the rules have forced people to pay artificially inflated costs to sell their homes.
Under the terms of the agreement announced Friday, the National Association of Realtors also agreed to pay $418 million to help compensate home sellers across the U.S.
Home sellers behind multiple lawsuits against the association and several major brokerages argued that the trade group's rules governing homes listed for sale on its affiliated Multiple Listing Services unfairly propped up agent commissions. The rules also incentivized agents representing buyers to avoid showing their clients listings where the seller's broker was offering a lower commission to the buyer's agent, they argued.
As part of the settlement, the association agreed to no longer require a broker advertising a home for sale on MLS to offer any upfront compensation to a buyer's agent. The rule change leaves it open for individual home sellers to negotiate such offers with a buyer's agent outside of the MLS platforms, though the home seller's broker has to disclose any such compensation arrangements.
The trade group also agreed to require agents or others working with a homebuyer to enter into a written agreement with them. That is meant to ensure homebuyers know going in what their agent will charge them for their services.
The rule changes, which are set to go into effect in mid-July, represent a major change to the way real estate agents have operated going back to the 1990s, and could lead to homebuyers and sellers negotiating lower agent commissions.
Michael Ketchmark, a plaintiff attorney representing Missouri home sellers in one of the cases, said he was confident that agreement would fundamentally change the real estate market and help lower the cost of housing and home sales.
"There's no doubt in my mind that this is going to bring about tremendous savings to homeowners," he said.
Currently, agents working with a buyer and seller typically split a commission of around 5% to 6% that's paid by the seller. This practice essentially became customary as home listings included built-in offers of "cooperative compensation" between agents on both sides of the transaction.
But the rule changes the association agreed to as part of the settlement could give home sellers and buyers more impetus to negotiate lower agent commissions.
"It may take some time for the changes to impact the marketplace, but our hope and expectation is that this will put a downward pressure on the cost of hiring a real estate broker," said Robby Braun, an attorney in a federal lawsuit brought in 2019 in Chicago on behalf of millions of home sellers.
Analysts with Keefe, Bruyette & Woods also anticipate that the association rule changes will lead to lower agent commissions and could persuade some homebuyers to skip using an agent altogether.
"In our view, the combination of mandated buyer representation agreements and the prohibition of blanket compensation offers made by listing agents and sellers should result in significant price competition for buyer agent commissions," the analysts wrote in a research note Friday.
In a report last year, Keefe, Bruyette & Woods estimated that possible changes to the structure could push the annual commission pool down by more than 30% over time as the market adjusts to a new system. The report also estimated that changes could lead to a 60% to 80% reduction in the number of real estate agents.
The association faced multiple lawsuits over the way agent commissions are set. In late October, a federal jury in Missouri found that the association and several large real estate brokerages conspired to require that home sellers pay homebuyers' agent commissions in violation of federal antitrust law.
The jury ordered the defendants to pay almost $1.8 billion in damages -- and potentially more than $5 billion if the court ended up awarding the plaintiffs treble damages.
The settlement, if approved by the court, resolves that and similar suits faced by the association. It covers over 1 million of the association's members, its affiliated Multiple Listing Services and all brokerages with an association member as a principal that had a residential transaction volume in 2022 of $2 billion or less.
"Ultimately, continuing to litigate would have hurt members and their small businesses," Nykia Wright, the association's interim chief executive officer, said in a statement. "While there could be no perfect outcome, this agreement is the best outcome we could achieve in the circumstances."
The settlement does not include real estate agents affiliated with Berkshire Hathaway Inc.'s HomeServices of America and its related companies.
Last month, Keller Williams Realty, one of the nation's largest real estate brokerages, agreed to pay $70 million and change some of of its agent guidelines to settle agent commission lawsuits.
Two other large real estate brokerages agreed to similar settlement terms last year. In their respective pacts, Anywhere Real Estate Inc. agreed to pay $83.5 million, while Re/Max agreed to pay $55 million.
Zillow Group Inc. shares fell 13% Friday to close at $46.22 in New York. The company gets the largest share of its revenue by selling leads to buyer's agents, and lower commissions could mean those representatives have less money to spend on marketing. Short seller Spruce Point Capital Management has argued that new commission rules could hurt Zillow, but the company has argued it is well-positioned to thrive in a changing industry landscape.
Stocks of real estate brokerages Compass Inc., Anywhere Real Estate Inc. and Redfin Corp. also fell.
Information for this article was contributed by Alex Veiga of The Associated Press, Julian Mark and Aaron Gregg of The Washington Post and Patrick Clark of Bloomberg News.