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Columbia Business Monthly

NAR Settlement Could Lower Real Estate Agent Fees

May 01, 2024 09:30AM ● By David Caraviello

It’s tacked onto the end of nearly every residential real estate listing in South Carolina: buyer’s brokerage commission 3 percent. And it will soon be a thing of the past, due to a landmark legal settlement reached March 15 by the National Association of Realtors.

While the NAR agreed to pay $418 million to resolve nationwide claims brought against the association by home sellers, the larger impact of the settlement in South Carolina and elsewhere will come in the area of commissions — in the past, largely accepted at 3 percent of the sale price for each the buyer’s and seller’s agents. Going forward, those commissions, particularly on the buyer’s side, promise to be much more fluid, and the NAR will now mandate that its member agents enter into written agreements with buyers stipulating the commission amount

Commission rates expressed through the Multiple Listing Service — such as specifying at the end of the listing that a buyer’s agent will receive 3 percent of the eventual sale price — will also be prohibited. Although the NAR has claimed that it has no set commission rate for its member agents, 3 percent apiece for the buyer’s and seller’s agents has long been accepted as an industry standard, in South Carolina and the nation at large.

“It's hard to know what impact it will have. In my honest opinion, I think it will be moderate at best. I think you'll see a slight softening of buyer's agent compensation, similar to what we see on the listing agent side,” said Michael Scarafile, president and CEO of Carolina One Real Estate in Charleston. “I don't think it'll be anywhere near as dramatic or draconian as the headlines you’re seeing.”

Nick Kremydas, CEO of S.C. Realtors, foresees more transparency between agents and clients on the issue of compensation. “More of those conversations are going to be required under the settlement, and that can't be anything but a good thing,” he added. “So, these compensation agreements that are front and center of this settlement, think you're going I think you're going to see agents be more transparent about that process so consumers have a better understanding of it.”

‘Negotiated on a deal-by-deal basis’

The settlement will end claims from home sellers who argued that they were forced to pay excessive fees to agents representing home buyers. Going forward, many experts believe that agent commission rates will be set on a client-to-client basis, with the market determining the exact percentages. The changes will go into effect in July.

“The forces of competition will be let loose,” Benjamin Brown, an antitrust attorney who helped hammer out the settlement, told The New York Times. “You’ll see some new pricing models, and some new and creative ways to provide services to home buyers. It’ll be a really exciting time for the industry.”

Added Toby Schifsky, vice president of real estate education at Kaplan: “On a scale of one to 10, the National Association of Realtors’ decision to shift the buyer side commission burden from sellers to buyers is a 10, and represents nothing short of a sea change. This is by far the biggest change to hit the real estate industry in more than 30 years and has introduced new complexities to the process of buying and selling a home.”

Scarafile isn’t so sure. “It probably never made sense that whether you were a good buyer's agent or a crappy buyer's agent, you were paid the same based on whatever is offered in the Multiple Listing Service,” he said. “You don't see the NFL say, ‘This is what we pay wide receivers,’ and If you drop the ball, you get paid the same as the guy who scored a touchdown. Now, that number is negotiated on a deal-by-deal basis. I think the good buyer's agents will still get paid fairly. Buyer's agents bring a lot to the table, and I think those that never did will probably see some softening in what they get paid.”

Commissions accrued over the course of a residential transaction can add up — on a home sold for $328,000, the median price in South Carolina in February, a 6 percent rate means agents for the buyer and seller would split a total of $19,680. And the NAR’s reach is extensive, given that the largest trade association in America has 1.5 million members, including nearly 30,000 in the Palmetto State.

In October, a federal jury in Kansas City found the NAR guilty of conspiring to artificially inflate commissions in home sales and ordered the association to pay $1.78 billion in damages. The settlement resolves those claims, according to the NAR, which chose to settle for the lesser amount after considering both an appeal and filing for Chapter 11 bankruptcy protection.

“Ultimately, continuing to litigate would have hurt members and their small businesses,” said Nykia Wright, interim president of the NAR. “While there could be no perfect outcome, this agreement is the best outcome we could achieve in the circumstances. It provides a path forward for our industry, which makes up nearly one fifth of the American economy, and NAR. For over a century, NAR has protected and advanced the right to real property ownership in this country, and we remain focused on delivering on that core mission.”

The settlement covers NAR brokerages that in 2022 reported a residential transaction volume of $2 billion or less, and independent contractors at other brokerages who are NAR members. Brokerages with a residential volume above $2 billion have the option to buy into settlement coverage, with the cost determined by a formula based on the agency’s size. Those funds will be added to the $418 million, which will go into a trust fund designated for distribution by the court after the settlement is formally approved, and be paid out over four years.

According to the Wall Street Journal, the settlement has left some prospective home buyers wondering whether to purchase now or wait until this summer when the changes mandated by the deal go into effect. And as for experts who have hinted that the settlement could ultimately lower home prices? “I think that’s a total joke,” Kremydas said.

‘Tremendous savings’ to homeowners?

For South Carolinians in the home market, the greater impacts of the settlement promise to come in the areas of agent commission. Buyers agreeing to a commission rate in writing, which had previously been an NAR recommendation, will soon become a mandate. There will be no more specifying commission rates in the MLS.

South Carolina law already mandates that agents and clients have written agreements, Kremydas said. “In South Carolina, if you represent a buyer and want to be compensated by that buyer, you have to have a written buyer agency agreement. That's been the law in South Carolina for 25 or 26 years,” he added. “We're one of only 18 states in the country that have laws in place like that. And there's also a correlating law for sellers — if you're listing property for sale, you have to have a written agreement with the seller over how you're going to be compensated.”

For that reason, Kremydas said the immediate impact of the settlement might be minimized in South Carolina compared to other states. But then there’s the question of those twin 3 percent commission rates, long seen as the industry standard, even though both NAR and S.C. Realtors say they don’t set commission rates for their members. Going forward, many believe those rates will be for the clients and the market to decide, raising the specter of buyer’s agents competing against each other to win over clients — and consumers potentially paying less in commission fees in the process.

“There’s no doubt in my mind that this is going to bring about tremendous savings to homeowners,” Michael Ketchmark, a plaintiff attorney representing Missouri home sellers in one of the cases against the NAR, told The Washington Post.

But Kremydas believes the settlement could adversely affect first-time or aspiring homebuyers who choose agents solely on low commission rates or try to eschew buyer’s agents altogether. “Getting through the inspections and all the due diligence required in the home-buying process, it's very, very difficult,” he added. “And in our current environment, where we have extremely low inventory, and where prices that have increased more than 50 percent since Covid across the board in South Carolina, there are additional hurdles for those aspiring homeowners.”

Once again, Scarafile believes the eventual changes will be more moderate than they might seem in the immediate wake of the March 15 settlement announcement, which threatened to shake up an NAR compensation model that’s been in place since the 1990s.

“At the end of the day, the average consumer in this business is buying or selling a home every seven to nine years, and it's their largest single financial transaction. They want somebody to hold their hand and guide them through that process,” he said. “And you know, if that buyer's agent is paid by the buyer through a negotiated contract as opposed to a flat fee on the MLS, that's fine. But it's not going to be that buyer's agents go away, and buyers now all of a sudden are on their own.”