How a major real estate settlement will change home buying in Phoenix
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Illustration: Sarah Grillo/Axios
The National Association of Realtors recently agreed to settle a big lawsuit that questions how real estate agents are paid — and who foots the bill.
Why it matters: The changes could eventually bring down the cost of real estate transactions, but in the interim, they're causing confusion for buyers, sellers and their agents.
The big picture: Beginning Aug. 17, agents won't be able to advertise commission rates in the Multiple Listing Service (MLS), the database where real estate agents post homes for sale.
- Additionally, buyers will have to sign a compensation agreement before a realtor can show them listings.
How it works (currently): Sellers and their broker negotiate a commission (most often 5%-6%), which the broker then splits with the buyer's agent. The buyer's agent's portion is what is advertised in MLS.
- The seller pays both agents from home sale earnings.
- Buyers aren't required to have a formal agreement with the agent representing them because they don't pay their agent's commission.
Friction point: The current structure has been widely criticized because of concerns that buyers' agents could steer their clients toward homes that offer them higher commission.
- Some sellers also complain that they shouldn't have to pay the commission of an agent that is technically working against their interests by representing the buyer.
Reality check: Commissions are not set by NAR or the MLS, and are already negotiable, although most buyers and sellers are unaware they have the power to bargain.
The intrigue: Now, increased transparency around agent profits could lead to more competition and negotiation and lower home selling costs.
- Most observers believe commissions will fall — a lot. Possibly to as low as 1%-1.5% per agent on each side, says Steve Brobeck, a senior fellow at the Consumer Federation of America.
Between the lines: The biggest impact of the settlement is that buyers will have to formalize an agreement with their agent and agree to pay them if the seller won't.
Zoom in: Metro Phoenix Realtor Jenn Newman of The Brokery told Axios Phoenix the settlement will create some new processes and paperwork but doesn't change the "blueprint for how we do business."
- However, she's concerned buyers won't understand all their options and could be discouraged if they can't afford the cost of hiring their own agent.
- A seller can still pay for the buyer's agent through negotiation, and many sellers will choose to do so because it will expand the pool of interested buyers, Newman said.
The other side: Greg Hague, founder and CEO of the speedy home-selling program 72SOLD, told us he's been advocating for this kind of major shift for years, and believes it will open up a new frontier of innovation and transparency in the real estate industry.
What they're saying: "The industry will be better because of it. Sellers will be better served, buyers will be better served and the cost of selling and buying a home will go down," Hague said.