A bombshell settlement by the National Association of Realtors last week has the potential to upend longstanding real estate commission practices, leaving many agents and their brokers in the Twin Cities stunned, if not uncertain about what it means for buyers, sellers and the agents who represent them.
What does the national settlement on home commissions mean for the Twin Cities?
The National Association of Realtors settlement changes how commissions work, shocking the industry.
The Minnesota Star Tribune
March 15, 2024 at 8:52PM
The settlement, announced Friday, is a jolt to a commission structure that has defined the dynamics of a real estate deal for decades. And there’s already considerable discussion about what happens next and whether it’ll cost less to buy and sell a home.
The associations that represent real estate agents in Minnesota, including the Minneapolis Area Realtors, have largely remained quiet on the topic as the issue has played out in court. In a statement Friday, the St. Paul Area Association of Realtors and the Minneapolis Area Realtors said they’ll have more to share in the coming days.
Right now, how does the commission structure work?
Typically, someone who is selling a house will pay their listing agent a commission. Right now, the standard commission is 5% to 6%, which splits between the listing agent and the buyer’s agent, if one exists, at the time of a sale. Sometimes, a buyer will work directly with the listing agent, whom the seller hires and who has an obligation to work on behalf of the seller. In that case, the buyer signs a document acknowledging the situation, which is called “dual agency,” and the entire commission goes to the listing agent.
Technically, buyers and sellers are under no obligation to pay agents a specific amount or percentage. So agents fiercely protect those commissions because it’s the only form of compensation for most of them.
How will it work in the future?
Leaders of the largest brokerages in the Twin Cities are still struggling to understand what’s next. That includes Chris Kelly, executive president of HomeServices of America, the Minneapolis-based company that owns Edina Realty and many of the nation’s largest brokerages. He said the company needs time to process the 100-plus-page settlement and what it means.
If a judge approves it, the settlement and its changes won’t come into effect until late July. The settlement clearly bars agents from advertising their compensation on listing information and releases sellers from the expectation they’ll have to pay the commission for the buyer’s agent.
Greg Lawrence, broker/owner of Golden Valley-based HomeAvenue, has long criticized the standard commission structure based on a percent of the total sales price, so his company charges a flat fee. What others decide to do is still undetermined.
“I’ve never agreed that compensation should be based on a percent of the sale price,” he said. “You’re getting the same service.”
Lawrence said he thinks more buyers’ agents will adopt a similar fee structure that will more directly compensate them for the services they provide while taking some of the burden off sellers who are currently paying buyers’ brokers. Under the settlement, buyers would have to pay their agents, making it an especially onerous proposition for first-time buyers already on a tight budget.
Lawrence said he’s concerned, however, some listing (or sellers’) agents will continue to collect the entire 6% commission, and some buyers will forgo representation altogether to work directly with sellers’ agents, who technically work on behalf of the seller.
Hasn’t the traditional brokerage model already changed?
Yes. Through the past decade, at least, a growing number of nontraditional brokerages have joined the industry. Some are flat-fee companies like HomeAvenue. Others are essentially web-based tech companies more akin to the flat-fee model.
Kris Lindahl, founder of Twin Cities-based KLRE, said while his firm has always treated commissions as negotiable; consumers want choices so brokerages will have to adapt. His company has a “guaranteed offer” program that forgoes a sales commission altogether. In the wake of the settlement, he started adding a “no commissions” banner to his billboards.
While there’s no telling what commissions will look like in the future, the agreement will “inspire continued education and transparency for agents, which is always a good thing,” Lindahl said.
Andrew Babula, director of the real estate program at the University of St. Thomas, agreed it’s too soon to say with any certainty how the agreement will affect the industry. He said he believes the settlement will have an impact, but he doesn’t think it will be “as earth-shattering as some claim.”
Will house prices come down?
Possibly.
“It should lower fees a bit,” Babula said. “Previously, [commission] still was technically open for negotiation, so I think some people will forgo some of the services that a buyer’s agent would provide and offer cheaper services, but I don’t think it will have a wholesale transformation like some people are claiming.”
Some experts believe the overall cost of buying a home — the sale price, along with all closing and broker costs — will go down.
Babula is not so sure. Fees for the buyer to hire an agent could come out to be the same as the 3% commission. You might pay up front instead of at the end, and someone else might pay it, but the net cost is the same.
He doesn’t think it will change the competitiveness of the housing market, though.
Does this mean agents will make less?
Agent fees are at risk, Babula said.
“While things may go more a la carte, buyers might have to pay agents whether they close on a transaction or not,” he said.
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