A bombshell settlement by the National Association of Realtors (NAR) has the potential to upend a long-standing real estate commission structure, 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.
The lawsuits — and tensions surrounding the current commission structure — have been years in the making. The associations representing Twin Cities area agents have largely remained quiet on the topic, citing the unprecedented nature of the situation. On Friday, hours after the decision, the St. Paul Area Association of Realtors and Minneapolis Area Realtors issued a joint statement that said, "We are encouraged by what we're hearing about the preliminary settlement. ... We look forward to learning more in the days to come."
The Twin Cities area is home to several major brokerages, including the largest real estate holding company in the country: HomeServices of America, a Berkshire Hathaway company that owns Edina Realty and many of the nation's largest brokerages. Executive President Chris Kelly said in an email that the Minneapolis-based company needed time to process the 108-page agreement.
Greg Lawrence, broker/owner of Golden Valley-based HomeAvenue, was quick to react: "It's absolutely shocking," he said. "This changes the whole industry."
For more than three decades, Lawrence has railed against the current commission structure. His company charges a flat fee for real estate services, a practice he says is much fairer than one that rewards an agent no matter the service they provide.
"I've never agreed that compensation should be based on a percent of the sale price," he said. "You're getting the same service."
He said he thinks more buyer's 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 buyer's brokers. Such an approach would also benefit buyers, who under the settlement will be forced to pay their agent — an especially onerous proposition for first-time buyers already on a tight budget.
Lawrence said he's concerned, however, that some listing agents will continue to collect the entire 6% commission, and that some buyers will forgo representation altogether and work directly with the seller's agent, who technically is working on behalf of the seller.
Kris Lindahl of Twin Cities-based KLRE said that his company has always treated commissions as negotiable, and that the biggest change to real estate right now is interest rates.
"As the settlement is released, we'll have a clearer picture of how the landscape will change," he said. "Real estate has always been evolving, and consumers want choices."
While there's no telling what things will look like in the future, the agreement will "inspire continued education and transparency for agents, which is always a good thing," Lindahl said. "It will also create more innovation to meet the consumer's choices. This is a very exciting time for us to continue to meet consumers where they are."
Andrew Babula, director of the real estate program at the University of St. Thomas, agreed that it's too soon to say with any certainty how the agreement will impact the industry, but he offered some initial answers to questions buyers, sellers, agents and brokers might have.
Q: Will this upend the industry?
A: A lot of my peers are claiming [the settlement is] going to completely transform the real estate industry. I think it will have an impact, but don't think it'll be as earth-shattering as some claim. It should lower fees a bit. 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.
Q: Will house prices come down?
A: No. Traditionally, the buyer's agent fee would be about 3%. If that is not paid by the seller, you could argue that housing prices would come down 3%. However, if the cost of the [seller's agent's] commission to the buyer's agent now needs to be paid out of pocket or directly by the buyer to the buyer's agent, the cost of a home might come down 3% but they might pay 3% to the agent. So the net cost is the same. [Sellers] might negotiate or forgo services and pay 1 to 2% instead. Fees might come down incrementally, but it's not like housing prices are going to drop 10 or 20% simply because of this change.
Q: How will buyer's agents be compensated?
A: I think we will see somewhat of a shift to an a la carte structure from a buyer's side in particular. ... [It's] entirely possible that the free market will negotiate rates at or close to where they are now. It makes it more transparent for buyers and sellers ... but it will ultimately depend on the market and supply and demand.
Q: Does this mean agents will get paid less?
A: Agent fees are at risk. ... They might work with a buyer to find a home — work with them for six months and never get paid anything. While things may go more a la carte, buyers might have to pay agents whether they close on a transaction or not.
