The $418 million commissions lawsuit that was settled last week with the National Association of Realtors (NAR) is certainly a big deal. The NAR is trying to sound positive, but all signs point to this outcome being meaningful for the industry. TD Cowen Insights is forecasting that commissions paid in the US each year could fall by some $25 to $50 billion (from a total of ~$100 billion). And this is the headline you’ll see everywhere right now. But how might this actually happen?

As we’ve talked about before, the status quo commissions set up is a good one for agents:

• Sellers are typically the party who pays 100% of the commissions
• But sellers don’t pay until the agent sells and they have fresh cash
• Money being deducted from proceeds (a “take rate”) is a lot less noticeable and has a lot less friction than cash you just have to pay out of pocket
• Buyers kind of don’t pay — or at least that’s how they’re supposed to feel

This is “good” because it perpetuates the existing model. If buyers feel like they’re mostly not paying, they’re just going to go to the marketplace with the most supply of homes. And that marketplace is the Multiple Listing Service (MLS). However, this marketplace also does things like tell buyer agents how much commission they will make as part of each deal. And the belief is that practices like this are anticompetitive.

So as part of the above settlement, the following new rules are expected to go into place by July 2024 in the US:

• Seller agents will no longer be able to set compensation for buyer agents
• All fields on MLS displaying broker compensation will need to be removed
• Furthermore, agents will no longer even need to subscribe to an MLS in order to accept compensation
• Buyers working with an agent will need to enter into their own buyer broker agreement and negotiate compensation separately
• However, there’s nothing stopping buyers and sellers from negotiating whatever commission structure they want; the idea is simply that it will be more transparent and negotiated by each participant

Why this is meaningful is that it decouples buyer agents and seller agents in a way that they aren’t today. Instead of everything originating from the sell side, each side of the transaction is now going to — theoretically at least — negotiate what they believe is fair compensation for their representation. At the same time, there’s no obligation to even subscribe to an MLS.

This leads us to, at least, two important things to think about:

1. What is fair compensation? Well, it should depend. If I’m a first-time buyer, I may want someone to walk me through the entire process. But if I’ve done it many times before, maybe I need very little. Or, if I’m an investor looking to renovate homes, maybe I want representation that is also an expert on construction. The point is that, in a truly open market, one should be able to find an agent and pay them based on the value that they’re creating. And this is presumably why everyone is expecting commissions to fall precipitously.
2. If there’s no obligation to even subscribe to an MLS, does this then open the door for new and more open listing platforms? Right now, I don’t know how this will play out. I’d like to better understand more of the details around this settlement item and what it could mean for the landscape. But I do know that the way to spur the most amount of innovation would be to have the marketplace run on something like a blockchain, and then allow anyone to create their own listing platform on top of it. One day.

This will be fascinating to watch play out. And I’m sure it’s only a matter of time before it spurs similar changes here in Canada. Expect further coverage of this topic on the blog.

Photo by Tom Rumble on Unsplash