Federal lawsuit settlement will change how real estate agents are paid | Real estate | Seven days

Before she put her Westford home up for sale, Vicky Phillips did some math. With the four-bedroom home listed at $808,000, Phillips estimated the real estate agent’s commission for handling the sale would be about $48,000.

Phillips decided to keep the money and sell the house herself. In May, she posted it on Picket Fence Preview, a website where owners list their homes for sale. She also paid a real estate agent $499 to list the house on a multiple listing service, a system that shows all properties for sale through brokers.

“It’s not complicated,” said Phillips, the business owner, who noted that she signed much more detailed contracts than the one she will rely on when selling her home.

She has shown her home five times, which usually takes her about two hours, including cleaning. If she had signed with a real estate agent to sell it, that person would have expected a standard commission of 2 or 3 percent, as much as $24,000. If a buyer’s agent had been involved, which is often the case, that person would have taken another 2 or 3 percent of the sale price.

“Real estate agents are great, but what are you paying for?” Phillips asked.

Questions like Phillips’ have rocked the real estate industry for years, and the home sellers’ revolt recently proved successful: In March, the National Association of Realtors agreed to pay $418 million in damages to settle a 2019 federal lawsuit that accused the organization of violating antitrust laws by adopting rules that created an industry standards committee.

The settlement requires NAR to withdraw regulations that require a home seller’s agent to offer to pay the agent for the buyer. Those regulations led to a standard commission of 5 to 6 percent being included in the price of most homes for sale. The settlement will make it easier for buyers and sellers to negotiate commissions with their real estate agents.

The settlement made national headlines, with some analysts predicting the home purchase price would drop significantly as a result of the reduced commission.

Lower commissions would be welcome news for Vermont home sellers, but local experts say the rising cost of buying a home is mostly a result of rising property values. The median price of a home sold in Chittenden County rose by more than $100,000 between 2020 and last year, to $460,500. At a typical commission of 5 or 6 percent, the person selling that home would pay the agents involved as much as $27,000.

Many real estate agents say the national settlement won’t change anything in Vermont. Local agents have always been honest with homebuyers and sellers about how much their commissions will cost — and they’ve always been open to negotiations, said Kathy Sweeten, CEO of the Vermont Association of Realtors.

“It won’t have a huge impact because we’re already doing it,” Sweeten said in an interview. Many Vermont real estate agencies take the same stance.

“We have been doing business this way for many years, sharing information about our agency,” said Laurie Mecier-Brochu, CEO of Four Seasons Sotheby’s International Realty.

But real estate industry analysts say the settlement will likely free up consumers to negotiate with agents for their services. The Consumer Federation of America, a nonprofit consumer advocacy group, said that while negotiation has always been an option in theory, agreements are typically drawn up by attorneys at local real estate associations. Under the current system, many homebuyers don’t realize they’re paying a 2 percent or 3 percent commission to their agent because it’s built into the home seller’s fees and, therefore, the price of the home.

Starting next month, buyers who hire an agent to show them homes will be asked to sign an agreement outlining how much they will pay the agent if it sells, so the cost is not hidden in the home’s sale price. The advocacy group said the settlement would give agents and consumers more freedom and transparency.

Change won’t happen overnight.

“The residential real estate market will need time, perhaps several years, to fully understand the implications of this settlement,” the Consumer Federation said in a statement after the NAR settlement was announced.

Not all agents are paid by commission. Some charge a flat fee — $3,500 is the norm — instead of a commission, using that transparency as a selling point. And there have always been homeowners, like Phillips, who have avoided commissions altogether by selling their homes on their own.

Changes in technology have made it easier. Today, websites like Zillow and Redfin display homes that are listed on the MLS, making them available online to anyone who knows how to look for them. When she was looking for a home two decades ago, Phillips noticed that her real estate agent would print out MLS listings and send them to her, a cumbersome process that gave the agent control over which properties Phillips could consider.

Online listing services also help potential home sellers find out how much similar properties are going for — and provide valuable information to buyers, such as how much a home has sold for in the past.

“Before, you couldn’t go on Zillow and find comparable listings, history or see what the taxes were” for homes on the MLS, Phillips added.

Demand for homes is high in Vermont, making it a great time for sellers to try their hand at going it alone.

Before she put her Montpelier modular home up for sale in May, Tammy Parish asked the Front Porch Forum for advice on selling without an agent. She got a lot of responses from sellers who had done just that — and a few requests from people who wanted to see her home.

“My phone was blowing up. It was people giving me advice, saying, ‘Yes, you can do this,’ or, ‘No, this is more detailed than you think,’” said Parish, who added that she sold her home for $240,000 the following weekend to one of the people who responded to her question.

Parish hired a lawyer to help her sign the agreement, paying about $2,000, she said. A 5 percent fee would have cost her about $12,000.

“That’s a lot of money for someone who posts photos and advertises them,” she said.

Phillips said she has been contacted by more than 25 agents since she posted her Westford home for sale on Front Porch Forum in May.

“Everybody wants to represent me,” said Phillips, who believes the lack of inventory and high interest rates may have created a very slow market for agents. She added that there are times when using an agent is essential. She is looking for a property in Asheville, North Carolina, where she will build her next home, and said an agent warned her that land prices are lower in a neighboring town because of a local paper mill.

“She said, ‘On a good day you can’t smell it, but on a bad day not only can you smell it everywhere, but the fumes are toxic,’” Phillips said. “Good advice.”

If more negotiations lead to lower commissions, as expected, some agents could leave the profession. The number of licensed real estate agents in Vermont has surged during the pandemic, reaching 3,072 last year — the most since the Secretary of State’s Office began keeping records in 2008. There are now 2,843 people licensed to sell real estate, according to the office.

It’s a tough way to make a living, according to Mikail Stein of RE/MAX North Professionals, who sells about 40 homes a year. Stein said his overhead is high and the hours are long. The income is unpredictable.

“It’s only been the last two years of my career that I’ve had a winter where I didn’t panic about the financial situation,” Stein said. “And as far as hours go, most people are doing a lot better than me.”

Stein believes professionals like himself will remain in the industry, and if commissions decline, it will likely be part-time, new or unskilled agents who leave.

“I hope it ultimately provides better service to the public,” NAR said of the settlement. “For those of us who provide great service, the compensation will be fair. And for those of us who don’t, the market will say, ‘You’re not providing enough.’”

A Landmark Federal Case

Lawsuit
A group of Missouri residents who used real estate agents to sell their homes filed a class-action lawsuit in 2019 against the $1.5 million National Association of Realtors and several multistate real estate brokerages. The lawsuit alleged that the defendants conspired to inflate real estate commissions paid by homeowners.

Details
The lawsuit concerned NAR’s “cooperative compensation” rule, which requires a home seller’s agent to offer compensation to a buyer’s agent in order to list the home on a multiple listing service. The lawsuit alleged that NAR, by controlling nearly all multiple listing services in the U.S., exerts monopoly power to artificially keep commissions high.

Verdict
A federal jury in Missouri ruled in favor of the homeowners in October 2023, awarding them $1.8 billion in damages. NAR said it would appeal.

Settlement
Instead, NAR reached a settlement in March, paying $418 million in damages and agreeing to change some practices.

What will change?
Sellers’ agents will not set the commission earned by a buyer’s agent. Instead, homebuyers will negotiate directly with those agents for their services. The changes are set to go into effect in August.

What’s next?
In Vermont, analysts say it’s too early to predict what impact, if any, the settlement will have on the state. Prices are high, driven by a critical shortage of supplies and high demand.

“If I had to guess, I would say that real estate agents will become less influential and there may be more fee-for-service real estate transactions,” said Jeff Lubell, a Norwich resident who works as a senior associate in housing policy at Abt Global, a consulting firm in Rockville, Md. “We’ll see different patterns in different places.”

Unintended consequence?
Some real estate firms and analysts say the settlement will hurt low-income homebuyers. These buyers may not be able to pay the commission out of pocket to their agent. Previously, the commission was rolled into the price of the home and therefore into the mortgage payment over time.