It’s long been the case that when a homeowner in Rhode Island is ready to sell and hires a Realtor, it’s taken for granted that a 5%-6% broker commission will be paid to that agent when the house sells, and potentially to the buyer’s agent, too.
But that is likely about to change, now that the National Association of Realtors has agreed to change the commission system in order to settle numerous lawsuits against the group.
The $418 million settlement reached in March is expected to go into effect this summer, pending court approval. But Realtors and industry observers are already bracing for sweeping shifts under the agreement, which would get rid of set commission fees and would require buyers and sellers to enter a formal agreement before they begin working together.
Who will emerge as the winners of the settlement will remain unclear, observers say, with many torn on how it will impact home prices in the sellers’ market.
Historically in Rhode Island, as is typical throughout the U.S., sellers have paid a 5%-6% commission that can be split between the agents of the buyers and sellers. Often, the commission is baked into the sale price, so the buyer also ends up paying, too.
While that fee isn’t set in stone, as it is in some other states, when it comes to the buyer’s agent, it’s never typically been up for negotiation.
“It was a misconception from consumers that [they] don’t have to pay anything to have buyers’ representation because it was always covered through the seller’s side of the transaction,” said Kristen Regine, a professor of marketing at Johnson & Wales University and a local Realtor.
And under current circumstances, where buyers don’t need a formal, written agreement to work with a Realtor, they might walk into a partnership without appropriate knowledge of the agent’s background and qualifications, Regine says.
“So I think what you’re going to see based on this [settlement] ... is more transparency in the industry,” she said.
But for homebuyers and sellers to realize benefits from the agreement, “there needs to be a clear message to consumers that commissions are negotiable,” Regine added.
The National Association of Realtors reached the settlement with a group of home sellers in Missouri who filed a lawsuit against the association and other real estate giants, such as Berkshire Hathaway HomeServices, alleging that popular real estate practices and the association’s code of ethics have created inflated commission rates.
In the settlement, the Realtors association denies wrongdoing of its own or by stakeholders but must make a $418 million payment over the course of about four years. The association “has worked hard for years to resolve this litigation in a manner that benefits our members and American consumers,” Nykia Wright, interim CEO of the National Association of Realtors, said in a statement at the time of the settlement. “It has always been our goal to preserve consumer choice and protect our members to the greatest extent possible.”
While homebuyers will now have more negotiating power, leveraging this change to their advantage will also require additional legwork, Regine says.
“I think a major change for the good of the buyer is they get to be more involved in the transaction,” Regine said. “But they also have to do their research and become more educated as part of the process, which is already complicated enough for them.”
In a potential downfall of the settlement, this function may sometimes fall to homebuyers involuntarily, says Melina Lodge, executive director of the Housing Network of Rhode Island.
Lodge and other observers suspect that the new guidelines – and resulting loss of commission revenue for real estate agents – will push professionals away from the industry, taking with them a resource for homebuyers and sellers.
“Whether people will have the information to make good choices is concerning,” Lodge said. “The real estate agent provides an expertise. ... There’s a lot lost, potentially, for people who don’t have a person guiding them through that process.”
Compounding a potential shortage of real estate agents, Rhode Island’s low supply of housing stock further limits options for interested homebuyers, says Brenda Clement, executive director of HousingWorksRI at Roger Williams University.
For first-time homebuyers in particular, Clement said, the settlement “emphasizes the importance of education and counseling.”
And while the settlement increases the negotiating power of buyers and sellers, observers say, it also runs the risk of raising the overall transaction cost buyers pay when purchasing and selling a home.
“Lower fees for the seller is a good thing,” Lodge said. “It allows them to keep more of their money. But now, if buyers need to pay a commission – which has historically been covered by the seller’s fee – there’s now an additional cost, potentially to buyers.”
But as to how the settlement will affect home prices – an issue that has vexed buyers in recent years – observers say it’s too early to tell.
“We’re in an uncharted space,” Lodge said. “I think the uncertainty of how this will really work, and work for people who can’t afford traditional costs, is the most troublesome.”
