Buying and Selling a Home in California Is About to Change: Here's How

The National Association of Realtors, one of the most powerful real estate groups in the country, announced on Friday it would settle a major class-action lawsuit that had accused the group of artificially inflating the commissions its agents make in home sales.

In 2021, Americans collectively paid real estate agents around $100 billion in commissions. But that’s expected to go down by an estimated 20%–50% if a court approves the settlement agreement, Steve Berman, a managing partner at Hagens Berman, which represented the plaintiffs, said in a statement.

“This is a seismic shift in the real estate market,” he said.

Without admitting wrongdoing, the association said it would pay $418 million over approximately four years. It also gave up its right to appeal and agreed to change its practices around setting commissions.

“It has always been our goal to preserve consumer choice and protect our members to the greatest extent possible,” Nykia Wright, interim CEO of the NAR, said in a statement. “This settlement achieves both of those goals.”

For people looking to buy or sell a home, here’s what this settlement means:

How do real estate agents get their commissions today? 

Imagine you’re on Zillow or Redfin, looking to buy a home. You see the list price for a home, but what you might not realize is that the commission for both the buyer’s and seller’s agents is baked into that price.

In the 1990s, the National Association of Realtors made it mandatory to publish in the home listing how much agents stand to make from a sale. While there isn’t a set rule for how much the commission should be, it became industry practice to set it around 5%–6%.

The lawsuit, filed in April 2019 by a group of home sellers in Missouri, argued the rule encouraged realtors to steer their clients away from homes with a lower commission and toward more expensive ones — where they could make a larger profit. It also meant home buyers and sellers were sometimes unaware of how the commission rates were set, discouraging them from negotiating that rate.

How does the proposed settlement change things? 

The settlement agreement, slated to go into effect in mid-July, would no longer allow agents to publish the commission in the listing. That rate would be set during negotiations.

Previously, the buyer’s and seller’s agents would split the commission, but now, the buyer and seller will both be responsible for paying their respective agents.

“What the settlement does is [it] enables both the buyer and the seller to negotiate with the broker upfront of what level of service they want and what their fees are going to be,” said Ted Tozer, a fellow at the Urban Institute, who specializes in housing finance. “I think, in the long run, this is very positive.”

How will the world of real estate change? 

Likely, quite a bit.

Because commission rates can’t be set up front, realtors will have to compete for business and may offer lower rates to their clients. But it could also mean bad news for part-time realtors, who have otherwise relied on that 5%–6% commission as an occasional income.

“If you’re a realtor and you only sell a couple houses a month, you’re going to have a tough time making it,” Tozer said. “You will probably have less realtors in numbers, but the ones that are doing business are probably going to be more effective at what they’re doing because they’ll have to make it a full-time job.”

What does all this mean for me, a home buyer or seller? 

Firstly, because this is a class-action lawsuit, some home sellers might be entitled to compensation. But it doesn’t include California. It only pertains to metro areas in Arizona, Colorado, Florida, Nevada, North Carolina, Ohio, Texas, Utah, Minnesota, Pennsylvania, Virginia and Washington, D.C.

That said, the proposed settlement will likely empower home buyers and sellers to negotiate the commission rate with their agents.

“What the lawsuit was all about was that the sellers felt like they should have more control,” Tozer said. “I should have the ability to have a say in what I’m paying.”