NAR Settlement Sparks Discussion on Commission Practices

When the National Association of Realtors reached a landmark settlement in the Sitzer-Burnett case a little over a week ago, it was clear the deal would have huge implications for residential real estate.

The trade group agreed to pay $418 million in damages to settle lawsuits brought by homesellers. But, more importantly for those in the industry, the organization agreed to make changes to the buyer’s agent commission rules at the center of the dispute.

The Real Deal’s “Deconstruct” spoke with Michael Nourmand, head of Los Angeles-based brokerage Nourmand & Associates, to discuss the settlement’s significance.

The plaintiff’s argument claimed NAR’s rules set a standard 6 percent commission, but Nourmand — and the trade group — said commission rates have always been negotiable.

“This idea that negotiating fees is a novel concept has not been the case here [in L.A.],” he said. “The consumer already knew that commissions were negotiable.”

Some have speculated on how the changes could change home prices, but that remains to be seen. One more readily available outcome is the new rules shift the burden of who pays the buyer’s agent’s commission fee.

Under the current rules, sellers have footed the costs for buyer’s agent commission. With that responsibility upended as of July, there will likely be more competition and innovation on the buyer side — like agents requiring an exclusivity agreement before showing a buyer homes.

“I think that’s good. I think that’s a win for the consumer, so they know how the commission works,” Nourmand said. “It’s also good for the agents because it formalizes the agreement.”

These agreements will lay out the services that an agent can provide and how they expect to be compensated once a purchase has been made, breaking out how buyer’s agents are making money.

This is a change from the long-standing practice of commission being factored into the price of the house, which Nourmand praised.

“The beauty of the traditional or historical system is that it was financed,” he said.

Breaking out those costs and stoking competition on the buyer side could also limit the buyer pool for a home.

“I could see a world where there are buyers that say ‘I don’t want my agent to show me things that I have to write a check for,’” Nourmand said. That scenario would likely hurt the seller, as fewer home shoppers may look at their home.

Advocates and plaintiffs in the cases over broker commissions have cheered rule changes targeting increased transparency, while some in the industry have issued mixed forecasts about the increased complexity that could rise with a push toward negotiation.

“That’s a lot of things to deal with,” Nourmand said. “The simpler you keep a deal, the more likely it is to close.”

Check out “Deconstruct” on Apple and Spotify.