The effects of the lawsuit that rattled the foundation of the national real estate industry last spring are beginning to be felt in North Carolina. So far, no chunks of Carolina blue skies have fallen, no apocalypse has dawned.
But it’s still early.
“The difference (the settlement) makes in NC … remains to be seen,” says Miram Baer, executive director for the North Carolina Real Estate Commission, which licenses about 60,000 agents. “But there are some other actors who have to weigh in. We’ll have to see what happens.”
The settlement, which went into effect in August, is a potential doozy. It stemmed from a class-action suit known as Sitzer-Barrett, filed in 2019 by home sellers in Missouri against the National Association of Realtors trade group, and various allied organizations and businesses.
A Kansas City jury awarded $1.78 billion to the plaintiffs and their representative class last October, agreeing that anticompetitive, opaque practices led to systematically overcharging consumers. Last spring, NAR and the plaintiffs reached a settlement that cut the award to $418 million, but gained some regulatory concessions. The national group represents about 90% of the 1.5 million agents in the U.S.
Under the settlement terms, NAR members will no longer advertise buyer agent commissions on the Multiple Listing Service website, and will require that buyers sign a contract with a buyer agent prior to visiting a property with that agent. A final judge’s decision is pending.
The standard industry practice has been for seller agents to advertise a total commission, typically 5% to 6% of the final sale price. That fee has been split between agents for the seller and buyer, making an informal commission structure around the industry longer than three-bedroom bungalows.
NAR’s settlement saved the organization a lot of money and staved off other regulatory concessions that were potentially more onerous.
In North Carolina, the results so far are not earth shaking. It was one of 18 states in which buyer’s agent contracts were already required.
“When it was first reported, everyone was screaming ‘seismic changes, seismic changes,’” says Andrea Bushnell, CEO of the NC Realtors trade organization. “Well, there will be some changes, but they’re not seismic.”
For North Carolina agents and consumers, the new rule on buyer contracts technically means just a slight change. Previously, state regulations required a potential buyer to sign a contract with his or her agent prior to that agent submitting an offer. Now, the contract must be in effect before the agent shows a property.
That difference alone is not significant. The written agreement is similar, and an agent with a contract in hand before the first showing is in compliance with the state’s regulation.
But bigger changes may be ahead.
The basis of the Sitzer-Bennett lawsuit was the idea that home sellers were forced, or at least coerced, into paying exorbitant agent commissions because agents rarely discussed fees in an open manner. Many consumers, who don’t trade homes frequently, may have believed the percentages were immutable.
Lots of money is at stake. The median price for North Carolina homes last year was $335,760. A 6% commission, divided between agents, totals more than $20,000. A $500,000 home can entail a $30,000 commission. That cost is typically rolled into the sales price and paid by the seller.
Inefficiencies in the current system lead to commissions that are as much as 30% higher than under a more competitive model, analysts at the Richmond Federal Reserve Bank concluded in a March working paper. That amounts to about $30 billion annually, they said.
In theory, the new rules prevent selling agents from advertising a rate for buyer’s agents on the multiple listing service, which is a critical tool for agents. They could also open the door for buyers and sellers to negotiate commissions.
So far, there hasn’t been much change, which shouldn’t be surprising. For years, various companies and entrepreneurs have offered lower-cost options to attract home buyers, without significant success.
Redfin, an online real estate broker, says that the average commission was 2.57% in July, down from 2.62% in January. That means a total commission of about 5.1%, covering both buyer and seller agents.
Charlotte Realtor Daniel Cottingham expects commissions to continue declining, which he says is a sensible, long overdue adjustment.
“The really big change, and this should have happened long ago, is that for the longest time, somebody else was determining what a buyer’s agent was going to get paid,” says Cottingham, president of the Cottingham Chalk firm.
“Going forward, each agent will negotiate their fees, based on the services they do or do not provide and that will be baked into the transaction.”
As a result, consumers will see a range of fees with more established agents likely to charge more than the inexperienced, says Cottingham.
While commissions overall will decline, he says, “I think for some at the top end of agents, they will get paid more.”
Many industry officials also expect a reduction in the number of licensed agents. Almost half the nation’s 1.5 million Realtors listed one or fewer properties per year. Meanwhile, fewer than 1% of Realtors list 45 or more properties per year.
“There has been this narrative in the business that [real estate] is something you can do part time, and if you sell 3-4 houses a year here and there, you might have some nice side income, and can do pretty well,” Cottingham says. Maintaining a license and other expenses as a part-time broker tends to cost at least a couple thousand dollars, according to industry experts.
“But I think not being full time will make for some tough discussions with customers now, as you negotiate a fee.”
The hope is that consumers benefit as the marketplace develops lower cost alternatives. That should have happened long ago, the Richmond Fed noted, as critical aspects of the industry, such as property listings, moved online. Looking at homes on a computer can save lots of hassle versus driving from house to house.
“There’s a need for a range of services,” says Cottingham, the son of his company’s founder.
“I’m bald. When I need a haircut, I just find a barber with a good razor and get a nice shave. It’s pretty inexpensive, and it should be. I have no hair. I don’t need much. Someone else may go to a creative stylist and pay $250 every couple weeks. That’s what they need.
“Our industry should be like that, too.” ■
