Rules for real estate commissions are changing
This weekend, a new set of real estate-related regulations comes into effect that fundamentally changes how real estate agents are paid.
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At the end of 2020, the National Association of Realtors issued an unusual statement – an apology.
“The NAR initially opposed the passage of the Fair Housing Act in 1968 and at times allowed the exclusion of members based on race or gender,” said the Washington-based group, which has more than 1.5 million real estate agents as members. “This discrimination was part of a systematic policy of racial segregation in the housing market, led by the federal government, supported by the American banking system and real estate industry, and driven by practices such as redlining.”
At a public event on stage, Charlie Oppler, then president of the group, added: “Because of our past mistakes, the real estate industry has a special role to play in the fight for fair housing.”
But just a few years later, the fight for fair ownership may have fallen behind. By decoupling commissions to buyers’ brokers from sales proceeds, the class action lawsuits against NAR and other large national brokerages on behalf of consumers are having unintended consequences, advocates say.
The concern: Black buyers, who often face a tough hand when it comes to home hunting, will be further disadvantaged because they will have to pay more out of pocket for agent representation – or they will choose not to seek representation in a transaction that is expensive, confusing and fraught with unknown issues.
“When buying a home, the down payment and closing costs are often the hurdle,” says Amber Lewis, owner of New Era Real Estate Group in Cleveland. “With the new rules, requiring our buyers to have additional funds to pay the commission becomes another hurdle.”
What obstacles are there on the way to owning your own home?
One of the biggest challenges facing black and other minority buyers is that many of them are not only first-time buyers, but also the first of their generation to own property. Only 45.3% of black Americans are homeowners, compared to 74.4% of whites, census data show. Thanks largely to higher homeownership rates, white Americans have an average household wealth of $1.4 million, nearly six times the $227,554 of black families, according to the Federal Reserve’s Survey of Consumer Finances.
“These communities don’t have parents who have accumulated wealth in the form of home equity because they have been unfairly, unjustly and discriminatorily excluded from the opportunity for homeownership,” said Lisa Rice, president of the National Fair Housing Alliance. “They can’t go to ‘Mom and Dad’s Bank’ to get money to pay the buyer’s agent. Because they have few assets, although they are not necessarily low income, they also have a disproportionate amount of student loan debt.”
Many Black buyers also lack the informal wisdom that comes from shared experiences, says Dr. Courtney Johnson Rose, president of the National Association of Real Estate Brokers, an organization of Black real estate professionals. When making the biggest financial transaction of their lives, it’s critical for most people to have a support system to help them make decisions on everything from mortgage rates to sump pumps.
“This is a classic example of people who have been built a ladder, who have climbed up it and are now pulling it back up behind them,” Rice said.
Dream postponed? The “American dream” has always been unattainable. Some people wonder if it is still worth fighting for.
Adaptation to changes after new real estate rules come into force
The changes, which came into effect on August 17, are causing excitement across the country, with many property market observers particularly concerned about the impact on home buyers.
“Has our job just gotten a little bit harder? Yes, absolutely,” said Sabrina Brown, founder of Pink Key Real Estate, a brokerage in Fresno, Calif. “Has it gotten harder for the Black and brown population? Yes, now there’s an additional layer of compensation. I think it’s going to deter them from talking about homeownership.”
NAR did not want the changes but pushed them through as a result of the settlements, Nate Johnson, the group’s advocacy director, said in an interview. “We had to land somewhere to satisfy the plaintiffs while protecting the needs of consumers.”
In an email, Michael Ketchmark, the attorney who successfully sued NAR and several brokerage firms, told USA TODAY, “We have studied this issue extensively and worked with consumer advocates for low-income and minority homebuyers. Every state has assistance programs for first-time homebuyers to cover the down payment. Under the old rules, minority buyers rarely used these programs because the money was taken away from homeowners. This will change under the free market.”
Attorneys for Cohen Milstein and Hagens Berman Sobol Shapiro, the other lead plaintiffs, did not respond to requests for comment.
“Pocket listings” give cause for concern
While the changes in the commission structure have attracted most of the attention, many observers are also concerned about the erosion of the centralized databases that once held all information about real estate listings.
Most listings typically included a confirmation that the seller would pay the buyer’s agent. Now, that information may be missing, requiring buyers and their agents to contact each seller or their agent individually.
“Let’s say there’s a house for sale,” Rose said. “Two offers come in, and now it’s up to the seller to decide which one to accept.” In many cases, the more attractive offer is one with a mortgage that doesn’t take as long to process, or one that requires everything to be paid for in cash. In fewer, but not all, cases, it may be an offer from an agent who belongs to the same social circles as the agent offering the property sale.
“I’m worried,” said Denise Franklin, a longtime real estate agent in Greenville, South Carolina. “We’re probably going to see more complaints and lawsuits about unjustified housing restrictions.”
Franklin works with many first-time buyers who take out mortgages backed by government agencies such as the Federal Housing Administration. These loans, which are aimed at borrowers with poor credit scores, can take longer to process and may be more prone to problems than loans backed by Fannie Mae and Freddie Mac. In 2023, 1 in 5 FHA-insured mortgage loans were made to a Black borrower.
Many proponents believe that some sellers’ agents avoid such situations altogether and prefer to keep the offers among themselves rather than making them public.
“There are homes now in certain communities that will never come on the market. We’ll never see them. They’re just being marketed through a network. And you know what? Black professionals are not part of that network,” said NAREB’s Rose.
The practice of conducting such “pocket offers” defies the logic of achieving a higher sales price among a wider audience, said NAR’s Johnson, not to mention that it violates fair housing rules.
Still, “fair housing groups have been fighting pocket listings for decades,” Rice told USA TODAY. “Discrimination is not logical. We need a completely transparent system for all homes on the market so all real estate agents can see what’s available and what’s on the market.”
One policy solution could be to have an agency such as the Department of Housing and Urban Development maintain the directories, she suggested. FHA and other mortgage programs such as those of the Department of Veterans Affairs are part of the department.
In a statement to USA TODAY, Julia Gordon, HUD’s assistant secretary for housing, said, “HUD is closely monitoring the impact of the settlement with the National Association of Realtors – and the potential that buyers of color and low-income buyers will be disadvantaged by the new practices. We remain fully focused on addressing the barriers that prevent buyers of color and low-income buyers from owning a home. This includes how the lack of generational wealth among some buyers of color can prevent them from meeting the financing requirements to purchase a home.
What happens next?
Brown, the Fresno-based real estate agent, believes sellers should not only market their listings more widely — they should also push their clients to offer the buyer’s agent as much compensation as possible to reach the widest possible audience.
“We are not competitors, we are here together to achieve the best for everyone,” she said. “Buyers want to buy and sellers want to sell, and we are in the middle of it all and help them negotiate that.”
NAR and others argue that the value of a real estate transaction becomes more apparent when buyers are forced to have honest conversations with their agents.
“Buyers will be better prepared and have a better understanding of how the buying process works,” Johnson said. “From a broker’s perspective, it’s an opportunity to better demonstrate our value proposition. If we don’t do that, it forces the buyer to look elsewhere.”
Rice said discussions are ongoing among fair housing advocacy groups about how best to proceed.
Although few real estate observers would have considered the MLS ideal, “it at least provided a high degree of transparency about what was on the market. We cannot decouple the seller’s commission from the buyer’s commission. We need a structure where the sellers pay the buyer’s commission.”
Meanwhile, some brokers, such as Denise Franklin, are already experiencing clients leaving the market.
“Others have told us, ‘We’re just going to wait and see,'” Franklin said. “One of our team members took a house off the market because he felt there was just too much confusion.”
Franklin added: “We have gone backwards, we have not moved forward.”
