How the real estate settlement will change buying and selling homes in Louisiana

When Wanda Gentris was shopping for her first home in Metairie early this year, she didn’t think much about how her real estate agent would get paid for services that included showing her a half dozen homes, helping her negotiate a deal and eventually closing the sale. She knew the seller’s agent would be paying her agent’s commission from a portion of the sale proceeds, as is customary, so she didn’t worry about it.

“There was so much paperwork involved I’m not even sure offhand what the commission was,” Gentris said.

Beginning later this year, buyers like Gentris will be aware of how much their agents are getting paid and where the money is coming from. A $418 million settlement agreed to by the National Association of Realtors in a massive class action lawsuit filed on behalf of home sellers will change the way real estate commissions are negotiated and paid.

The changes are intended to address anti-trade issues raised in the case and help consumers by potentially lowering the cost of buying and selling a house, though experts disagree over the extent to which that might happen and how long it will take.

What is clear is that the settlement will change the way residential real estate deals are done and possibly open the industry to more competition.

“I think there will be minimal disruption for consumers, at least for the time being,” said Stephen Brobeck, a senior fellow with the Consumer Federation of America. “I think there will be quite a lot of disruption for agents and brokers.”

Unbaking the cake

The changes, which are expected to go into effect in July, are the result of the settlement that the NAR reached earlier this month with plaintiffs in more than 20 class action suits filed across the country. The suits argued that the current practice of requiring a seller’s agent to make an offer of payment to a buyer’s agent amounts to price fixing and drives up commissions, which typically average 5% to 6% of a sale and is split between the agents.

On a $350,000 home sale, which is a little higher than the median price in the New Orleans area, a typical commission would range from $17,500 to $21,000.

Because that commission is effectively baked into the sale price, it has evolved into one of the many hidden costs of buying a house, which, plaintiffs argued in the lawsuits, has kept rates artificially higher than in many countries, where commissions range from 1% to 3%.

Under the terms of the settlement, seller agents will no longer be able to post offers of compensation to buyer agents on the Multiple Listing Service, the database of properties controlled by the NAR and its regional affiliates, though they will be able to privately offer concessions to buyers.

The settlement also requires that buyer agents negotiate a compensation amount with clients before working with them and execute a signed agreement. According to industry estimates, only about 1 in 5 homebuyers in the U.S. have written contracts with agents.

“This will benefit consumers by driving down the costs associated with buying a house because both buyers and sellers will be strongly encouraged to negotiate compensations down,” Brobeck said.

A good thing?

Local real estate agents and brokers are anxiously waiting for the new rules that will result from the legal settlement, and they’re not happy. They take issue with the argument that a 5% or 6% commission is too high, especially for agents who sell homes in the lower and moderate price range. 

“People think real estate agents get paid a lot for not doing much work,” said Jerry Del Rio, one of the most prolific agents in the Baton Rouge market. “It’s a 24/7 job. It never stops.”

They also point out that the so-called “standard” 6% commission was never set in stone and is usually negotiated, despite what was argued in the lawsuit.

“A commission can be anything from a $1,500 consulting fee to 4 or 5%,” said Scott Bannon, a Realtor and broker with Latter and Blum. “Once I had one that was as high as 7% because it was a massive buyer’s market and the only way you get your house in front of everybody is to pay more to a good Realtor.”

But they also say decoupling the commissions is a good thing for buyer agents and will bring greater transparency to transactions.

“We would never have a relationship with a seller without entering into a listing agreement,” said David Favret, managing broker at Reve Realty. “Now, before I can show a buyer a property, we’ll sit down, I will explain to them the value of what I bring, and we will negotiate what I should be paid.”

Because the settlement does not prohibit seller agents from offering to split commissions with buyer agents outside of the MLS, Favret and others expect the practice to continue. It just won’t be implicit in the deal and must be negotiated separately.

“Sellers are still going to offer to pay both commissions because the seller wants to sell their house,” said Vickye Vasser, a broker with Home Smart Realty South. 

That’s especially true with the sellers of the highest-priced homes, according to Quita Cutrer, of Burns and Company, who regularly serves as the listing and buyer agent for Baton Rouge’s most expensive homes.

“If you’re selling a $3 million house, you’re not going to care,” Cutrer said. “You’re going to pay the commission.” 

Differing opinions

Some industry experts estimate the settlement will ultimately bring down housing costs by as much as 50%. Brobeck predicts the decrease will be more like 30% and that change will be slow because it will take several years for the industry to adjust to new ways of doing business. Others, particularly in the broker community, don’t think prices will come down much at all.

“I think there is a certain amount of denial with those arguments,” Brobeck said.

What no one disputes is that there will be a lot more paperwork and a lot of consumer education.

They also predict it will discourage some real estate professionals from working for buyers and drive some struggling agents out of the industry altogether.

“I know of agents who are only going to list houses now, and I think you’ll see more of that,” Cutrer said.

Some are also predicting that the upheaval will create a vacuum that AI and online platforms will seek to fill for buyers, who may be inclined to do more house hunting on their own. Given that they’ll be the ones paying for the services of brokers to represent them, they may decide not to call in a broker until the last minute.

“I don’t think this changes what we do or the need for our services,” Favret said. “But it will definitely open the door for all sorts of new models.”