This topic was originally to be briefly included in the State of the Industry session at EuRA; however, time ran short. The potential impact outside the US of the country’s domestic real estate changes is an important topic that has yet to be part of the non-US mobility conversations.  

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The real estate industry in the United States is facing significant shifts, driven by recent multi-billion dollar lawsuits and pending regulatory changes. These developments are poised to alter traditional practices around real estate commissions, with broad implications for buyers, sellers, and the global relocation industry.

Legal Challenges and Antitrust Lawsuits

In recent years, several multi-billion dollar lawsuits have been filed against real estate companies in the U.S., accusing them of violating antitrust laws. These lawsuits are centered around the common practice where sellers engage real estate brokers to sell their homes. To attract more buyers, sellers often offer to pay a commission to the buyer’s real estate agent in addition to paying their own agent. However, the alleged failure of some agents to adequately disclose these arrangements to both buyers and sellers has led to legal scrutiny and accusations of antitrust violations, posing significant legal challenges for the industry.

The NAR Settlement and Its Implications

The NAR Settlement, a pivotal development in the changing landscape of real estate commissions, has been granted preliminary approval by the presiding judge and is not currently being supported or opposed by the Department of Justice.  After a few recent delays, it is expected to be implemented sometime in July or August. This settlement will fundamentally change how real estate commissions are structured and paid. In the future, there will be no single website curating offers of compensation (i.e. buyer agent commission.

Under the new rules, buyers must enter into a buyer agency agreement with their real estate agent. This agreement will specify the buyer’s compensation to their agent, potentially shifting the financial responsibility directly to the buyer. The buyer’s agent amounts can still be offset by a concession from a seller,(directly or through their agent) or a buyer could choose to avoid the buyer’s agent fees and opt to be unrepresented in the transaction.  This may seem normal to many as the practice is common elsewhere, but in the US, it will be a new process with significant implications for buyers and sellers.

New Compensation Models for Real Estate Agents

With the implementation of the NAR Settlement, the compensation for buyer’s agents will be handled in one of three ways:

• Buyer-Paid Commission: The buyer will pay their agent directly.
• Corporate-Paid Commission: For employees relocating for work, their company may cover all or some of the buyer’s agent commission as a relocation benefit. Currently, companies often pay the seller’s agent for both sides of the commission.
• Seller-Paid Concessions: Sellers who still offer to pay a commission to the buyer’s agent will provide this as a concession to the buyer at closing, transferring the funds directly to the buyer rather than the real estate company.

Impact on Talent Mobility and Relocation

These changes have significant implications for talent mobility and the relocation industry, globally. For the US industry, the impact is greatest.  The talent mobility industry in the United States was built around the old commission system.  Corporations often pay for the seller’s agent fees to reduce the financial burden on the relocating employee.  This process is tax-beneficial under current laws, and with homeownership rates in the US averaging around 66%, many relocating employees are homeowners who benefit from these programs.  The new commission structures will require adjustments to these relocation benefits.

There are less direct implications for companies in the talent mobility industry outside the US.  Corporations providing relocation benefits often refer, either directly or through a Relocation Management Company (RMC), their employees to a relocation-trained real estate agent.  The relocation benefit includes payment of the seller’s commission (and at the moment, any coop buyers commission).  The agent assisting the relocating employee, either buyer or seller, will pay an average of 42% of their commission as a referral fee back to the RMC or Corporation.  This referral fee funds the overall cost of the relocation services performed by the RMC and, in some cases, offsets the relocation cost for the Corporation through revenue-sharing.  These proceeds also go to support the costs for services delivered to non-US destination assignees.

Referral Fees and the Role of Corporations and RMCs

Referral fees have been a substantial revenue source for Relocation Management Companies (RMCs), accounting for up to 75% of their income. From the Corporate client perspective, these fees not only cover the low-cost or no-cost services of the RMC who take the real estate referral fees as payment, but those Corporations participating in revenue-sharing reduce the overall costs of their relocation program.  However, the changes in commission payments threaten to reduce or eliminate these fees.

Future Revenue and Operational Challenges

Post-implementation of the NAR Settlement, RMCs and corporations face the real prospect of losing significant revenue. Revenue from buyer agent commissions could be reduced if buyers decide not to work with buyer agents, or strictly limit the amount they are willing to pay.  Additionally, buyers may resist RMC or employer referral fees on their relocation expenses, especially if such fees are not covered under benefit policies, or if sellers provide direct buyer credits at closing.

The potential loss of referral fees could be substantial, impacting the funding for international relocation services. This shortfall may increase the overall cost of moving employees for corporations. As the industry approaches the July/August implementation, many questions remain unresolved. Will employers decide to pay the buyer’s agent commission and will they change the seller’s relocation benefit? Will Corporations pay RMC’s for the services no longer covered by referral fees? Will completely new benefits be developed?

Anticipating Future Industry Dynamics

In the coming months, the real estate and relocation sectors are likely to experience challenging times. RMCs may need to address significant revenue losses, and corporations will have to contend with higher costs for relocating employees. These pressures could lead to further industry consolidation, a decrease in the number of relocations, increased price competition, and more requests for proposals (RFPs) as Corporations seek to manage rising relocation costs with their current providers or search for alternatives.

At the moment, there is no clear path forward and no expectations for how companies will work through this, despite many ongoing discussions.  There are some clear scenarios that one would hope Corporations are working to plan how they will respond.  Every indication or discussion this writer has been party to indicates that there is more lack of preparation than there is preparation occurring.  It will be a very interesting second half of the year.