Who Will Pay the Brokers' Fees?

The fallout from a massive lawsuit over inflated broker commissions is roiling the New York real estate market. It started in October, when a Missouri jury ruled that the National Association of Realtors and two brokerages had kept commissions artificially high, setting damages the defendants must pay at $1.78 billion. Then earlier this month, Monty March filed a civil case in the U.S. District Court for the Southern District of New York, alleging that the system of having the seller pay the fee for the buyer’s broker “increases a seller’s transaction cost, and artificially inflates Manhattan residential real estate broker commissions paid by residential real estate sellers,” according to the complaint.

The fallout, according to Crain's, is that brokers are paralyzed — along with people trying to buy and sell co-op and condo apartments. 

“They feel like there’s this tidal wave of change coming and they’re sort of frozen, they don’t know quite how to react,” says John Walkup, co-founder of real estate analytics company UrbanDigs. “It’s just a bundle of uncertainty for them.”

Typically in Manhattan, the broker on a listing could make an offer for compensation to the buyer’s broker, with money often coming from the proceeds of the home sale. Brooklyn’s system is slightly different. As lawsuits started to pile up this year, the Real Estate Board of New York tweaked its policy. Starting next year, the group requires that buyer’s agents will be compensated directly by sellers or will need to negotiate their potential pay with their buyers.

A Consumer Federation of America report in 2022 showed that the median rates paid to buyer agents ranged from 1% in Brooklyn — which doesn’t require listing brokers to offer any compensation to the buyer’s agent — to 3% in Manhattan.

UrbanDigs’ Walkup says Manhattan real estate deals could soon look more like those in Brooklyn, where buyer and seller agent commissions are decoupled. Moving forward, agents will have to adjust their approach and learn to communicate the change to buyers. Walkup thinks the transition will be rough at first, but agents will adapt. “It’s just going to be a little rocky before we redefine how those payments are structured," he says.

Meanwhile, the market remains sluggish. Mortgage rates hovering above 7% have pushed some would-be buyers to the sidelines. Manhattan home sales were down about 23% in the third quarter from the same period a year earlier, according to data from appraiser Miller Samuel and brokerage Douglas Elliman Real Estate.