On Friday, March 15th, the National Association of Realtors (NAR) settled a case with groups of home sellers alleging that the NAR’s Broker-members operated in a manner in which home sellers were “forced” to pay an average of 6% commissions on their sales price. These entities won a $1.7 billion judgment earlier this year but agreed to a modified settlement that also included changes in the business practices of Brokers and their agents.
The changes that NAR agreed to are:
- Listing agents can no longer disclose selling agents’ compensation on MLS systems, which would discourage selling agents from steering buyers to listings where the agent would receive a higher commission.
- Brokerages will no longer be required to participate in any MLS system in their local area, which would lower fees (and visibility of listings) and possibly lead to lower commissions.
- Buyers’ brokers must now enter into written agreements with their buyers. This change will result in buyers agreeing to pay their agent if the seller is unwilling to compensate them via the terms in the seller’s listing agreement.
Now that the details are out, everyone is declaring that the “old” model of real estate compensation will be destroyed, resulting in the slashing of commission costs to sellers and giving buyers lower price points, leading to greater affordability. I’ve read articles, read the settlement, and watched many people claim that the changes in this settlement will be a boon to our younger population, which faces a steep climb to reach homeownership in the current environment.
Home sellers can now negotiate any commission percentage they want to pay within the range of 3% to 6%, providing that the agent they want to work with agrees to that percentage. They will also include a provision that any buyer’s agent should be directed to seek compensation from the buyer, thereby knowing exactly what they’re paying for and to whom.
While this seems productive, it’s a plan that will trend towards the current model, with sellers paying closer to the full commission to both sides than a 3% cost to the seller and a 3% cost to the buyer model. When a seller lists their home, the buyers have the money. They have more control over the cost to sellers when sellers signal, by signing a listing agreement, that they no longer want the house they seek to transact.
Sellers lose leverage to buyers with a desire to purchase. The great caveat here is that market conditions sometimes swing the leverage between buyers and sellers, and prices for homes level off when those conditions cause sellers to reduce or buyers to increase the prices at which homes sell.
What this Means for Buyers
When buyers have leverage, they can tell their agents that they don’t want to sign an agreement that requires them to pay a buyer’s fee and that they should attempt to be compensated by the seller instead of them. What does a buyer’s agent do, then? I see two options – refuse to work with the buyer, which guarantees the agent ZERO from that relationship. Or, see if the seller would be willing to cooperate with a buyer’s agent and pay them a fee, returning us to the current model.
Here’s something that likely hasn’t been considered: if a buyer puts down less than 20% of the purchase price of a home, they are required to carry Private Mortgage Insurance (PMI) which is insurance to the lender if the buyers default on their loan. However, if a buyer has saved 20% of the price of the home but now has to pay 3% of the purchase price ($500,000) to their broker, that could lower their available cash for the downpayment by $15,000, causing them to fall below the 20% limit. This would trigger a need for PMI, thus increasing their cost of homeownership and lowering affordability.
The Financial Impact
Many of the talking points of the settlement are about sellers having lowered the expense of commissions and how that will now lead to lower prices for buyers. If sellers save money on their transactions due to lower commissions, they’re much less likely to pass on that savings to the buyer than to pocket the additional money as extra profit on the sale. The changes proposed under this settlement will have a limited financial impact on affordability and access to lower-priced homes than the prior system. The realtor model is here to stay, and this settlement won’t likely move the needle significantly to benefit either side.
The NAR settlement represents a pivotal moment in the real estate industry, promising shifts towards more transparent and negotiable commission structures. While the changes are hailed as progressive steps towards affordability and fairness in homeownership, their practical impact might be more nuanced than anticipated. Home sellers’ ability to negotiate commission rates introduces a potential for savings. Yet, market dynamics and the inherent power imbalances between buyers and sellers could limit the extent of these benefits.
The requirement for buyers to enter into written agreements with their brokers could introduce new financial burdens, complicating the path to homeownership. Despite these reforms, the enduring influence of the Realtor model and market conditions may ensure that the traditional dynamics of real estate transactions remain largely intact.
Conclusion
While the settlement marks a significant development in the industry, its true effectiveness in making homeownership more accessible and affordable will depend on the interplay between market forces, consumer behavior, and regulatory compliance. As the industry adapts to these changes, stakeholders should remain vigilant and evaluate the real-world implications of these reforms to ensure they serve the best interests of all parties involved in the real estate market.