In response to multiple class-action lawsuits, the National Association of Realtors (NAR) has agreed to policy changes affecting real estate agent commissions.
These changes aim to introduce more transparency and competition into the market.
So what does all this mean?
Let’s get into it.
History of Agent Commission
Traditionally, compensation in real estate transactions operated on a straightforward model: sellers enlisted the help of licensed agents, who then shared their fees with agents representing buyers.
However, this model came under scrutiny with the emergence of lawsuits alleging antitrust violations.
These lawsuits questioned the transparency of compensation offers and raised concerns about potential steering and collusion practices.
In layman’s terms: Brokers who list a home can no longer advertise on any database connected to NAR offers of compensation for the buyer’s agent.
Why Is This a Concern?
The concern is that buyer agents have the ability to steer their clients to only offers with higher advertised compensation.
The lawsuits surrounding buyer compensation culminated in significant settlements and proposed rule changes. The National Association of Realtors (NAR) found itself at the center of these lawsuits, facing billions of dollars in potential damages.
While no admission of fault was made, NAR and other defendants opted to settle.
This temporary settlement in March, which is set to be finalized in November, greatly impacts how agents are compensated.
This also impacts how you may choose a realtor.
Why Is This a Concern?
One of the most significant changes resulting from these legal developments is the removal of compensation of the buying agent from MLS listings.
In theory, this will force both agents to sit down and discuss how they each expect to get paid during the process.
This shift aims to enhance transparency and mitigate concerns about steering and collusion.
However, it also introduces new challenges for buyers’ agents, who must now navigate compensation discussions directly with sellers’ agents or brokers.
The agent must also meet with their clients to agree to terms of service and payment expected.
There will still be no commission cap, something NAR has always been steadfast about.
But, it is now up to each of the parties to come to an agreement on commission. Which, can obviously add complications to an already complex process.
The Rise of Buyer Agency Contracts
Another pivotal change is the requirement for buyer agency contracts to be signed before commencing agency services.
In theory, this is written consent and agreement for that agent’s price of service. Keeping all parties on the same page from the start.
While this may seem like a minor procedural adjustment, it represents a fundamental shift in how buyer representation is conducted.
This means you must pick a realtor before beginning the buying process and sign a contract with them agreeing to their terms of service and fees.
By formalizing the relationship between agents and clients, these contracts provide clarity and accountability for both parties.
What if I am a Seller?
This change is expected to prompt more sellers to negotiate their listing agents’ compensation. However, sellers might still feel pressure to cover buyer-agent commissions due to an exception allowing buyer’s agents to view compensation offers from their own brokerage.
What if I am a Buyer?
Buyers might request compensation concessions from sellers, but those who don’t offer to pay the buyer’s agent commission could force buyers to find affordable agents and sign contracts detailing the agent’s fees. This additional expense could challenge buyers, especially those with limited financial flexibility.
What If I am an Investor?
The Good News
Many are saying that for investors, especially those who already use the same brokerage, there will be very little change.
Under current rules, sellers can assist buyers in covering their agent’s fees, potentially motivating more sellers to offer concessions to stay competitive. Instead of the typical 5-6% commission split between agents, sellers might pay 2.5-3% each to their agent and the buyer’s agent, respectively. Real estate investors may see minor changes in purchase agreements, but no significant impact on transactions.
The Not Great News
Some home sellers suing the NAR seek to make buyers responsible for agent fees, potentially prompting DOJ intervention. This could lead to:
- Possible property value declines due to reduced buyer participation.
- Increased difficulty for small-scale investors to afford agent fees.
- Higher acquisition costs for large-scale investors, with potential price drops offsetting competition reduction.
What's Next?
If you’re looking to buy in 2024 for your real estate portfolio, you may want to get started now.
With these new standards set to be finalized in mid-July, if you are concerned about the implications then now is the time to buy.
As always, we will keep you updated on this developing situation.
