Just in case you haven't heard, the National Association of Realtors (NAR) has just reached a settlement with the various recent lawsuits. You may have seen many headlines proclaiming "The 6% commission on buying or selling a home is gone" or "Costs May Fall as New Rules Loom" or even "Home prices in the US could drop following realtors' settlement."
As ever, you shouldn't believe every headline you read.
I apologize in advance for how "in the weeds" this might seem, but I believe it is extremely important to set the record straight on what is going on. This will be a long one.
A Quick Overview of the Settlement
The crux of the NAR settlement addresses concerns over the transparency and fairness of seller-paid buyer’s agent commissions. Critics argued that this longstanding practice could inflate costs and stifle competition. While the settlement doesn’t abolish current commission models, it mandates clearer negotiations and disclosures, ensuring that buyers and sellers are fully informed about the financial aspects of their transactions.
The key points include:
- Enhanced Transparency: The agreement calls for clearer disclosure about commissions, helping clients understand exactly what they're paying for.
- Commission Negotiability: It reaffirms the negotiable nature of commissions, potentially leading to more competitive pricing in the industry.
- Representation Agreements: Buyers and their agents must formalize their relationship through agreements that specify commission arrangements, fostering transparency and mutual understanding.
The recent settlement does mark a pivotal shift, introducing changes that could significantly influence how we approach the buying and selling of homes. This settlement stems from a lawsuit that challenged longstanding practices regarding realtor commissions. Specifically, it questioned the transparency and fairness of the seller paying the buyer’s agent commission, suggesting this could inflate costs and limit competition. The settlement reached does not upend the current model but emphasizes the need for greater clarity and options in commission negotiations.
At the heart of these adjustments is a core principle that has always directed my practice: Realtor commissions are, and always have been, negotiable.
What Will Happen to Commissions?
There is no such thing as a standard 6% commission for the services of a real estate agent. Or 3%. Or $10,000. The way this transaction has worked (and worked well) is that the Listing Agent (or Brokerage) charges a negotiable fee from the sellers for their services. That number may be 6% for some brokerages, it may be 5%, or 7%. It may be a flat fee, it may be the gross amount of money the property sells for above the listing price. It may even be as low as $500 as some discount brokerages operate. As a part of the Listing Agreement, the Listing Agent and seller come to agreement on the commission due, paid in full to the listing brokerage. Also in the agreement is that the listing agent will offer some of that commission to a Buyer's Agent who is bringing them a buyer. That amount being offered is also negotiable.
How it currently works (for now)
It is usually in the best interest of the Listing Agent to offer such a commission to the buying side. Most best and qualified buyers are already working with a buyer's agent under a representation agreement, meaning it is actually breaking contract rules for the listing agent to contact these buyers directly. The Buyer's Agent needs to get paid, the Listing Agent wants the home to sell and the Sellers want to sell their property for the most amount of money. It then follows that the Listing Agent to effectively pay the cooperating opposite side of the transaction as essentially advertising to secure the best buyers for their clients.
They would be doing their sellers a disservice by NOT presenting their property to the highest amount of qualified buyers. A buyer coming out of their own pocket to pay for their agent's services also has the potential to derail their ability to afford that property by way of affecting their ability to qualify for a loan or make the down payment. The commission coming from the seller's proceeds on the sale but originating from the buyer's funds and the agents splitting the commission in a pre-agreed upon manner services both parties very fairly.
And make no mistake, there are a lot of agents calling a 6% commission "standard" or saying that they "deserve 3%" on every transaction. As such, some agents have been steering their clients away from certain listings when they offer anything less than 3% of the purchase price in commission. These types of agents are who these lawsuits are targeting.
Understanding the settlement's implications for buyers and sellers is crucial as we move forward. Here's my perspective on what these developments mean for you.
For Buyers: The Value of Representation
The NAR settlement shines a spotlight on the potential shifts in buyer representation. As we discussed above, the seller traditionally has covered the buyer's agent commission, a practice that could change as the settlement promotes more open negotiations about these fees. Consequently, buyers may now face direct responsibility for their agent's commission.
Why Opt for a Buyer's Agent?
Despite the prospect of additional costs, the benefits of having a buyer's agent by your side are invaluable:
- Expert Guidance: The complexities of real estate demand expertise. A buyer's agent offers profound insights into the local market and identifies potential property pitfalls.
- Negotiation Skills: An adept agent doesn't just negotiate prices but secures favorable terms, potentially saving you more than their commission cost.
- Access to Resources: Agents provide access to extensive listings and information, ensuring you don't overlook potential homes.
- Peace of Mind: Most importantly, your agent is your advocate, dedicated to protecting your interests throughout the transaction process.
As part of this settlement, prospective buyers and their representative agents will be REQUIRED to enter into a representation agreement BEFORE purchasing the home, and that agreement will stipulate how much the agent is due upon a closed transaction. That agreement could look a number of different ways, just as the listing agreement could, with some at 3% of the purchase price, some for more or less or a flat fee. Whatever is in this buyer representation agreement will be due to the agent IN ADDITION to what the Listing Agent is offering. Some may choose to credit the buyer back for anything they make over the agreed upon amount, some will charge the buyer only for what they don't make in the difference between the two offers, and some may just pocket the extra cash.
Because of this, it is entirely possible that there isn't actually a substantial change from how things have traditionally operated. Listing agents who are smart will know that offering a commission to cooperating agents is in their seller's best interests. But there will be occasions moving forward where listing agents will be offering nothing to a cooperating buyer's agent.
As such, buyers may have to make tough decisions moving forward. Buyers MASSIVELY benefit from the knowledge and expertise of a great buyer's agent, but they made be put in the position where they have to pay extra for those benefits. They may be put in a position where the home they love is offering no commission at all to their agent, most buyer's agents won't work for free, and the buyer is forced to go unrepresented in what may be the biggest purchase of their lives. They could always represent themselves or choose to work with the Listing Agent directly, but neither are likely to end in a good income for the buyer.
For Sellers: Understanding the Impact on Home Prices
The settlement raises concerns among sellers about the potential impact on home prices, fearing that changes in commission structure might devalue homes. However, this concern is largely unfounded due to several reasons:
- Market Value Driven by Demand: Home values are primarily determined by market demand. Austin's vibrant culture and robust economy continue to attract buyers, maintaining strong demand.
- Attracting Qualified Buyers: Negotiating commissions to entice buyers' agents, and thus qualified buyers, remains an effective strategy. A well-negotiated commission serves as a potent marketing tool, broadening your home's exposure.
- Flexibility in Transactions: The negotiability of commissions offers sellers the flexibility to craft deals appealing to both parties, streamlining the sales process.
There is no question this will have an effect on seller's decision making, but it will not reduce the value of their home. What this will mean, however, will be tougher decision making.
As mentioned above, offering a commission to the buyer's agent comes from an agreement between the listing brokerage and the home seller. It is still in the best interest of the seller to offer a commission to the buyer's agent, but what that amount is may be lower than what agents have typically come to expect. Seller's now have the knowledge and greater power that this amount is negotiable and may be more aggressive in keeping more money in their pocket. Largely, this doesn't come from anything in the settlement itself but more from the wider news coverage of the lawsuit.
This settlement DOES NOT prevent buyers agents from steering their clients away from sellers offering no commission. I am telling all of my sellers to still offer a commission, it brings the best and qualified buyers who are smart enough to higher their own agent. A buyer that I can't speak to directly because I would be abdicating my fiduciary responsibility to my sellers by potentially negotiating a better deal for the buyers. If a buyer goes unrepresented in a transaction, the listing agent then represents both parties. If I'm a seller, I want my agent working for me AND ONLY me.
My Thoughts
In my opinion, buyer's agents will still get paid a commission from the listing brokerage. It may often be less than that "3%" number and that may mean there are far fewer buyer's agents in the industry, but they are not going away. Seller's may walk away with a little more money in their pocket than they were before and agents are going to get even more aggressive chasing obtaining listings. You will probably see Buyer's Agents looking at alternative models for charging for their services. Some may ask for a retainer fee similar to lawyers. You may see agents charge "per door" that they open. It may be the wild west out there for creative billing.
I think that the people that comes out worst from this settlement are the buyers themselves. Good representation will be hard to find (harder than it already is) and they may have to pay a substantial amount of money to their agent ON TOP of what it already costs to buy a home. First-time home buyers will be hit the hardest, and those choosing to go unrepresented could end up in terrible financial situations.
It's tragically ironic that this lawsuit supposedly aimed at "commission transparency" to protect the money of the consumer may end up making things worse for the very people it's supposed to protect.
I suggest you read the settlement yourself straight from NAR to get the most accurate information possible.
But don't freak out. Your home isn't worth less than it was before the settlement. And if you are looking to buy, the right agent will still be able to provide you top quality service and that will be more important than ever.
