Background

The National Association of REALTORS® (NAR) made a surprising announcement on Friday, March 15, 2024, revealing a $418 million settlement with a nationwide group of home sellers. This settlement is intended to resolve claims from multiple antitrust class actions against NAR. The lawsuits alleged that NAR and some of the largest residential real estate brokerages in the country were unfairly requiring home sellers to pay inflated real estate fees.

The allegations revoloved around NAR's enforcement of a Buyer Broker Commission Rule, which required listing agents to provide compensation to the buyer's agent when listing a property on a Multiple Listing Service (MLS).

The plantiff contended that this practice forced home sellers to bear the expense of buyer's agents, a cost they believed should be assumed by the buyer in a competitive market. This also prompted accusations that home values were artificially inflated to accommodate real estate agent commissions, potentially violating federal antitrust laws.

Resolution

NAR is proposing a $418 million settlement and revisions to certain aspects of the real estate agent commissions, to include:

• Non-disclosure of agents' compensation on the MLS: Previously, listing agents would disclose the buyer's agent compensation in a specific MLS field. However, this information can no longer be displayed on the MLS. The intention behind this change is the enable buyers to negotiate the buyer's agent fee directly with their agent. Nonetheless, listing agents and sellers retain the option to offer compensation for buyer broker services, but such offers cannot be conveyed via the MLS. 

• Written agreements required for buyers before property tours: Although NAR has been promoting the use of written agreements for some time, this settlement now mandates MLS participants working with buyers to establish written representation agreements with their buyers before touring a property. These agreements can assist consumers in understanding the exact services provided and their associated costs.

• Elimination of mandatory MLS subscription for REALTORS®/brokers: Many local MLS services previously mandated that agents subscribe to the MLS to receive compensation for their services. However, this requirement is now prohibited.

The Concern for Buyers

Home buyers are currently grappling with historically high expenses when purchasing a home, particularly due to increased interest rates. With substantial down payments and closing costs already on their plate, the addition of real estate agent fees could potentially price some buyers out of the housing market altogether.

This predicament is particularly acute for already vulnerable groups such as first-time home buyers an those utilizing VA loans. For those unfamiliar, VA buyers encompass active military service members, veterans, and surviving spouses who rely on support from the Department of Veteran's Affairs for their home loans. Notably, the VA explicitly prohibits certain fees for VA buyers during the home purchase process, including real estate agent fees. Consequently, VA buyers are effectively barred from covering the costs of their own representation.

This settlement introduces a fresh hurdle for buyers who lack the financial means to cover their agent's fees independently. 

The Concern for Sellers

The media is conveying to sellers that they no longer bear the responsibility of paying for the buyer's agent, suggesting substantial savings moving forward. However, this notion is likely inaccurate.

As previously mentioned, buyers who must cover their agent's expenses independently may find themselves unable to afford a home purchase at all. This would effectively reduce the pool of potential buyers for sellers in today's market. Traditionally, motivated sellers have offered incentives to attract buyers to their listings, and covering the cost of the buyer's agent has proven to be one of the most valuable incentives.

Thus, while sellers are being informed that their real estate fees will decrease from approximately 6% to around 3%, the probable scenario is that they will still allocate around 3% to their own agent and allocate around 3% to the buyers to enable them to pay for their agent. The media's portrayal is fostering unrealistic expectations for sellers, which are likely to result in disappointment and frustration.

Why Can't Real Estate Agents Just Charge Less?

If agent fees are posing a concern, why can't agents simply charge less?

First and foremost, it's crucial to understand that real estate commissions have always been negotiable. While 6% commissions have become standard in many local markets nationwide, this percentage has never been enforced by any real estate licensing board or Board of REALTORS®.

Now, let's break it down: If you're selling a $500,000 home with a 6% commission, you're looking at $30,000 in agent fees. That might seem like a hefty sum, especially when it appears that your agent merely puts up a sign in the yard, lists the house, arranges showings, and handles paperwork.

However, there's a lot more happening behind the scenes.

What Real Estate Agent Fees Actually Include

Firstly, listing agents shoulder upfront marketing expenses. A significant portion of their eventual commission is allocated to reimbursing themselves for costs incurred, such as professional listing photography, videos, and property advertisements. If the property fails to sell, the agent may not recoup these expenditures.

Then, there's the unseen labor. A proficient agent will:

• Devise a pricing strategy based on extensive market knowledge and experience.
• Craft compelling listing descriptions to attract potential buyers
• Dedicate hours to personally contacting a communicating with every qualified buyer in their network.
• Develop graphics and content for marketing purposes.
• Generate social media posts and videos to enhance visibility.
• Disseminate listing announcements within the local community and their brokerage.
• Conduct research on online market segments for targeted digital advertising.
• Organize email marketing initiatives.
• Potentially host open houses or broker opens.
• Field numerous inquiries from buyers and their agents.
• Continuously analyze comparable properties to ensure your listing remains competitive.
• Review and present offers.
• Negotiate on your behalf.
• Draft counter offers and disclosures.
• Navigate through the contract period.

Additionally, these fees also cover the buyer's agent, who is responsible for:

• Pre-qualifying buyers to ensure only serious and financially capable buyers visit your home.
• Assisting buyers in obtaining pre-approval for a home loan, facilitating their ability to purchase your property.
• Educating buyers on the intricacies of the home buying process, preparing them to make informed offers.
• Personally contacting potential buyers who may have an interest in your property.
• Drafting and submitting multiple offers.
• Coordinating with inspectors, appraisers, and title search representatives.
• Showing various properties, including yours.

Research has consistently shown that sellers who attempt to sell without an agent typically end up with lower net proceeds from the sale compared to those who opt to pay real estate commissions and enlist professionals to handle the process for them.

What Does This Mean for Buyers?

The NAR settlement doesn't necessarily require you to personally cover your agent's expenses. Many sellers are likely to offer concessions to offset your real estate agent's fees, understanding the financial strain of down payments and closing costs.

As always, you have the freedom to negotiate directly with your buyer's agent before establishing a working arrangement. Some agents might agree to a flat or hourly rate. However, if you end up touring more properties than anticipated, your expenses could match or exceed a standard commission agreement. Additionally, you might overlook essential services you didn't initially consider.

It's important to note again, following these legal changes, you must have a signed buyer agreement in place with an agent before touring a property.

What Does This Mean for Sellers?

Sellers should anticipate paying a similar rate for real estate representation as in previous years. As always, real estate commissions remain open to negotiation. Nonetheless, an agent confident in their worth is unlikely to lower their standard rate. It's wise to exercise caution when hiring a real estate agent who struggles to negotiate their commission, as they will represent you in negotiations with buyers.

Instead of allocating approximately 6% (or the negotiated percentage) to your listing agent, who then shares it with the buyer's agent, you might end up dividing the payment with about 3% going to your listing agent and another 3% in concessions to the buyer for their agent's fee. 

You have the right to insist on only paying your agent's fee without covering the buyer's agent cost. However, this could significantly reduce your pool of qualified buyers since many buyers may not afford additional expenses on top of the substantial upfront investment of purchasing a new home.

The Bottom Line

The NAR settlement seeks to bring greater equity and clarity to the commission framework, it also brings along fresh challenges for all parties to consider. If you have inquiries regarding this developement, please don't hesitate to contact to one of our qualifed agents. The media may not always provide the most accurate and comprehensive information on this topic. One of our agents would be happy to address any and all of your concerns as we head into this transition.