The National Association of Realtors (NAR) recently settled multiple lawsuits with home sellers, agreeing to pay out $418 million and implement significant rule changes for Multiple Listing Services (MLS) and real estate agent practices. These changes, effective in August, have sparked a range of reactions—from panic to indifference. Major headlines, such as CNN’s “The 6% commission on buying or selling a home is gone” and the New York Times’ podcast episode titled “The Bombshell Case That Will Transform the Housing Market,” have added fuel to the fire. In this post, I’ll break down the changes and what they mean for buyers and sellers, particularly here in Ohio.
What Actually Changed?
The settlement brings two major changes:
1. No More Advertising Buyer Agent Commissions on the MLS
Nationwide, in about 98% of the cases, buyers hire a buyer’s agent to represent them in their home purchase. And in almost all cases, the fees earned by the buyer’s agent are paid by the seller. Listing agents advertise these fees on the MLS system. However, as of August, listing agents will no longer be allowed to advertise these fees on the MLS. This change is expected to have the following results:
- Increased Communication: Listing agents may receive more inquiries about buyer agent commissions. While this could mean more work, it also provides opportunities for agents to engage with potential buyers and their agents.
- Negotiation Points: Buyer agent commissions will now become a negotiation point throughout the home buying process, requiring more upfront discussions about compensation between buyers and their agents.
2. Mandatory Written Buyer Agency Agreements
The settlement also mandates written agreements between buyers and buyer agents. The new rule requires clear, written contracts outlining the services and fees of the buyer’s agent.
The Value of Buyer’s Agents
With these changes, demonstrating the value of buyer agents becomes crucial. Buyer agents perform numerous tasks behind the scenes, from data analysis and property matching to negotiation and transaction coordination. They ensure that buyers get the best deal and are protected throughout the process.
To adapt, agents might need to explore different compensation models, such as:
- Flat Fees: Offering set fees for specific services, though this often correlates with reduced service levels.
- Min and Max Fees: Establishing a fee range that adjusts based on the seller’s offered commission.
- Hourly or Per-Offer Rates: Charging based on the time spent or the number of offers made, similar to legal billing.
- Built into the Contract: Structuring offers to include buyer agent commissions, though this might not always be advantageous.
- Built into the Loan: Exploring options to include commissions in the buyer’s mortgage, which could be a viable solution for first-time homebuyers.
The Impact on Home Prices
There have been a lot of media assertions that this will potentially lower home prices. The claim is that, if sellers choose not to pay buyer agent commissions, they will be able to reduce the price of the home. I seriously doubt this will be the case for two primary reasons.
- How to Sell Your Home: The primary concern of a seller is their bottom line… the check they walk away with at closing. And the way to get the highest bottom-line number is by attracting the highest number of buyers. Since 98% of buyers have a buyer’s agent that must be paid, most sellers are going to want to keep those buyers in the bidding. The number of buyers using buyer agents may drop lower than 98% over time, but it will not change overnight. Homes are a major investment, one the average American does only once every 10.6 years. I suspect most will continue to want a professional to guide and represent them through the process. In most cases, sellers who choose not to pay this fee will receive fewer offers, reducing their bottom-line.
- How Homes are Priced: The current central Ohio real estate market is a strong seller’s market. And asking prices are determined by comparable sales and market conditions, not buyer agent commissions. If a home can sell for $500,000, the seller is going to expect $500,000. If they choose to not pay the buyer’s agent, it is because they plan on pocketing those funds themselves. In a hot seller’s market, it is unrealistic to expect sellers to be altruistic and reduce the price to benefit the buyer. Thing could certainly change as the market shifts back to a buyer’s market but will not be happening anytime soon. In a seller’s market, if fees are reduced, it will benefit the seller.
Investor Insights
These changes will impact investors as well:
- Seller Commissions: Some sellers may opt to offer no buyer agent commissions, affecting how investors negotiate and structure their deals.
- Agent Partnerships: Investors will need to formalize relationships with agents, moving away from informal “bring me a deal” arrangements to more structured agreements that outline compensation
- NAR Membership: The future of the NAR is uncertain, and its funding could be affected by these changes. Investors should consider the broader implications of a potentially weakened NAR on real estate legislation and market dynamics.
Final Thoughts
As we approach August, it’s crucial for everyone in the real estate industry to stay informed and adaptable. While the NAR settlement introduces significant changes, those who understand and navigate these shifts will find opportunities for growth and success in this evolving landscape.
Kyle Alfriend has been investing in real estate for over 35 years, assisting over 3,000 clients in buying, selling, or investing in real estate.
For more tips on buying, selling, or investing, or for a personal consultation, contact Kyle Alfriend, (614) 395-1776, or info@AlfriendGroup.com. Or go to our website, AlfriendGroup.com