The Future of Real Estate Commissions: Understanding the Implications of the NAR Settlement Agreement

In a landmark development poised to reshape the landscape of real estate transactions across the United States, the National Association of REALTORS (NAR) recently reached a pivotal settlement agreement in response to the Sitzer class action lawsuit.

The world of real estate

This agreement has been called a "seismic shift in how real estate commissions" are structured, potentially altering the dynamics of buying and selling homes for the first time in decades. With implications reaching both sellers and buyers, it's crucial to delve into the details of this transformative development.  As far as the public is concerned, they all think they've won - both buyers and sellers alike.  However, the day that the buyers realize that the seismic shift is all to their disadvantage will be the true shitty day, and maybe the beginning of another lawsuit.

In real estate, there is a delicate balance between the buyer side and the seller side.  Both sides need each other and thinking that they don't is the same thought process that causes so many divorces.  Without home buyers, sellers are stuck with properties that do not sell and without homes to buy, buyers have no place to go.  It seems pretty simple, however many times the simple things escape the masses and many times we can label that as 'common sense'.

The Shift in Real Estate Commission Dynamics:

For years, the framework for real estate transactions has revolved around the MLS, where listing agents determined the commissions paid to buyer's agents should their sellers desire to offer a cooperative commission to the buyer's side of the transaction. This standardized practice (not commission), that sellers have long been shouldered by sellers, to get their properties sold has been a choice of sellers because it gets their homes sold and reduces their liability.  Decoupling of commissions where the buyer pays for their agent's commission separately puts an unfair burden on the buyer when it is their money that kicks off the transaction (because without the buyer's funds, it would be a dry-dock closing).  Now, we have all heard the fact that the sellers have been paying an estimated $100 billion annually in real estate commissions.  Okay, so let's call that for the sake of argument a cost of goods sold.  Now consumers from potentially both sides of the fence have hopped on the same wagon (ill-advised as well) thinking this is a good thing while throwing critical thinking right out of the window.

Legal Action and Settlement:

However, a legal verdict rendered last year found the MLS structure to artificially inflate commission rates is beyond me.  I have never known that the market value has ever been tied to commissions and I've never known a third-party appraiser who is licensed and whose license is on the line with every appraisal would ever allow the appraised value to be inflated by agents. 

Fannie Mae's own defines market value as "the most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: buyer and seller are typically motivated; both parties are well informed or well advised, and each acting in what they consider to be in their own best interest; a reasonable time is allowed for exposure in the open market; payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale."

Now let's look at a couple of phrases (1) each acting prudently and knowledgeably (hello!!!!  informed by the market knowledge of a real estate agent). (2) both parties are well informed or well advised (hello!!!! informed and advice by a real estate agent). Nothing makes sense with many of the statements made by the general public regarding the fact that this settlement is good for everyone... it is if you're a seller, it's brilliant if you are wealthy or affluent because you can easily afford an agent, and it is horrible for the lower and middle classes because they do not typically have the money to pay an agent or will be forced to shop for houses of lower price to be able to cover the fees and costs.  Remember how health care deductibles were not that bad until you had to pay a large one and now it's the decision to have the procedure or basically go bankrupt... yeah not such a brilliant idea now.

In response, the NAR recently announced a groundbreaking settlement, which not only includes a substantial fine of $418 million but also mandates structural changes in how real estate agent commissions are handled.  That's not brilliant either because they get to pay it over 4-years and left out the top 100 or so brokerages that to have the protection of the settlement must pay in full.  Yeah, not brilliant either there NAR, and not brilliant for your members to remain loyal (remember Anywhere, Redfin and RE/MAX).

History Lesson:  In 2021 in a settlement agreement with the DOJ (Department of Justice) the National Association of REALTORS agreed to publically publish the buyer agent commission number for the public to see on every website.  Now, just 3-years later they are removing the fields altogether and placing the burden on Seller who believe in cooperative compensation to find other means to advertise that we get it, we support the buyers having adequate and separate representation but I do not get a seller's argument (SITZER!) that they didn't like having to pay for an agent to negotiate against them (then it sounds like you should have picked another agent because your confidence level in them is zilch!).

Now, I get the fact that agents need to be mandated to use a written buyer representation agreement.  However, why was the government not sued?  Because express oral agreements in Texas are valid (you know, I'm a buyer and your an agent, will you represent me, yes, kind of deal) as well as implied agency where an agent is deemed to represent a client by virtue of their actions.  Neither one of these types of agency (express oral or implied [at least here in Texas]) guarantees that a buyer has at the very least read a document and signed it about agency and how a customer becomes a client through representation).  Where are the lawsuits against the states?  Oh yeah - wound't work right?  So you need to have the right direction towards your elected officials.  They are the ones who enacted the laws that allowed agency to take place in the current forms - not agents.  Oh, wait, what?  It's about commissions.  That's right... go after the low-hanging fruit and affect change based on the easy issue and not the source.

Implications for Sellers:

Under the new agreement, listing agents can still offer commissions to buyer's agents, albeit without public disclosure on the MLS. The MLS is a marketing platform and a benefit of the offer of covering cooperative compensation is part of the marketing of the home.  Consequently, the unfounded claims that sellers will no longer be automatically responsible for covering commissions ranging from five to six percent bears no weight with an educated mind.  It bears no weight because there was no mandate or no standard.  With that said, could two or more professionals charge similar fees for their services?  Absolutely!  That is the same principal as the market value because the price you charge for your services has to be in line with the market (what everyone else charges) for people to use your services.  It is this way in every aspect of life, every vocation, and every product or service offered in a free and open market.  If you charge too much, no one will hire you and if you charge too little people will think there is something wrong with your services and that you cannot command a higher price.

The best of all deals with the claims that "this shift introduces a potential reduction in the overall cost of homeownership for sellers". What crap!  A knowledgeable and informed seller (remember the Fannie Mae definition of "market value" above) who is going to say I am going to take less for my property knowing the actual value because the buyers do not have an agent.  It's sellers giving buyers the middle finger!  How do I know?  Sellers who are educated and agents who are knowledgable and experienced all understand that an unrepresented buyer (one without an agent) has more of a chance of not making it to closing than one who has an agent.  They also know that those buyers are more problematic, are going to miss deadlines, have chosen a lender that is going to be anything than easy to work with, and by far and wide are going to cause at least a few more stress lines and wrinkles on a seller and a seller's agent.  Typically, it's not worth it in many cases to work with an unrepresented party.

Considerations for Buyers:

Conversely, the burden of commission payments may now fall on buyers, significantly impacting their financial obligations as after all this publicity and lawsuit additional sellers will think (at least for a while) that their not paying for the buyer's agent.  I do not think this will be mainstream, I think there will be a few that are going to play that card and are going to reap the results that are setting themselves up for. With sellers no longer footing the bill for buyer's agent commissions, buyers could face unexpected costs totaling tens of thousands of dollars more than they were already having to come to the table with.  

You see it was in 1992 that buyers agency was even ever created.  Before then, all the agents worked for the sellers, and the buyers were not represented until the creation of buyers' agency.  Now some 32 years later somebody didn't learn from history and thought this was a good idea again. Oh yeah, you can have representation - you just have to pay for it, and consumers who have not bought a property and likely will not know 

The settlement mandates upfront agreements between agents and buyers regarding commission payments, emphasizing transparency and clarity from the outset of the transaction.

Future Realities for Homebuyers:

This new framework fundamentally alters the relationship between buyers and real estate agents. Previously, buyers could engage agents without immediate financial commitments. However, under the proposed settlement, buyers may need to negotiate commission agreements with agents before any property viewings. If sellers decline to contribute to commission costs, buyers will be responsible for the full amount, necessitating careful financial planning and consideration.

Regulatory Approval and Timeline:

While the settlement represents a watershed moment in real estate practices, its implementation hinges on approval from a federal judge. If ratified, the changes are slated to take effect in July, ushering in a new era of real estate transactions nationwide.

As the real estate landscape undergoes a historic transformation, it's imperative for both buyers and sellers to comprehend the ramifications of the NAR settlement agreement. By embracing transparency, negotiating commission agreements, and adapting to the evolving dynamics of real estate transactions, stakeholders can navigate these changes with confidence and clarity, ensuring a smoother transition into this new era of homeownership. Stay informed, stay proactive, and prepare for the future of real estate commissions.

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