Overview

On October 31, 2023 a jury in a lawsuit filed by a nationwide class of home sellers found the National Association of Realtors (N.A.R.) and a number of large real estate brokerages liable for more than $5 billion in damages for conspiring to inflate real estate commissions. In March of this year, N.A.R. announced a settlement in the case which will pay plaintiffs more than $400 million and make some key changes to commission rules.

While the financial settlement made headlines, after deducting attorneys fees, it’s estimated that each member of the plaintiff class of 21 million homeowners could receive as little as $13. What’s more important to most home sellers and buyers are the changes to the way that real estate agents are compensated.

Media headlines following the announcement of the settlement gave the impression that real estate agent fees would be reduced and that home sellers would save thousands of dollars in commission payments. These headlines were largely misleading and didn’t explain the details on how the proposed changes will actually impact real estate transactions. 

Upcoming Changes

There are two material changes to understand. The most immediate and concrete change is the mandatory implementation of a buyer representation agreement. These agreements formalize the relationship between a buyer and a real estate agent, clearly outlining the agent’s duties and how they will be compensated by the buyer. Beginning on August 17, all buyers need to sign an agreement before a real estate agent can begin showing them properties.

The second key element of the settlement agreement is that home sellers will no longer be allowed to market cooperating commissions for buyer’s agents through the Multiple Listing Service (MLS). If a seller chooses to offer commission to a buyer’s agent, this will need to be communicated off the MLS such as through a property website, digital advertisement, or by direct communication between buyer and seller representatives.

Impact on Buyers

So how do these changes impact home sellers and buyers? Let’s start with home buyers. Buyers will now need to sign a contract with their real estate agent committing to paying a negotiated fee for representation in a real estate transaction. 

There will be three likely scenarios for how home buyers will cover the fee to their agent:

1. In order to attract a high number of purchase offers, sellers may still make offers of compensation to the buyer’s representative. However, that offer may not equal the fee agreed to by the buyer and their representative. If the compensation offered by the seller is less than what the buyer agreed to pay their agent, the buyer will have to come up with the difference. If the seller offers more compensation than the buyer and their representative agreed upon, the agent can only receive the amount of compensation in the buyer representation agreement and any additional compensation offered is retained by the seller.
2. The buyer may pay their agent fee directly at close of escrow along with all other closing costs such as loan origination fees, title and escrow fees, and transfer taxes. This means buyers will need extra cash to cover not only their down payment and closing costs, but their agent representation fee as well.
3. The buyer can request the seller pay the buyer agent fee as part of their purchase offer. This will effectively be the way that things worked in the past with the seller paying the fee for the buyer’s representative. The big difference is that the buyer will negotiate the fee with their agent as opposed to the agent accepting the compensation offered by the seller.

Impact on Sellers

For home sellers, things will mostly be the same as they were in the past. Seller’s will negotiate the fee they pay their listing agent and have the choice to offer commission to the buyer’s agent. If they choose not to make an offer of compensation to the buyer’s agent, sellers can expect that many buyers will include a request for the seller to pay their agent fees as part of the purchase offer.

Paying Commission

So how do home buyers cover the cost of their real estate agent representation? As stated above, the buyer can ask the seller to pay the fee as part of the purchase offer, but the seller has no obligation to accept such an offer, or might choose to pay only part of the fee. If the seller has other offers on the table that don’t require them to pay the buyer’s agent fee, they will likely accept those offers.

Alternatively, buyers can finance the fee they pay to their representative, effectively rolling that cost into the amount borrowed for the mortgage. This approach comes with some caveats. First, if the home is appraised for less than the price offered, the buyer will need additional cash to cover any delta. Secondly, most mortgage lenders require that buyers maintain a loan-to-value ratio of no more than 80%. Beyond that, the lender may require Private Mortgage Insurance (PMI) until the loan is paid down to an 80/20 ratio. PMI will increase the repayment cost each month, possibly putting the loan payments out of financial reach of the buyer.  

So, what is a buyer to do in this new landscape? There are a few choices. They can choose to represent themselves in what will likely be the largest financial transaction of their life. They may also hire a lawyer to help them navigate the myriad disclosure documents and purchase agreements that are part of every real estate transaction, as well as to support them in negotiating a final purchase price.

Or, they can pay for professional representation in the form of an experienced, licensed real estate agent. The benefits of hiring an exceptional agent are manifold: in addition to helping buyers evaluate their individual financial situation and make introductions to mortgage brokers, a great agent will help a buyer target their home search to properties that they can afford, advise them on remodeling projects that will increase their future home value, provide vetted vendor referrals, and negotiate with the listing agent on their behalf.

This means the agent develops an in-depth understanding of the buyer’s needs, family circumstances, future plans, financial growth trajectory, lifestyle considerations, and many other factors that will impact their ability to successfully purchase a home that meets their needs and also fits within their budget.

Conclusion

Ultimately, I believe that the changes put forth in the N.A.R. settlement are going to be in the best interest of both buyers and sellers. Buyer’s agents need to clearly articulate their value to command the negotiated commission. This is going to increase overall professionalism in the industry and lead to higher quality representation. If you have any further questions about the settlement, Realtor commissions, or any other topic, please let me know and we can schedule a time to talk.