NAR Settlement: Will it “Slash” Home Prices?
Are 6% Seller Commissions really going away?
The recent NAR settlement is a huge buzz in the industry. Social media and the press are blowing up with sensational headlines on what this will mean for the American real estate market. Recent headlines from CNN like; “The NAR settlement could slash home prices for many Americans” and “The settlement, which is still subject to a judge’s approval, will eliminate the long-standing standard 6% commission paid by the seller” are misleading, and unfortunately creating anxiety in the real estate community and confusion for buyers and sellers.
Many of you reached out and asked for comments on what is going on with this lawsuit and want to understand how this will affect your buyers and agents. Understanding what this settlement truly means and accomplishes is critical so that you can do what you do best- quiet the noise and provide guidance to your referral partners and your clients.
The “cliff notes” version of the settlement:
The simple nuts and bolts of the settlement eliminates NAR from requiring agents to disclose how much the seller will pay in buyer commissions in the MLS system and will require buyers to sign a disclosure. This settlement does not ban the ability for a seller to pay a buyer’s commission on the sale of a home. It simply prevents NAR from making it a required field in the MLS. As we know, both buyers and seller’s agent’s commission are already negotiable, and this settlement really does not change, reduce, or improve the fee structure. With the publicity of this lawsuit and settlement it does make it more widely known to the consumer that commissions are negotiable. With the requirement for the buyers to sign an agreement clearly documenting how the buyer’s agent will be compensated there will be no question of who is paying for what. In many markets this is already a common practice for agents.
What does this mean for commission fees?
Although the two changes are supposed to go into effect as early as July of this year, it will likely take a while for anyone to see any tangible commission changes in the marketplace if it even happens at all. It is highly likely that seller and buyer commissions will continue to hover around 5-6% for an extended period. Most sellers are already conditioned to price in 6% for listing properties and most agents already negotiate to reduce commissions or cover a portion of closing costs when home deals are tight. I would expect this to cause changes only in very competitive markets where multiple offers are already an issue and high negotiations are already a factor for buying a home.
What’s the big deal? Who is losing?
Unfortunately, unlike the headlines are portraying, the initial loser in this deal is going to be the homebuyer with little cash. In highly competitive areas sellers will be more reluctant to include the costs of the buyer’s agent’s commissions. Listing agents will be less willing to reduce commissions because the house will sell anyway, and buyer’s agents will not want to work for free. So, the buyer with limited cash resources in a tight inventory market will be left on the sidelines. I do think it will take time for this to cycle through the market and mortgage lenders are already working on solutions to help in this area. Overall, I think increased negotiations and the publicity of this case may cause realtor commissions to erode over time. Sadly, the buyer’s agent is often the one doing the most work in the transaction. They spend time finding the buyers, driving multiple properties with the buyers, and submitting multiple offers to try to get the buyer in a home. In the long run buyer’s agents and lower income buyers may end up getting the short end of this stick.
Can we finance in the commission fees?
There is not a straightforward answer on this yet. Commissions are part of closing costs and closing costs can be covered by premium pricing. So theoretically it should be able to be covered by premium pricing. However, it is unclear if Fannie, Freddie, and HUD will reject that stance and deem it non-allowable. Groups are actively trying to collaborate with Fannie Mae and HUD to bolster the buyer’s incentive program to include commissions. Keep in mind buyer commissions are not currently considered an allowable closing costs per VA.
The bright side:
Two areas of light and opportunity. One, chaos always brings growth and innovation, and this will be no different. Two, builders will continue to be able to be the rockstars in the market. Most already have incentives built into the prices and they will continue to woo buyers to their homes with these offerings. I would expect sales agents and builders to leverage this settlement as an opportunity to drive more sales with realtors. And if I was an agent, I would get very cozy with new home sales agents.
For more details on the ruling see the Q &A listed below, and feel free to reach out with additional questions.
NAR Settlement Q&A
Q 1. What is going on with the settlement and what exactly is changing for agents?
A. NAR has been under pressure for years for “price fixing” and “requiring” buyer’s agent commissions to be paid. Friday a settlement was reached but it still has to be approved by the courts. In the $418 million legal settlement (down from the $1.8 billion verdict handed down last November) NAR agreed to certain stipulations around buyer commissions. This is not a ban on buyer’s agents’ commissions as some were reporting. Under the terms of the settlement agreement, “sellers and their listing agents cannot advertise the commission they are choosing to offer the buyer’s agent on the MLS, it can still be part of negotiations between the buyer and the seller facilitated by their respective agents. Additionally, if a seller or their agent chooses to advertise the listing somewhere besides the MLS, they can display the commission amount they are willing to pay the buyers’ agent with the listing.” -NAR.com
My Comments: Buyers and seller’s agents’ commissions have always been negotiable. But it has always been dictated by what is commonplace in the market. This rule does not change that fact. Buyers and Sellers commissions are still negotiable. You are just not required to advertise it in MLS like you were required to in the past.
Q 2. Is there a work around?
A. Yes. Although the MLS can no longer contain offers of commission, currently agents could still put in the broker comment section that they will give a credit to the buyer to pay their agent
My comments: I don’t see a dramatic impact in the market at first. Most sellers are conditioned to the 6% and I think both agents will hold on to this pretty tightly in the beginning. But over time commissions will gradually decline. With that said the speed of reduction will vary by market based on the speed of movement on homes selling in that area.
Q 3. Will we be able to finance in the buyers’ commissions?
A. Yes, Technically, and No for VA. Technically realtors’ commissions are part of closing costs and closing costs can be covered by premium pricing. So theoretically it should be able to be covered by premium pricing. However, it is unclear if Fannie, Freddie, and HUD will reject that stance and deem it non-allowable. With that said a new real estate association that was formed American Real Estate Association (AREA) not to be confused with AREAA :) the Asian Real Estate Association of America which has been around for a long time. AREA (American Real Estate Association) is actively trying to collaborate with Fannie Mae and HUD to bolster the buyer’s incentive program to include commissions. Buyer commissions is not currently considered an allowable closing costs per VA.
Q 4. Will the borrower have to pay commissions out of their own pockets?
A. In the beginning I see most sellers still covering the costs, but it will be negotiated in the price more transparently. Some sellers in very hot markets may choose to reduce or not offer to cover the costs based on the negotiated purchase price. This is very similar to closing costs. If a seller wants to sell his home, he will cover what the market dictates is needed to sell the home. I see this being covered in the beginning and perhaps eroding over time.
Q 5. How else will the buyers be affected?
A. NAR has agreed to create a new rule that would require MLS participants working with buyers to enter into written agreements with their buyers. These agreements will document what services they will provide and how much they will be paid. Many buyers are currently reluctant to sign these agreements. This could create friction until it becomes accepted as a norm. The challenge will come if a buyer agrees to pay the buyer’s agent 1% and the seller refuses to pay the commission. Either the buyer will have to pay these costs out of pocket or find another house.
Q 6. What is the American Real Estate Association:
A. Compass agent Jason Haber has created a new, alternative trade association in protest to NAR, named the American Real Estate Association. They have also set up an alternative nationwide listing database to compete with MLS, the National Listing Service. It will be interesting to see how this association progresses.
Q 7. Why did NAR settle?
A. Only NAR can answer that question. But in my opinion, it is twofold. I think they knew this fight would be an uphill battle and possibly threaten the organization with bankruptcy. And this gave them the ability to control the requirements of how commission structure would work going forward instead of leaving it to the government or the courts.
Q 8. When will the changes go into effect?
A. These changes will go into effect in mid-July 2024.
Q 9. Will this hurt the industry and buyers’ agents:
A. It is currently unclear how this will affect the industry. Everything will hinge on how the consumer sees the value of the buyers’ agents. Some believe it is all about value creation. “It does put the emphasis on what we always felt was most important: You have to be showing value to your clients, and you have to be providing exceptional service and communication constantly. And nobody should be paying for a service if they don’t feel that there’s value there.” - Gomes team in Austin, Texas, told The Washington Post . While others feel change creates opportunity and new business models will emerge.
My comments: I do believe this will bring a little chaos in the market for a while. And as I said yesterday in my Sunday Snips, chaos brings opportunities. However, reduced fee commissions and salaried realtors are not new. Many agencies have tried to eliminate agents and agent commissions and it has been a slog for them to break through. The real estate industry is hyper local, and agents live and die by their personal connections. Impersonal non-local companies like REX https://www.rexhomes.com/buy-with-rex backed by Goldman Sachs, created in 2015; have a seller fee of 2.5% and salaried agents have not taken off like rockets. This however is a perfect time for them to jump on the trend and use it for PR. My suggestion is that agents get in front of the trend and carve out a position for themselves.
Q10: Where can I find the settlement?
A. The settlement has not been approved by the court but when it is it will be released here: Case filing: https://www.mow.uscourts.gov/sites/mow/files/ca/19-cv-332-759.pdf
B. You can find NAR’s statements here: https://www.nar.realtor/newsroom/nar-reaches-agreement-to-resolve-nationwide-claims-brought-by-home-sellers