If you have been following real estate news in the media, then you have likely read about the recent proposed $418 million settlement between the National Association of Realtors (NAR) and the plaintiffs in a lawsuit filed last year in Arizona. While the settlement has not been approved by the court, it likely will be and would take effect July 1, 2024. It stands to have the greatest impact on the residential real estate industry of any single issue that has occurred in decades.
A few months ago, the jury in this case ruled in favor of the plaintiffs who had asserted that a home seller should not be required to pay compensation to the agent representing a buyer. Since buyer agency came into effect in the late 1980s, a seller who wanted their house to be advertised in their local multiple listing service (MLS) was required to pay the buyer agents’ compensation. If this settlement is approved, that requirement will be removed.
Furthermore, listing agents will not be allowed to advertise compensation to a buyer's agent, if the seller is willing to pay that, anywhere in the MLS. Going forward, any buyer agency commission we'll have to be negotiated between the buyer's agent and the buyer for that purpose. However, it does not preclude the seller from still paying the buyer's agent.
There are two main reasons why advocates for this ruling say that it was necessary. First, they asserted that buyer agents' commissions were inflated and that agents would try to steer their clients to more expensive homes, so that their commission would be greater, or to homes where the seller was paying a higher commission to the agent. Secondly, the plaintiffs in the lawsuit asserted that it is unfair that the seller be required to pay compensation to a buyer’s agent.
Currently, there are, unfortunately, buyer agents who tell their clients that they work for free. While this is false, and I will explain why below, those agents will no longer be able to say that. Since sellers will no longer be required to pay the buyer’s agent, that agent will have to have an honest conversation with their client as to what compensation they are to be paid when the buyer purchases a home. And that compensation will be negotiable between the buyer and their agent. That’s a good thing in my opinion.
HOWEVER, this has been the case ever since buyer agency was introduced into our industry. In order for a buyer agent to present a client’s offer to a seller, that agent is required to sign a buyer agency representation agreement with their client. And in this agreement, the terms of the agent’s compensation are to be specified by the buyer and their agent, meaning that they are negotiable. However, the agreement also states that should the seller pay this compensation, the buyer owes the agent no compensation.
In previous years, this is almost always how it worked out. But as of July 1, that will not always be the case. There will be more situations, where a buyer is going to have to pay their agent in addition to the purchase price of the home. For some buyers, it might be difficult or impossible to make a down payment on their mortgage, pay other closing costs and pay their agent. This could particularly be the case for some first time homebuyers.
Current mortgage regulations do not allow for buyer's agents compensation to be included in the loan unless it is included in the purchase price and then deducted from the seller’s proceeds. This is going to have to change, but I have no idea if and when that might occur. If a seller is unwilling to pay the buyer agent, the buyer and seller could still agree to add their compensation to the agreed upon purchase price so that that compensation could be financed into the loan. Or the seller can agree upfront to pay the agent’s compensation without increasing the purchase price.
There are a few myths that we want to point out about the impact of this settlement. The first is that sellers pay the commission to a buyer's agent, thus the buyer is getting representation for free. However, once the buyer and seller agree to a purchase price for the home, that price contemplates a certain amount of compensation being paid to the buyer’s agent.
While that compensation does come out of the seller’s proceeds, that is simply an accounting issue. The fact is that the buyer is still paying their agent’s compensation. In fact, many sellers have in the past agreed to a lower purchase price when a buyer is unrepresented by an agent.
The second myth is that since sellers will no longer be required to pay the buyer’s agent, there will be a decrease in home prices. There are many so-called experts saying this in the media, and this assertion is simply false.
First of all, when listing agents and their sellers set the list price of the home, they are typically looking at historical comparable sales in order to do that. And those sales currently include the buyer's agent compensation being paid from the purchase in most cases. As of July 1, since advertising potential buyer agent compensation in the MLS will no longer be allowed, appraisers are not going to know whether that compensation was paid from the seller’s proceeds or by the buyer in addition to the purchase price. Therefore, appraisers will be unable to adjust the purchase price of a comparable home that was sold to factor in whether or not the buyer agent was paid from the purchase price.
Secondly, due to the severe shortage of homes for sale, there is way more demand than supply. Simple economics tells us that home prices cannot go down in this situation. Specifically in Charlotte, that is not forecasted to change for years. Therefore home prices cannot decrease in Charlotte unless something drastic occurs in the economy. Furthermore, as mortgage rates are forecasted to decrease this year and in 2025, that is going to unlock an additional flood of buyer demand which will push home prices even higher.
The third myth for a seller is that there is such a demand for homes right now that someone will buy their home without the seller having to pay the buyer agent out of their proceeds. That MAY be the case in some situations where the seller receives multiple offers. But otherwise, we do not think this will be the case in most situations. Many homes are not getting multiple offers. As mentioned before, if the buyer has to pay their agent in addition to the purchase price, this could be problematic for those buyers who are short on cash.
If the seller is unwilling to pay the buyer's agent out of their proceeds or refuses to increase the purchase price to pay the buyer's agent, then that could cause the seller's house to sit on the market for a longer period of time and thus result in a lower than market sale price. Thus it could be advantageous for the seller to cooperate with the buyer in this type of situation.
The final myth is that homebuyers will just represent themselves in order to avoid having to pay a buyer’s agent. In 2023, 89% of buyers were represented by an agent. While there may have been some people in that group who mistakenly thought that they were getting “free” representation, that simply was not the case with the majority of those buyers. While we do think that the percentage of buyers represented by an agent will likely decrease some, we believe that it is shortsighted for most buyers to represent themselves.
As an example, if you decided to sue someone for $1 million, you could certainly represent yourself during the process. But if the defendants hire an experienced and competent attorney, would that be a smart decision? While you certainly could do some research on the internet, will that adequately prepare you compared to the years of education and experience that the attorney has had? The answer is obvious, and the same issues exist when one is purchasing what, for many people, is the single largest asset that they will own.
In the New York Times’ bestseller, The Millionaire Next Door, which profiles the common traits of US millionaires, they live below their means, buy used cars, and are extremely frugal. However, they are willing to pay for expert advice. They recognize that those expenses are investments in helping them to make smart financial decisions. And we believe that astute homebuyers will continue to seek the advice of competent real estate agents when they are purchasing a home.
In conclusion, the proposed NAR settlement has created meaningful discussions within and outside of the real estate industry. If approved by the court, which seems likely, this settlement will bring about change that we believe will be for the better.
One of those changes will be a greater awareness by homebuyers that they can negotiate the compensation that their agent is to be paid. And there will be greater transparency about the entire compensation issue. But the change is not likely to be as significant as many in the media are portraying. While sellers will no longer be required to offer compensation to buyer’s agents, we believe that most sellers will continue to do so.
If they want to make their home as compelling as possible to potential buyers, then they will want to remove any impediments that may turn away a potential buyer from making an offer. At the very least, we believe that sellers will allow buyers to add their agent’s compensation to the purchase price thus giving buyers the ability to finance that compensation into their loan.
Ultimately, the upcoming changes in compensation will emphasize the importance of the value for professional guidance in real estate transactions. Just as most people invest in legal and accounting advice, prudent homebuyers will recognize the value of leveraging the expertise of qualified real estate professionals.
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