We’ve been fielding questions from our clients and friends about the National Association of Realtors (NAR) settlement that’s been making recent headlines. While the settlement is still going through the final approval process and the specific details around practical implementation aren’t set in stone yet, we’d like to break down what we do know so far. Let’s dig into the anticipated settlement, its impact on our clients, and the common myths we know to be false.
Key Changes
When all is said and done, the settlement will result in two key changes with regard to how real estate transactions are handled in the United States.
- Compensation for cooperating agents (i.e., buyer's agents that bring an offer on a home listed by a seller’s agent) cannot be advertised in the multiple listing service (MLS). While listing agents cannot offer that compensation directly in the MLS, they can offer it elsewhere.
- Buyer’s agents will be required to have a written agreement with a buyer before showing a home.
Practically speaking, this will likely not change much when it comes to a typical transaction. Since the offer of compensation in the MLS has always been a guarantee to a buyer’s agent that they will be paid, there will need to be agreement somewhere else. It is too early to say for sure, but our expectation is that this will become a part of the contract to buy and sell a home.
7 Myths Surrounding the NAR Settlement
While the practical changes outlined above are nothing catastrophic, the ongoing coverage of the settlement has brought about several points of confusion and concern. These are some of the myths we’ve been hearing in response to the settlement.
1. The settlement will upend the real estate industry.
As described above, there are really only two changes resulting from the settlement. We don’t expect that either will significantly change how business is done. There will be changes to the details of the agreements and where they are documented, but the basic process will remain the same.
2. The NAR settlement allows buyers and sellers to negotiate the commissions paid to brokers for the first time in history.
Commissions have always been negotiable. In Colorado, both the listing agreement with sellers and the buyer agency agreement with buyers specifies the commission that will be paid to the Realtor and by whom. These agreements have always been open to negotiation.
3. The NAR settlement forces brokers to reduce their compensation.
There is no stipulation in the settlement related to the amount of compensation. Brokers are still able to negotiate their compensation as they have always done.
4. The settlement will serve to meaningfully lower prices and make homeownership affordable again.
Home values are determined by supply and demand. When we have a limited inventory, as we do now, prices continue to rise because there are more buyers than there are homes available. Compensation to Realtors has no bearing on this basic economic truth.
5. The settlement prohibits sellers from paying a commission to a buyer’s agent and relieves sellers of the financial burden.
There is no stipulation in the settlement directing who will pay commissions. Since many homebuyers lack the available cash to pay their agent’s commission it is anticipated that sellers will usually continue to cover that cost.
6. The NAR settlement is a win for buyers who will now be able to negotiate the fee for representation.
The general practice has always been for the seller to pay the commissions for both agents involved in the transaction. If anything, the settlement complicates the process, adds an extra layer to the negotiation, and introduces the possibility that a buyer will have to pay more. There may be some cases where buyers find themselves paying the commission themselves rather than having that cost covered by the seller.
7. The NAR settlement will result in significant restitution to consumers who were harmed over recent years in their transactions by Realtors.
The total settlement amount that NAR will pay in damages is $418 million. Of that, roughly $80 million will go to the lawyers representing both sides of the case. Dividing the remainder across all of the potential recipients is estimated to result in roughly $10 per consumer.
What We’re Watching For in the Long Term
The practical implications of this settlement are not major. At the same time, we are on the lookout for changes in standard practice that might be brought about by these shifts.
As addressed in myth six above, the settlement introduces the possibility that a buyer may have to pay for the buyer’s agent fees. This new layer of negotiation and possible financial responsibility might open the door to changes in buyer preferences in the way they engage with real estate agents.
Markets come and go, but in the most competitive markets it’s possible that cases where sellers and seller’s agents choose not to pay for the buyer’s agent fee for representation could increase. As a result, people wonder whether this will lead to buyers not wanting to use a traditional Realtor anymore because they don’t want to pay for their fees. In turn, some Realtors may start to break down their fees and services.
It’s important to consider all of these possibilities. At the same time, we try not to get carried away by “what ifs” that are many variables removed from current reality. Buying a home is still the largest financial decision most people will make in their lifetime. There is no substitute to having a knowledgeable professional to navigate the process and negotiate the best deal. We do still expect that sellers will continue to pay buyer’s agent fees the majority of the time, as stated under myth five above.
While fee structures may change and we might see more steps in the negotiation process to adapt to these changes, we do not foresee any major changes in our core mission or our core processes. We intend to continue serving our clients, friends and communities as they find their dream homes and complete transactions that will have major impacts on their financial wellbeing.
We will follow up on these updates as the settlement goes into action and as the market adjusts to these key changes. In the meantime, don’t hesitate to reach out with any questions or concerns, or just to chat! As always, we are here to simplify real estate for you.
