November 2023 saw a massive $1.78 Billion judgment issued against the National Association of REALTORS, finding that the NAR conspired to keep commissions artificially high. Since then, I’ve been asked repeatedly for my opinion on the matter, and what it means for buyers and sellers.
TL;DR (“Too long, didn’t read”) I don’t think anything will change short-term. Long-term, if it does change things, it will be bad for consumers but very good for well-established agents:
The norm is the norm for good reason.
Deviating from the norm will mean a buyer has to write a commission check, which could lead to buyers opting for no professional representation in the most important financial transaction of their lives.
Deviating from the norm means less eyeballs on a seller’s property, which means less money for the seller.
Real estate agents that aren’t in this business for the love of it will be washed out, meaning less competition for the big dogs.
NAR and Commissions Today
First things first - what is the National Association of REALTORS? It is a trade organization of real estate agents, property managers, appraisers, and other real estate professionals. I am not a member of NAR, nor have I ever been. The reason why is simple - it’s an expensive membership that does nothing to help me service my beloved clients better. So while I am a real estate agent, I am not a REALTOR. There is a big difference.
How do commissions typically work? The industry norm is that sellers pay a 4-6% commission to their listing agent, who splits that commission with the agent who brings the buyer. Today, buyers don’t pay a commission, meaning they get the representation of a professional real estate agent for free.
What does the NAR judgment change? Sellers and listing agents will no longer have to provide an offer of compensation to buyers agents.
It’s obvious that a seller would want to avoid paying a buyer's agent if they could, but why is it in the seller’s best interest to pay a buyer’s agent? If a buyer’s agent sees that they are not going to get paid, then they are not going to show the seller’s house. As much as an agent wants to help you, no one works for free, nor should they.
You may be thinking to yourself - “So what if the seller doesn’t offer a buyer’s agent commission?” This ends up being bad for sellers and buyers.
Buyers and the NAR Settlement
Let’s start with the buyer. What this settlement means is that if the buyer opts for professional representation, which as I explain in my article on the value of the right real estate agent, they always should, their agent will require them sign an agency agreement stating that if compensation is not offered by a seller, they will be on the hook for their 2-3% commission.
As if buying a house isn’t expensive enough already! For some perspective, let’s say we’re working with a first-time homebuyer that can only put 5% down on a $500,000 home. Cooperating compensation is not offered by the seller. The buyer is on the hook for a $25,000 down payment, $5,000 in closing costs, and now a $12,500 commission check (2.5%). Instead of being out of pocket $30k, they’re out of pocket $42.5k.
Therefore, buyers are going to be less incentivized to look at properties where they are on the hook for a commission. If they do look for such a house, then they’ll possibly try to represent themselves in the transaction.
To them I would say good luck and God bless. You are opting to represent yourself in the most important financial transaction of your life. There is incredible, life-saving (from a financial perspective) value in having a partner by your side who has gone through this process many many times.
Transactions are ruthless, and the other side is not going to feel sorry for you if you enter into a binding agreement that turns out to not be in your best interest.
Sellers and the NAR Settlement
Now, let’s look at the sell side, as this reveals why I feel the status quo is likely to continue. If a seller does not offer listing agent compensation, buyers aren’t as incentivized to go take a look at it. This means less demand, which means lower sales price. So while they might have saved a few bucks by not paying a buyers agent, they shot themselves in the foot.
Conclusion: Agents and the NAR Settlement
All to say that the status quo is the status quo for a reason. Is it perfect? Clearly not. Are all real estate agents phenomenal, highly professional, and insanely skilled? Definitely not.
Will the right one help protect you and your family’s best interests and keep as much money in your pocket as possible? Definitely.
Though I believe the status quo is unlikely to be upended, who do I know the settlement is good for? Ironically, it's the good real estate agents! The settlement headline is going to discourage the wannabe real estate agent from entering the business. This means less competition for the established players.
No one has a crystal ball, so no one can definitively say what the long-term effects of the settlement will be. The best you can do is ensure you and your family have the level of professional representation you feel is appropriate.
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