NAR Settlement: What You Need to Know

** On Friday, March 15, 2024 the National Association of Realtors (NAR) reached a settlement agreement following a many years fought lawsuit (Sitzer/Burnett and Moehrl) regarding the way commissions are paid in real estate brokerage. The Settlement still needs court approval and no decision is final yet. Terms of the proposed settlement were released and broadly shared in the media. No decision or changes are expected before July 2024. 

The day the proposed NAR settlement was announced headlines started getting splashed everywhere declaring real estate agents would lose their commission, real estate brokerage would massively change, and home values could go down. A lot of real estate agents took to social media, angry and panicking over the news.

Did I worry? No. For one simple reason: change happens and those who are smart and great at what they do can navigate change. They innovate and know how to expertly guide and thrive in any situation.

There is also a second reason I am not worried about the headlines, and nor should the real estate industry be.  To be direct, the headlines over the last few days regarding the NAR lawsuit have been very misleading at best, and flat wrong at worse. It is apparent that many of the publications spewing out recent headlines did not actually read the results of the court case and/or do not understand how brokerage works. To be clear: (1) Commission rates have always been negotiable. (2) Buyer’s agents will still be paid a commission. (3) Listing agents will still be paid a commission.  (4) It is very likely that in most transactions Sellers will still pay a buyer’s broker to sell their property.  All that will change is (A) the contractual forms that stipulate commissions will shift (it will move from the Cooperating Broker Agreement to the Residential Purchase Agreement in most cases) and (B) the transparency of commissions will now become less transparent as commissions use to be public record (on the MLS) and now commissions will not be public record (but they will still be paid – at least until the day comes that we find a labor force willing to work for free… which won't happen).

You can read about the settlement and lawsuit anywhere so I’m not going to rehash it.

Let’s talk about a few of the big things that are in this settlement agreement, which will go into effect in mid-July 2024.

1. Buyer Representation Agreements: All home buyers will now need to enter into a Buyer Representation Agreement with their agent. Just like sellers sign a listing agreement with one agent when they want to sell their home, now buyers will do the same when they want to buy a home. In many parts of the country, this is already standard practice. This agreement (as it stands now) simply states that the buyer agrees to work with a specific agent, for a specific period of time, in a specific price range and compensate the agent a certain amount (percent) of sale. This is most often done by seller credits or the listing agent’s brokerage compensating the buyer’s agent brokerage. Basically, this protects agents to ensure that they are not working for free and buyers can no longer jump from agent to agent. Sounds fair. Some might say that buyers will now just forego working with an agent all together. The truth is, even before the recent lawsuit buyers could always choose to forego working with an agent. The recent lawsuit did not change that. But the fact is that most buyers realize that they are about to embark on the largest and most complicated financial transaction of their lives, and for that reason nearly all buyers choose to work with a real estate agent to assist in navigating a truly complex process. Without a buyer’s agent representing a buyer in a transaction, the buyer has no one working in their best interests as a fiduciary. As someone who has seen a lot in the industry, I can assure you that I have often witnessed both sellers and buyers who go unrepresented be taken advantage of by the other side that was represented (either sellers selling for far too little or buyers paying far too much due to lack of representation or by working with incompetent representation).  Going into a real estate transaction as a buyer or seller without professional real estate brokerage representation is like walking into a courtroom without professional legal representation.  It is foolish and primed for failure.
2. Compensation to Buyer’s Agents: The settlement essentially says that in the MLS (Multiple Listing Service, where homes are listed for sale) listing descriptions can no longer advertise a commission to the buyer’s agent. However, a commission can still be offered and advertised through any other means to include any other website other than the MLS (such as the broker’s website), through email, phone call, advertising, etc. Seller’s can still offer incentive (commission) to the buyer’s agent that sells the home, the sellers simply cannot put this amount in the MLS.  But they can list the amount of compensation in any other of the billions of websites that exist.

Along with now advertising commissions outside of the MLS, sellers can also still offer “seller concessions” which can be used for the buyer as a credit to pay for the compensation that was agreed to in the above-mentioned Buyer Representation Agreement.

Let’s be very clear.  Few people work for free, and real estate agents assisting buyers will still be compensated for their work. The only person with a product to sell is the home seller, and the home seller, understanding how all products in the world are sold, will be more than willing to compensate a person (the buyer’s agent) for finding a buyer to purchase their home. I’ve always said, listing agents (the agent that represents the seller) do not sell homes.  Listing agents market homes.  It is the buyer’s agent that always has and always will be the ultimate agent that sells the home. The forces of economics and business will all but ensure that sellers will continue to compensate listing agents for marketing the home and buyer’s agents for selling the home.

So how will buyer’s agents get paid? Remember, this isn’t a hobby for agents, it is a livelihood. This is a career and just as you are paid at your job, real estate agents are paid for their job, the time they devote, and the value they bring their clients.

Importantly, many first-time buyers do not have additional funds to cover an agent’s commission – they are often scraping together what they do have for a down payment.

Some sellers will offer up front a payment to a buyer’s agent for selling their home (understanding that to incentivize a person to work at selling your home, you must compensate that person for their work, time, and effort). Some sellers will not offer up front a payment to a buyer’s agent, and what will more than likely happen in these instances is buyers will write offers that will ask for seller credit to cover the buyer’s agents commission. Either way, the seller still pays the buyer’s agent for the act of “selling” the seller’s house.

Scenario: Stop for a minute and pretend you want to sell your home. You want as many people to come to your home as possible. You want offers to be as high as possible. We want to create a bidding war on your home. What is one way you can do that? Offer a seller concession of a certain dollar amount. The buyer can use this as they wish. In fact, we see this already – sometimes homes for sale will have a note saying things like “seller offering $10,000 for buyer to use for interest rate buy down or towards closing costs.” The seller isn’t doing that out of the kindness of their heart. They are doing it to get more offers and higher offers.

Now, let’s address two of the consequences of this settlement that The New York Times said could occur:

1. New York Times says home prices will drop: I say no. We simply do not have enough supply to meet buyer demand and we won’t for decades to come. Buyers still want to buy homes and when you have 5, 10, 20+ offers on every home as we do today, the prices do not drop. And, as I mentioned earlier, buyers will likely just increase their purchase price and ask for a seller credit to compensate their buyer’s agent. If anything, home prices might actually increase further. The factor that has increased the cost of home ownership the most is not the 2.5% buyer’s agent commission. It’s the higher interest rate environment we are in which has doubled mortgage payments. And yet, with this higher cost of home ownership (interest rates more than doubling) we are still seeing home values hit record highs.  Home prices are not determined so much by external factors such as interest rates, agent commissions, title insurance fees, or escrow fees.  Home prices are determined by ONLY the same two things that determine the price of anything: Supply and Demand.  We simply do not have enough supply for the large demographic demand.

In San Diego we just experienced two of the biggest months of price increases that we have seen since record keeping began (home prices increase 11%+ December through February). That is with interest rates in the high 6% - 7% range. Imagine if interest rates drop and even more buyers want to purchase homes and rush to buy a home. This will just increase home prices more. Removing a 2.5% buyer agent commission (which as discussed above is not being removed) would not lower home values. The only thing that will slow home price escalation is the addition of more supply.

2. New York Times says 1 million real estate agents could leave the profession: I say Good. Let them. It will increase the quality of agent and thus it will increase the quality of service consumers receive. I have always believed that the market is oversaturated with too many real estate agents, specifically, too many agents that do not treat our profession as a full time professional career. While I don’t think 1 million agents will leave, I do think a very large percentage will. And that’s OK. We need that. There are too many part time agents in the real estate brokerage business working less than 40 hours per week, and you can’t be great at anything that you do part time. Consumers deserve great real estate agents, not part timers.  Working in real estate isn’t a hobby that you do for fun. When 50% of licensed agents sell 1 home or less per year, they shouldn’t be real estate agents.

You as a consumer are making one of the biggest financial decisions of your life. You shouldn’t be working with someone that isn’t a full-time professional agent who knows how to expertly guide you and navigate hundreds of pages of legal documents, difficult negotiations, and uncommon scenarios so you have as little stress as possible and you know your purchase, sale, or investment is protected. We need agents who do not work full time within the profession to leave the business and I am OK if this is what it takes to make that happen. Great agents will survive and thrive. The rest will wash out. And that is what is best for consumers.

When change happens, the people who can innovate, who are creative, and who are smart are just fine. We are a top producing Diamond level team in San Diego and in the top 1% of all real estate teams in the United State with more individual and team awards than any other residential team I know of in San Diego. We know we will succeed even with these industry changes.

I have no doubt that top agents will be just fine. You know who else wins? Consumers. I cringe whenever I hear about a consumer using a second cousin twice removed who has sold 1 or 2 homes to buy their first property or sell their largest investment. That shouldn’t be. Consumers need to be protected and that happens when they work with a full-time intelligent agent who has their back and is a professional. If this lawsuit and the settlement agreement helps elevate our industry and the professionals in it, then we all win.