Understanding the NAR changes and how they effect Sellers

On August 17, 2024 seismic changes rocked the realm of real estate, decimating decades of tradition and forever changing the way we buy and sell houses. The result of a slew of antitrust lawsuits; NAR – the largest trade association in the United States with more than 1.5 million realtor members agreed to a settlement removing the responsibility for sellers to pay buyer’s agent commissions in a real estate transaction and barring further public advertising of commissions to buyers agents via the MLS (multiple listing service)  

The goals of this settlement are simple: transparency and more market competition between real estate brokerages. But will the terms of the settlement have the desired effect for buyers and sellers? This author isn’t so sure. 

The 6% standard commission

For decades the standard commission charged by real estate brokers has been 5-6% of the sales price. This fee is usually split evenly between the seller’s broker and the buyer’s broker, and almost always paid by the seller. But it’s never been a hard rule. Commissions are, and have always been entirely negotiable, with some modern brokerages offering discount listings for as low as 1%. Of course, sellers usually get what they pay for, and discount listings typically offer a greatly reduced service in exchange for the low cost. 

So why force change if it’s not a strict requirement? The simple answer goes back to transparency. It’s no secret that real estate agents want, and need to get paid. Nobody works for free and a good agent brings an immense amount of professionalism and knowledge to the table. But because sellers typically paid the buyer’s agent’s commission, the amount that they offer had the ability to impact a buyer’s agent’s decisions about which properties to present to their clients. 

Real estate agents have a fiduciary duty to ensure that they represent their clients interests to the best of their ability, but when they are being paid by the opposite party, things can get muddled quickly. 

Under the settlement buyers will now establish agreements with their agents prior to viewing properties, similar to the way sellers have typically entered into long term agreements with their agents. Buyers will be responsible for paying their agent, and sellers will be responsible for paying their agent. No more conflict of interest. It seems like the perfect solution, but there’s a dark undercurrent of risk lurking just beneath the surface. 

Kinks in an already imperfect system

There is a prevailing hope that these changes will help to ease the extreme prices of purchasing a home in the current market. Seller’s can better negotiate terms with their agents, and in a perfect world they can pass those savings on directly to the buyer. But we don’t live in a perfect world, and behavioral economics gives us some clues about how sellers may react to the possibility of saving on commissions. The most likely outcome? Greed. 

But there’s another potential snag. Lenders. One of the main concerns many first time homebuyers have is cash savings. Historically buyers would put down around 20% of their home’s purchase price as a cash down payment, financing the remainder. But over the years as the average home price has outpaced wage growth by a significant factor, lenders had to get creative with new financing options tailored to lower down payments, and less cash to close. 

Some of these programs, including the government backed FHA loans which offer down payments as low as 3.5%, have strict requirements for how much a seller can contribute to a buyer’s costs, making it harder to abuse the system. But these requirements haven’t been revised under the settlement changes. As a result, buyer’s are unlikely to be able to finance their agent’s commissions which could be as high as 3% of the purchase price. With the average house sale in Jacksonville approaching $450,000 as of July 2024 that extra cost burden can amount to tens of thousands at a time when affordability is already hampering sales. 

There’s a strong likelihood that lenders will begin to adopt new loan products to support buyers, but it will take time. The period of uncertainty that time gap will create has the potential to hurt both buyers and sellers alike. 

Out of the frying pan….

There is of course another option for buyers. Go unrepresented. While it’s always been an option, it was never a compelling one under the old system. After all, if the seller is paying for it, why not get the expertise and negotiating prowess of a professional to assist you in your transaction? 

Under the new system with buyers footing the bill for their own representation, there’s a strong likelihood that we see an uptick of unrepresented buyers entering the marketplace and trying to brave it on their own. I’ve obviously got some bias as someone inside the industry, but buying and selling real estate is complicated, and it’s difficult. We can look at the failure rate of FSBO listings for some real world data on just how tough it can be to go unrepresented. 

There are a ton of pitfalls an unrepresented buyer can fall into, including many that can be costly to both sides. Without representation, buyers may enter into contracts that they don’t fully understand, putting binder deposits, inspection fees, and appraisal fees at risk. Delays are already common when multiple professionals are working together on a file, and even a few days can cost hundreds or thousands in holding costs. 

But here’s the kicker. The buyers who need representation the most, those who are already shopping on narrow margins and who can’t afford a few thousand dollars in expected setbacks, are the ones most likely to decline it for the same reason. Savings. Homeownership is a difficult enough dream to obtain for most Americans, and there’s a real concern that first time homebuyers may be at an ever greater disadvantage now. 

The upside

While I’m skeptical that this settlement will have the desired effect, it does open the door for some great improvements. 

The people of the United States have collectively and correctly agreed that monopolies are bad. They hamper growth and innovation, and they harm consumers. Please understand that I’m not accusing NAR of being a monopoly. But some of their policies have undeniably stifled competition. The renewed attention on commission negotiations should force brokerages to find new and exciting ways to gain a competitive edge, a good thing for an industry that hasn’t changed much in the past five decades. 

Additionally, there’s likely to be a greater focus on the value of real estate agent’s services and expertise. It’s an incredible opportunity for high caliber agents and brokerages to set themselves apart, and may even help to fight some of the negative stigmas that have begun to surround the benefits that having an agent actually provides. 

What sellers should expect

Real estate is a slow beast. Except on a few unique occasions, it doesn’t usually react in real time. It’s likely going to take a few months for the dust to settle and any real direction to become apparent, but in the meantime sellers should prepare themselves for a bit of turbulence. 

Real estate sales have always been uncertain. Disruptors such as Duval Home Buyers have built much of their business on offering certainty in an uncertain market. But these settlement changes are unprecedented. That usually causes confusion. Confusion leads to…you guessed it… uncertainty. Brokerages are still getting their processes ironed out, so there are likely going to be some delays in places that have historically been fairly smooth and straightforward. 

Sellers should also get used to the idea of offering some sort of concession directly to the buyer where allowed by the buyer’s lender. Nothing in the settlement precludes sellers from offering or marketing incentives directly to the buyer, and if buyers are going to be footing the cost of their own representation, they’re going to expect some concessions. At least at the start. 

I’ve already begun to see them pop up in the public comment sections of MLS listings, peruse Zillow for a few minutes and I’m certain you’d find some as well. 

Should I stay or should I go?

Timing is always a big question in any home sale. Sell at the right time and you could make huge gains on your investment. Sell at the wrong time and you may spend the rest of your life kicking yourself. So which is it right now? 

Well, it’s a loaded question, and that’s the answer I’ll always give. If you need to sell, you need to sell, and any timing that achieves your goals is the right time. If you just want to maximize your returns, the wind is gusting in both directions. Interest rates are falling and affordability is slowly rising. Home values are appreciating, so waiting it out could bring a bigger yield. 

But unemployment is also on the rise, and home sales have been slowing. If too much inventory floods the market without a stable supply of buyers, home prices will inevitably drop. 

The best advice? Seriously take some time to think about why you are looking to sell, and make the decision that will check your boxes. The NAR rules change is going to cause some shakeup, but only time will tell how it will all settle. 

 

The thoughts opinions expressed within this content are solely the author’s and do not reflect the opinions and beliefs of this website or its affiliates. Always consult a real estate professional.