Titan Properties USA

After multiple lawsuits, the National Association of Realtors (NAR) has agreed to a settlement with home sellers amounting to a payment of $418 million and a few monumental rule changes for multiple listing services (MLS) and how real estate agents conduct business. The changes will go into effect in July. This has led to an array of responses within the real estate industry, from panic and complete reworking of real estate practices to others claiming it’s no big deal and business as usual. 

National media has seized on the story, with headlines such as CNN’s “The 6% commission on buying or selling a home is gone” and the New York Times Daily podcast titled “The Bombshell Case That Will Transform the Housing Market.” Much of how this will actually affect homebuyers, sellers, and agents is yet to be determined, and we will have to watch and see how things develop. 

Here, we will explore what changes we know will take place and how those changes could impact real estate agents. 

What Actually Changes for Agents?

The actual changes of the settlement that would go into effect if approved by the federal court are:

  1. Listing agents can no longer advertise buyer agent commissions on the MLS. 
  2. Buyers and buyer agents will have to execute written agreements (buyer agency) to show homes and submit offers.

No more advertising buyer agent commissions in the MLS

Until now, most MLSs have allowed a listing agent to advertise a buyer agent commission. This commission was agreed upon between the seller and listing agent, or, depending on the state, the listing agent decides how much of their agreed-upon commission they will offer to the buyer agent.

Currently, the buyer’s agent could simply look at the property on the MLS, see the commission being offered, and know what they stand to earn if they complete the sale with their client. This allowed the buyer agent to largely negate talking about compensation with their buyer. 

Despite all the headlines, this doesn’t mean that sellers offering buyer agent commissions are over (more on that later). However, it does mean two things:

  1. Listing agents will get a lot more phone calls seeing what the status of a buyer’s agent commission is. This isn’t simply for the agents to decide to steer clients toward this property or not because of payment (which is illegal and against NAR ethics), but to know if a commission is being offered or if they would need to factor that into a potential offer on the home. Although the idea of a lot more phone calls can seem like more work, good agents welcome the opportunity to talk to interested buyers and buyer’s agents and have more opportunities to make deals happen.
  2. Buyer agent commissions will be a negotiation point at every part of the home sale process. It will be talked about before seeing a home and starting a working relationship between buyer and buyer agent in structuring an offer and a potential ongoing negotiation point once under contract.

Written agreements between buyers and buyer agents. 

The second major change brought about by the settlement is the enforcement of written working agreements between buyers and buyer agents. Technically, this will directly affect the states (the majority) that still practice some form of subagency. 

In practice, subagency occurs when a listing agent and seller have a binding written agreement to work together to sell the home. When a prospective buyer sees the home with an agent and wants to put in an offer, that agent enters into a subagent relationship/agreement with the listing agent and seller to be compensated rather than being in a written binding agreement with the buyer exclusively.

Often, a disclosure of the working relationships is provided to the buyer that outlines the relationship between the seller, listing agent, subagent, and buyer and says the subagent will work in the buyer’s best interest. Simultaneously, the subagent is contractually a fiduciary of the listing broker and seller for compensation. 

For years, this practice has understandably been cited as a conflict of interest, and it’s just a convoluted way to do business. Upon ratification of the settlement, buyers and buyer’s agents will have to enter into a contract outlining their working relationship, defining that the buyer’s agent will be the fiduciary to the buyer working solely for their best interest, formally known as buyer agency. States like Colorado, where I hold my real estate license, have been practicing buyer agency since the 1990s. 

Frankly, the NAR should have made all states adopt this long ago to prevent antitrust and conflict of interest complaints. This ruling should clarify the working relationships in a real estate transaction and promote more disclosure about real estate brokers’ compensation. 

The second rule doesn’t directly affect agents in states that already practice buyer agency, but these two new rules, taken together, will change how we do business and the conversations about compensation with buyers. 

Traditionally, I and other real estate brokers could tell buyers they had no obligation to pay us directly. I will be paid by the listing broker or sellers because 99% of listings on the MLS offer decent compensation. This image outlines how we structure that contractually from the Colorado Real Estate Commission’s Exclusive Right to Buy Contract by choosing 7.3.3. 

Starting in July, without knowing what the seller or listing broker is offering for commission via the MLS, as well as it is a potential point of negotiation between the buyer, buyer agent, and seller/listing agent, most brokers will have to talk about the potential of buyers paying a commission if the seller isn’t willing to pay and how that will be structured. Agents will need to talk about how they will be compensated for their work, and more importantly, they will need to hone in on their value proposition to demonstrate why they should be paid in the first place. There will be a lot more buyer agreements in the future where 7.3.1 is checked. 

The Value of Buyer’s Agents

The questions left to be answered include: Will these rule changes bring about more competition when it comes to agent commissions? Will seller sentiment change to offering lower commissions or no buyer agent commission at all? Or will we go forward with a few different semantics but run the business as usual? 

Until a new norm has been set, it will be paramount for buyer agents to demonstrate their value to potential buyers, who may have to pay commission at closing. Agents need to be proactive about the following.

The fundamentals 

Buyers’ agents do a lot of work that goes unseen. As agents, we need to improve our communication of the fundamentals of what we do. 

We are data analysts mining through lists of properties, matching homes that meet our buyers’ needs, goals, and budgets. Agents spend endless hours showing homes, pointing out both the pros that make a home special and the cons that buyers should be aware of, and that could be potential negotiation points. We simultaneously play counselor and financial advisor as we coach clients through the emotional roller coaster that is the biggest purchase of their lives. 

Brokers are the quarterbacks of the real estate transaction. They coordinate with the co-op agent, lenders, title companies, lawyers, inspectors, and appraisers and ensure that everyone does their job within the contract deadlines and in the best interest of the buyer. 

We are expert negotiators. Personally, I saved clients hundreds of thousands of dollars on individual deals. We are experts in real estate contracts, making sure our clients have contingencies and are not taken advantage of. And we do all of this for multiple clients at one time. 

Agents: Let me know what I’m missing in the comments! 

Payment structures 

Agents need to propose structures in order to be compensated if a seller isn’t willing to pay them. New ideas and models will emerge. Examples include but are not limited to the following:

  • Flat fees: Many “budget brokers” already offer flat-fee models. The cheaper they are generally, the less service you receive.
  • Min and max fees: A broker can suggest a minimum and maximum fee. This gives options for a seller to pay or a buyer to pay. If a seller offers a commission and it falls within the range, the seller pays. If it’s under the set range, the buyer would pay all or a partial amount up to the minimum. If a seller is offering over the max, the agent could then market this as a rebate back to the buyers toward the purchase price or closing costs. 
  • Hourly or per-offer rates: Many have proposed that agents should start billing clients like lawyers based on hours and contracts drawn up. If it is a quick, easy transaction, it costs less. If it is a year-long property search, touring hundreds of homes with multiple offers, it costs more. 
  • Built into contract: The hard truth is some buyers will not be able to afford a buyer agent commission. An option would need to strategically build this into an offer that is acceptable to a seller. Agents will need to be upfront with buyers that this model may not be advantageous to a seller who is hell-bent on not paying a buyer agent commission. 
  • Built into loan: Consult your lenders on the legality of this. As it stands, a buyer agent commission cannot simply be tacked onto the loan. It does seem there is a roundabout way for an agent to be paid from lender credits, but it could potentially increase the buyer’s interest rate.

The first call I made after hearing about the NAR settlement was to my lender partners, asking them to find solutions for buyer agent commissions built into the loan. In my opinion, if the trend turns to buyers paying BA commissions, commissions being built into loans will be one of the few solutions for many first-time homebuyers.  

How Agents Price Homes

Another hot-button issue we as agents have to speak on to clients and investors is that this settlement will have little to no effect on home prices. Multiple news outlets have made this statement, one being the largest national news podcast, The New York Times’ The Daily. On their episode covering the settlement, reporter Debra Kamin, who was also interviewed on the BiggerPockets podcast, asserts the settlement will “make it significantly cheaper” to buy a home. 

The media talking points around this idea have been something to the effect of the following:

“6% agent commissions have been added on top of the actual home value, artificially inflating home prices. If the 6% commission is taken away, home prices will become cheaper.”

I would disagree with this statement for two reasons: 

  1. Agent commissions largely do not factor into how we set prices. Often, the only time this would even be part of a pricing discussion with a seller would be if they have such low equity in the home that selling would cause them to have to write a check at closing after commissions and closing costs. (Many agents will take a fee as low as possible or work pro bono in this situation to help people out.). The way home prices are set ultimately is up to what the seller wants to sell it for. Agents advise sellers on sale prices based on comparable sales.
  2. I would disagree based on human nature and common sense. Kamin and others who support this theory are insinuating that sellers will become more altruistic with their home equity upon these rules going into place. I think the Vegas odds would favor that not happening. 

Here’s the hypothetical scenario: Your neighbor sells an exact replica of your home for $500,000. You have negotiated with your agent to only pay 3% in commissions rather than 6%. Are you going to sell your home for $485,000 (3% less)? Or are you going to sell for the same price as your neighbor and keep $15,000 more for yourself?

There may be a few charitable people who take a price cut, but my guess is that will be the exception, not the rule. These rule changes may lead to home sellers paying less in commission fees, but that doesn’t equate to home prices being cheaper. In fact, if buyer agent commissions are passed on to buyers, it may make it even more expensive to buy a home, not cheaper. 

Investor Insights From an Agent

These rule changes will affect agents, investors, and retail homebuyers and sellers both directly and indirectly. Here are a few potential changes on the horizon we should all be aware of. 

Some sellers will offer no buyer agent commission

We will have to wait and see if the market trends toward sellers no longer offering buyer agent commission if it ends up being close to where it is today, or if it lands somewhere in the middle. 

I’ve asked flippers and developers if they are considering offering no buyer agent commissions, and some have said they will strategically test it out and see how it affects demand and the negotiation process. If there is still demand and they stand to profit more, they are definitely open to the idea of no buyer agent commissions. 

I think whether opting out of offering a buyer agent commission is helpful or not will largely depend on the sector of the market a home falls in. With homes that could be categorized as starter homes or on the affordable end of the spectrum, buyers struggle to come up with down payment and closing costs as is, so they more than likely will not be able to offer a buyer agent commission on their closing fees.

Homes in price ranges of upper-middle-class and wealthier clients that have multiple offers may be safe offering no commission because buyers could afford to pay their own agent and make their offer even more attractive to a seller by alleviating their cost to pay a buyer agent and keep that money in their pocket. 

Investors need to be educated on how agent commissions could affect their offers and have a compensation plan agreed on with their agent that is in line with their investing goal. 

The role of agent partners

That leads me to my next insight: agent partners. Frequently, investors will have one of two business relationships with real estate agents. One is having an agent partner per market who is their go-to for most of their real estate needs. They often have a contractual agreement with this agent while they are searching for properties. 

The other is investors who have relationships with many agents whom they give their buy box to and say, “Bring me a deal.” With buyer agent commissions in limbo, the days of “bring me a deal” without a contractual relationship may be over. 

I know that if I can source a deal for an investor that meets their criteria, I have assurance the commission being offered on the MLS would be my compensation if I get under contract with the investor. With commission potentially not being offered or a point of negotiation between myself, the listing agent, and the investor, I would be less eager to hunt down deals for investors without knowing how I would be compensated. 

The way the ruling is written, agents would need a written agreement even to show homes to potential buyers. Investors need to be aware that agents will be required to have these buyer agency agreements in order to show them homes and outline how they will be compensated. 

For investors, I anticipate the rise of open buyer agency agreements. Agents want to complete exclusive buyer agency agreements—to know contractually that they are the only agents working with a buyer as they are shopping for homes. This gives them much more assurance of compensation for the work they put in sourcing deals for an investor. 

Investors who still want to employ multiple agents at once have the option to outline working relationships and compensation agreements in order to be in compliance with this ruling by having multiple open rather than exclusive buyer agreements in place, formally known as open buyer agency. 

I think developing great agent partnerships may be the more advantageous route for investors—agents who can advise when to offer buyer agent commissions based on the sector of the market of the home you’re selling or agents who will offer you a discounted rate if they know there is a flip resale or repeat business they will be compensated on in the future. Having a great agent who can help you navigate the nuances of this new ruling, who are experts in the fundamentals of buying and selling a home, and who can create win-win scenarios for themselves and investors will be paramount in this upcoming season. 

The future of the NAR

The future of the National Association of Realtors itself may be the most important thing investors need to be paying attention to. Faithful NAR members have been paying high member dues for years to have the “invisible hand” of the association working on their behalf. 

Many Realtors are frustrated with the settlement’s outcome and the NAR’s incapacity to validate the value of their members’ vocation in these trials. With the settlement, not being able to see compensation on the MLS, and being required to list on the MLS, many Realtors are questioning whether they should continue their NAR membership altogether. 

At first glance, this seems like it would affect Realtors rather than investors in the day to day, but we must remember that the NAR is one of the most powerful lobbying groups in the country. They are funded by both Realtors and wealthy real estate investors, enjoying the income and tax benefits derived from investing in real estate. They promote initiatives and legislation that both Realtors and investors favor to encourage further investing and the buying and selling of homes.

The NAR is critical in mitigating the rise of rent control, anti-landlord policy, and further property taxation. However, if the NAR’s funding dries up from nonrenewing Realtors, it may no longer have the same sway over future legislation impacting real estate investing. Investors need to consider this before encouraging their real estate agent to ditch the NAR.

Final Thoughts

We all need to keep a pulse on how this develops once implemented in July. Lean on your industry partners and the BiggerPockets community to be informed and create win-win scenarios for yourself, sellers, buyers, and agents. All businesses experience shifts, and real estate investing is no different. It’s those who are informed and hustle through times of change who thrive on the other side. 

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

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