NAR Settlement Fallout: Buyers Screwed Like Never Before
Many of you are aware of the NAR settlement reached last week. Sadly, most of the articles wrongly concluded that sellers will no longer have to pay buyer agent commissions, that buyer agents are not needed and will switch careers, and that choices for buyers will make process better than ever. No one knows how it will work.
Setting the Record Straight- Settlement Helps No One Except Lawyers Who Brought Class Action
What is the settlement?
The National Association of Realtors (NAR) lost a jury case brought by sellers in the Missouri area who, after successfully selling their homes, argued they were not informed the commission charged by the list agent also included a commission for the buyer agent.
The sellers argued that they should not have to pay the buyer agent, but instead buyers should pay their own agent. The jury awarded the sellers (and their lawyers) over $400 million. Instead of appealing the decision because the seller voluntarily agreed to pay the buyers agent (to bring in well-qualified buyers presumably), NAR settled the case.
The settlement essentials does two things: (1) there must be a written agreement between buyers and buyer agents covering how buyer agent will be paid; and (2) effective in July, the listing boards can no longer include a section spelling out the buyer agents commission.
How the Process Works Now
Sellers hire a list agent to sell their home and sign a listing agreement. Most of the time, the list agent charges a total commission of 4-6% of the final sales price as a total commission. Some portion of that (usually half) is offered to a buyer agent to bring in a well-qualified buyers, walk them through a negotiation, and bring the sale to a successful closing. The better agents take the 4-6% on the list agreement and break it out, so the sellers can see that half is kept by their agent and half will go to the buyer agent. Whatever buyer agent commission is agreed upon is then disclosed to buyer agents at the bottom of a listing for a particular home. This has how homes have been sold for decades with sellers raking in record profits in recent years.
Buyers also benefit from this system. They can hire their own agent to explain a very scary process and protect them from the seller, list agent, lender, attorneys, and title company. In the past, the buyer agent would give them confidence to bid much lower than list price, now the benefit is the knowledge to explain they might have to offer over list price and how to package an offer in a multiple bid situation. Nowadays, buyers are struggling to save the 20% needed to be successful in negotiations plus the 2-3% in closing costs on top. All that money out the door, but at least included in the deal was fair representation.
How the Process Might Work
No one knows how it will work now. The kneejerk reaction from the press is this is windfall for sellers because they will only pay 2-2.5% commission to their agent and none to buyer agent.
The reasoning is the market is so red hot that well-qualified buyers will continue to flood in without an agent or with an agreement to pay their agent some low flat fee amount.
Possible Scenarios:
#1 Nothing Changes Except More Paperwork
Buyers will sign agreements for buyer agents to receive same 2-2.5% commission as before. Most agencies have long required agreements so this is not a big deal.
The listings will not show this compensation, so instead the buyer agent will contact the list agent prior to the showing to confirm the buyer agent fee is being offered. In most cases, it will be and thus nothing will change for anyone except more communication and paperwork. Offers would include an addendum making it clear that the buyer agent will be paid as part of the deal. This will be no surprise to the seller since they already signed a list agreement agreeing to this.
This becomes customary- an end run around the settlement. Buyers and sellers remain on even playing field and sales continue at record levels. Sellers have confidence that the buyers will follow the process to closing and deal will be completed.
What is not known is what other ways a list office could let buyer agents know they offer a commission and the amount. If it cannot be on the listing, then could it be on websites, etc.
#2 Sellers Refuse to Pay Buyer Commission
Sellers could say the market is red hot, let buyers fend for themselves. They will instruct list agents just to hold open houses to reach buyers. List agreements will not include money for buyer agents.
- Buyers Don’t Hire Agent. Buyers may not see value in buyer’s agent since before they were “free”. Or they might not have extra money for a buyer agent. This is the worst case scenario for buyers as it’s the Wild West out there. They will not understand the process and as a result will pay more than is fair. They may or may not do inspections or have an attorney, but certainly it won’t be the best professionals recommended by their own agent. When home has defects, they will not have agent to fight for repairs. HOA all messed up? They will proceed to closing anyhow.
- Buyers Hire Agent Flat Fee. Some buyers will hire an agent for a flat fee upfront, presumably much lower than 2.5%. Say $5,000. The busiest (i.e., the best agents) won’t agree to that. So you get subpar help and if you are not successful In closing on a home, you are still out $5,000.
- Buyers Hire Agent Full Commission (Try to Roll Into the Loan or Include in Offer) Other buyers might see the benefit of the best agent, and agree to 2.5% with the caveat that the agent first try to get the sellers to pay it (through an addendum to their offer) or if that fails to roll it into the law. Laws must be changed for this to happen since right now its not allowed. Buyers could decide to only pursue homes where the seller agrees to pay the full commission. This limits options for buyers now, but might work better when market becomes more balanced.
What Do We Think?
Certainly all buyers will become aware that to buy a home with an agent, there needs to be formal agreement spelling out the terms. Not sure how Redin will continue to meet buyers at homes with little notice when an agreement is needed. Maybe an agreement for that day only, signed online before the showing?
Short-term, buyers face stiff competition when making offers and fear of not winning may supercede fear of not having an agent. Buyers may falsely be convinced the list agent is there to help them with the process. Certainly some flat fees companies may spring up but these options have always been there and little used. Buyers will find flat fee brokerages will put limits on representation they are not used to: number of homes that can be shown, hours agent can be reach, number of offers that can be made., etc.
Then in a few years lawsuits brought by screwed over buyers will highlight why buyers need their own agent, and the industry and the law will make changes making it easier to hire one without going out of pocket. Probably the law changed so that commissions will be allowed to be rolled into the loan.
No doubt there is a focus on the amount of commissions both sides have been receiving. It was seen as excessive even before the NAR lawsuit. So perhaps the percentages might be reduced to a new standard of say 2% per each side?
More to follow, enjoy the ride…