How Will the NAR Settlement Impact You?
NOTE: This article has been updated to reflect recent changes that will take effect on August 17, 2024.
You might have heard of the headlines concerning the National Association of Realtors (NAR) and their proposed settlement to address a class-action lawsuit originating from Missouri. The lawsuit accused NAR and local brokerages of colluding to fix real estate commissions at a non-negotiable rate of 6%, specifically in Missouri. The court ruled against NAR, ordering damages of $1.8B with the potential for punitive damages exceeding $5B.
Surprisingly, rather than pursuing an appeal, NAR opted to propose a sweeping settlement that will impact real estate transactions nationwide. While the settlement may bring about positive changes, imposing uniform regulations in an industry as diverse as real estate raises concerns.
In California, where real estate practices differ significantly, the need for such drastic change is debatable. Our listing contract had always stated that commission is negotiable.
Key Changes
BUYER IMPACT
Decoupling the listing commission from the buyer's commission means buyers may now be responsible for their agent's fees. This could deter certain buyers, particularly those with tight budgets such as first time buyers, or restricted financing options, such as military personnel using VA loans. In the pricey Bay Area, many buyers are already stretched to their limits trying to gather a down payment.
- Binding Buyer-Agent Contracts: Buyer's Agents will be required to sign contracts by law with buyers before showing properties. Requiring written agreements between agents and buyers provides clarity and protection for both parties.
- These agreements, commonly known as "Buyer-Broker Agreements," are required to outline 1) the responsibilities of the buyer's agent, and 2) the agreed-upon compensation for the buyer's agent, 3) define the specific areas/properties covered by the agreement and the timeframe.
SELLER IMPACT
In the past, in the California Association of Realtors (CAR) Listing Agreement, the listing brokerage would request a fee when selling the house, which would be shared with the buyer's brokerage. Changes are being made to remove the Buyer agent’s compensation from the listing agreement, as the Department of Justice has had concerns about this practice. Despite this, sellers will still be able to offer compensation to the buyer's brokerage, but the process will change.
- The updated CAR Listing Agreement no longer includes any reference to cooperating compensation to the buyer's brokerage. As a seller, your focus is solely on your listing agent’s compensation.
- While it is still permissible to offer Buyer Agent compensation, it cannot be displayed on the Multiple Listing Service (MLS), leading to the removal of the commission field in the MLS. It can be displayed on Compass’ website, the property website, the listing agent’s website and in marketing materials.
- If a seller chooses to compensate the buyer's brokerage, this is now managed through a separate addendum, and the payment is made directly from the seller to the buyer's brokerage through escrow. Alternatively, the seller can simply state that they prefer not to compensate the buyer's brokerage at all.
OUR THOUGHTS
Sellers can save money by only compensating their listing broker, but this may be short-sighted and reduce the buyer pool for their home. Here are a few considerations for the seller:
- Offering commission to the Buyer's Agent excites buyers and garners more attention for the home, increases the likelihood of multiple offers, selling more quickly, and is ultimately likely to secure a higher sales price that would pay for the Buyer Agent commission.
- Conversely, buyers without the funds (such as first-time buyers), may overlook a property due to financial constraints, leading to fewer offers.
- A professional buyer agent is crucial for a successful close, as many factors can lead to complications and transaction failure.
- Unrepresented buyers will require more of the listing agent’s time (if they even agree to work with an unrepresented buyer), and may increase the commission the listing agent will charge.
GOING FORWARD
These changes will take effect on August 17, 2024, and we expect it to be confusing and chaotic for the next several months at a minimum as the market adapts. The lawsuit's claim of reducing housing costs is uncertain for our local Bay Area market. High prices stem mainly from low inventory. To tackle this issue, the government should explore methods to motivate more homeowners to sell their properties. This might include measures such as lowering interest rates and updating the capital gains tax exemption, which has remained unchanged since 1997 and is severely outdated.
Article updated August 1, 2024
