You might have heard of the recent 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 CAR (California Association of Realtors) listing contract already states that commission is negotiable, and 5% (2.5% split evenly between listing and buyer agent) is the norm.
Key Changes
- Changes to Buyer Compensation: Sellers can no longer offer compensation to the buyer's broker through the MLS. Instead, compensation must be arranged separately. This aims to address perceived commission fixing. However, the commission can be listed on the brokerage’s website for that listing. For example, as we are Compass agents, our listings on the Compass website could list commission for the buyer agent.
- Binding Buyer-Agent Contracts: Buyer's agents will be required to sign contracts with buyers before showing properties, clarifying responsibilities and payment terms.
Impact for Buyers
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, with many buyers already stretched thin to gather down payments, the need for strong representation is heightened. In situations where sellers don't offer commission to buyer agents, adept negotiation becomes crucial.
Impact for Sellers
Sellers have the option to save money by solely compensating the listing agent, with the choice to opt out of paying the buyer agent's commission. However, this approach might prove to be shortsighted. By forgoing the payment to the buyer agent, sellers risk diminishing the pool of potential buyers for their property, thereby losing the advantage of multiple offers. Our research indicates that sellers typically secure the most favorable price for their home when they receive multiple offers, prompting buyers to submit competitive bids. These superior offers often outweigh the combined commissions. Therefore, sellers must carefully weigh the trade-off between saving on commissions and limiting the interest in their property from potential buyers.
Buyer-Broker Agreement
Requiring written agreements between agents and buyers ensures clarity and protection in real estate transactions. These agreements define the terms of the agent-client relationship, covering services, commissions, and responsibilities. For agents, written agreements formalize their efforts and secure compensation rights. In the competitive Bay Area market, working with buyers can be time-consuming, often requiring multiple offers to secure a home. For buyers, these agreements set expectations and clarify received services. Ultimately, written agreements foster transparency, accountability, and smoother transactions.
The Outcome
If accepted, these changes could take effect as early as July. However, there's likely to be confusion and adjustments as the market adapts. Some local brokers are already advising sellers to offer lower fees to buyers' agents. 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.
We’ve assisted many clients in accomplishing their real estate objectives and each one has recognized and appreciated the value and expertise that a top-notch agent brings to the table, demonstrating their willingness to invest in full-service support—especially considering a home purchase is one of the most important investments of a lifetime.
If you have questions, reach out! We're here to help.
