NAR Settlement Discussion

by Amanda Martin

There is a big conversation in the world of real estate that most people have become aware of in one way or another at this point: Buyer Agent Commissions and the lawsuit that was recently settled by NAR (National Association of Realtors) that will take effect in July (or maybe August) of this year. The headlines are eye-catching and dramatic, and that’s not surprising since that’s what people respond to, but I would say there are a lot of misunderstandings and incorrect assumptions that people are making here.

So, here’s MY TAKE of the situation:

There is no such thing as a standard 6% selling commission. Commissions have always been negotiable between the seller and the agent. While it is true that, in general, there would be a commission amount somewhere between 5-6% paid by the seller, with a portion of that going to the buyer’s agent, there are all sorts of variations that break out of those generalities. It has been tradition that the buyer’s agent would be paid out of escrow from the seller’s proceeds at the close. That number also varied, but most agents would agree to share at least 2-3% of their total commission with the buyer’s agent, and this agreement was solidified in the listing agreement that is signed between the seller and listing agency/broker.

The NAR settlement now makes it so that it’s not allowable for the commission amount going to the buyer’s agent to be advertised in the MLS. It would still be allowable for the seller to offer payment to the buyer’s agent, they just can’t put it in the MLS – so, that will create a lot of confusion until a new system of communicating this effectively falls into place or is created by a different platform. I think that transparency is very important and I’m all for the buyers knowing how much is being paid to their agents, and for the sellers to be able to negotiate how much they would like to (or not) offer to the buyer’s agent. I am concerned that there will be many unintended consequences to this decision.

Here are MY CONCERNS:

• Buyers (especially in the Bay Area) are typically just barely able to cobble together the large down payment to purchase a property. By shifting the cost to them instead of the seller, they will have less buying power. This will give a huge advantage to institutional buyers or cash buyers/those with very deep pockets.
• Buyers who do not have deeper pockets will be tempted to go without representation, or to go with the listing agent for representation, or choosing a discount/flat fee service. All of those options have downsides for the consumer:

1. Going without representation means having no support in what can be a very complicated transaction.
2. Going to the listing agent – that is dual agency/dual representation – in many states this is not even legal, and I would argue it shouldn’t be legal in California either (having the same agent represent both the seller and buyer – not just dual agency where two agents from the same brokerage represent each side).
3. Going with a discount/flat fee brokerage – this may be OK for some buyers, but the level of hand-holding is incredibly low, and if anything out of the ordinary happens (which happens a lot in the world of real estate) they are not going to help you weather the storm in a way that a thoughtful, dedicated, and experienced Agent with a high level of service can do. Having managed a brokerage for 3 years with 30 agents, I can tell you that all kinds of odd things can and do come up. Additionally, going with a flat fee/discount brokerage will not get you the level of market knowledge and negotiation skills needed in a sophisticated and fast moving market such as we have here in the Bay Area. The bottom line is that it can cost you more than you can save.

All of that said, THERE ARE GOOD THINGS that will come out of this once the dust settles, and here’s what I think those things are:

• There will be more transparency about the true cost of services and representation. Buyers who may have put up with underwhelming service because “The seller is paying” may be more discerning in the representation they demand – I welcome this! Sub-par buyer agents who do not do their homework, and do not provide stellar service to their clients, will find business harder to come by.
• I believe this new rule will create better efficiency, trust, and understanding between agents and their clients. Buyers will have to sign an agreement with any agent they engage for showing property. As it stands now, some buyers just mow through agents making appointments with any Zillow or Redfin agent to get showing appointments with no intention of ever working with them, and then will go with a totally different agent to write an offer. Or, they may ditch an agent they’ve been working with for a long time (viewing properties, reviewing disclosures, getting market updates and research assistance with areas or properties) when it’s time to write the offer because they want to get a credit back from a discount broker, or think they will have a better chance writing their offer with the listing agent..
  Here are some ways that I see this playing out over time in the marketplace (this is only my prediction – time will tell for sure!)
• Part time/inexperienced agents who don’t keep up will exit the market.
• Buyers’ agents’ commissions will be negotiated more frequently. More buyers will pay their agent directly and then receive concessions from sellers to cover some or all of those fees. That means many sellers will likely still be effectively paying the buyer agents.
• Lenders may find ways to package the buyer agent fees into the body of the loan so that the buyers don’t have to come up with the cash to pay at closing.

Ultimately, after the storm passes, those agents who show their value will still be valued – both by sellers and buyers. I believe they will be paid commensurate with their value. I’ve worked with agents in various states and areas, and I have to say that San Francisco has a very large concentration of professional, dedicated, collaborative, passionate agents who work incredibly hard for their clients. They take their fiduciary responsibility to their clients very seriously. I feel fortunate to have these people as my colleagues. The real estate landscape is evolving, and while challenges lie ahead and we may have some choppy water over the next year, I’m optimistic about the lasting benefits this shift can bring to our industry.