The National Association of REALTORS Settlement Explained
By now many of you have seen the news headlines putting real estate commissions and property values front and center, taking a big swing at agents across the US. A lot of this has been sensationalized, and in many cases is incomplete or plainly inaccurate.
As such, I thought it important to share with my community and client family some key takeaways for what this actually means for you. The following is a breakdown of the NAR Settlement ruling, what it means for you as a buyer or a seller, and answers to Frequently Asked Questions.
Here is what the NAR Commission Settlement ruling could mean for you.
Key Takeaways for Buyers
Written buyer-broker agreements for agents acting on behalf of buyers will be required. This document outlines your agent's responsibilities, how their commission will be paid and by whom, and gives them permission to begin working on your behalf and legally advocate for you. It’s similar to a listing agreement agents sign with sellers.
The underlying responsibility to pay the buyer agent's fee will fall onto the buyer as specified within their buyer broker agreement. However, buyers can specify within their offer that this fee will be a seller responsibility paid out of seller proceeds. You will also likely see it become commonplace for sellers to preemptively offer to cover buyer concessions including the buyer broker fee.
Key Takeaway for Sellers
Sellers and their agents are now prohibited from explicitly listing their offer to pay the buyer broker commission in the MLS. Historically, the buyer's agent fee was coupled with the listing agent fee within the listing agreement that sellers signed with their agent. This fee was then posted on the MLS for buyer agent visibility. Come July, seller offers of compensation can continue to be an option only through off-MLS negotiation and consultation with real estate professionals. However, sellers can still offer to pay buyer concessions on an MLS (for example—concessions for buyer closing costs which may include buyer broker fees).
Frequently Asked Questions
Q: Can a buyer still ask a seller to cover payment of their buyer broker fee through the proceeds of the sale?
Yes. I believe this will be the new norm for how we conduct business in the Bay Area. Sellers here are savvy and forward thinking enough to know that not offering to pay the buyer broker fee may significantly decrease their sale price. The most likely scenario is that sellers will continue to offer to pay the buyer broker fee in the form of a concession, and as a result the fee will remain embedded into the sale price. The CAR(California Association of Realtors) purchase agreement already has a paragraph dedicated to transferring the buyer broker fee from buyer to seller responsibility, and this will likely be coming shortly to the SFAR (San Francisco Association of Realtors) purchase agreement.
Q: Weren't fees always paid out of the buyer's offer price?
Yes. Although the seller has historically signed an agreement saying broker fees come out of their proceeds of the sale, the source of those funds is the buyer's offer. So to put it plainly, commissions have always been paid by the buyer, embedded in their offer price. This new rule introduces clarity and transparency surrounding the structure of how a buyer’s agent is paid, which is a good thing.
Q: Why would a seller want to offer to pay a buyer's agent commission?
Because if they don't, the buyer will have significantly less purchasing power. Consider this scenario: A buyer has a budget of $1M to buy a home. They have finally saved $200K to put down the minimum 20% down payment to avoid private mortgage insurance, and are maxed out on liquid funds. If a seller is paying the buyer's agent fee of 2.5% (or $25,000), then this fee is embedded in the offer price and the buyer can offer their full budget. Now what happens if the seller no longer offers to pay the buyer's agent fee of 2.5%? In this case, the buyer has to come out of pocket $25,000. They now only have $175K to give the bank, which becomes their new 20% down payment. At this down payment, the buyer's budget drops to $875K. So instead of paying a $25K commission to the buyer's agent, the seller is now losing $125K on the offer price.
Q: Why wouldn't a buyer go straight to a listing agent instead of paying a fee to have their own agent?
It is a conflict of interest. The importance of the buyer-agency relationship is that you have someone with a fiduciary duty to provide advocacy and act solely on your behalf. California is a Title & Escrow state, not an attorney state, and therefore buyers rely on their agent to review, explain, and fill out the purchase contract, explain seller disclosures, and analyze comps to make sure they offer the right price on the home (particularly in areas like San Francisco and Marin, where the listing price is rarely the sales price). A listing agent's job is to get the highest price for their seller. How then, can buyers be sure this same agent will act on their behalf or prevent them from overpaying for the house? Further, with inventory levels so low, demand is at an all time high and so is competition. In order to secure a home here, buyers often rely on their agent's relationships, their access to off-market listings, and their ability to negotiate effectively on their behalf.
Personally, I am encouraged by this newfound transparency surrounding how agents are paid. I believe it will elevate the profession and raise the standard for new agents entering the business. Real estate commissions have always been negotiable, and fair market value will determine the difference, if any, in the amount agents are paid. This also may vary from state to state and market to market. The reason commissions are higher in the US than anywhere else in the country is because buying real estate in America brings the most value and return to homebuyers. It has been the main investment vehicle for the average person, which has transformed the middle class of America. Americans build wealth when they buy real estate here more than anywhere else in the world, in part because the US offers unique incentives for real estate investment (e.g. deductions, capital gains, depreciation, etc.). Further, other countries offer much less protection to the buyer, including less due diligence, disclosure, and ethics. So while real agent commissions may be higher here relative to other countries, the aforementioned is a big reason why these commissions exist and how this business model has sustained itself for so long.
If you have additional questions or would like to discuss further, please don’t hesitate to reach out.
