The settlement reached in the class-action suit against the National Association of REALTORS® (NAR) has the potential to radically change how real estate is bought and sold, but I feel that much of the reporting on the settlement has missed the mark.
Let me start at the beginning. Before the 1990s, all agents worked for sellers. The person driving you all over town all day long, showing you a dozen houses, counseling you on good neighborhoods, and helping you negotiate? They worked for the seller. This was an obvious conflict of interest.
That is why, during the 1990s, states started introducing buyers’ agency laws. Buyers’ agency ensures that real estate buyers could also have an independent agent bound by law to represent their best interest. Buyers’ agents are typically paid via a commission split that the sellers and their agents agree to pay.
Although much of the recent coverage of the NAR suit make it seem as though these commission splits are cheating homeowners and inflating real estate prices, the reality is that — like everything in real estate —commissions are negotiable.
In Pennsylvania, the standard Pennsylvania Association of REALTORS (PAR) listing contract has a place for the broker’s fee, and it is blank. Above the blank it specifically says that there is no set or recommended fee. There is also a place for if and how that commission will be shared with a buyers’ agent, and that too is blank. While real estate markets seem to have settled into patterns for what agents charge and what the split is, I can tell you that when I used to sell houses, there were times I was working for three different sellers at three different commission rates and with three different commission splits.
To understand the NAR settlement, you need to know that listing agents advertise commission splits through the Multiple Listing Service (MLS). The MLS was created by REALTORS to promote their sellers’ homes. Advertising the commission split lets buyers’ agents know that they will be compensated and ensures this compensation doesn’t need to be a negotiation point between buyers and sellers.
The settlement agreement with NAR will do away with this form of advertising. Moreover, it will require buyers and buyers’ agents to enter into a contract before the agent shows buyers a home. Stop and think about that for a moment. If you find a house you want to see, under the mandate of the NAR settlement agreement, you will have to sign a contract with an agent to go inside.
Because the commission split will no longer be advertised, alternative arrangements will have to be made for ensuring buyers’ agents are compensated. Either buyers’ agents will have to include their commission in the sale negotiation or seek compensation directly from buyers.
The former could be a test of whether comingling negotiations over commissions with negotiations over the sale of homes is detrimental to buyers and sellers. Since the PAR listing contract includes a section about splits, this could become little more than a formality, but sellers might see this as an opportunity to reduce their expenses by cutting out buyers’ agents. Some have suggested that this could lead to a rise in “flat fee” agency, which seems like a boon to sellers. This would actually be regressive, because the fee would be a smaller share of what a seller with a higher-priced home will make.
If buyers’ agents have to seek commissions from buyers, it could severely impact the ability of buyers to retain a buyers’ agent. Paying an agent may be cost prohibitive, and the money a buyer would have to pay an agent could have been used for a larger down payment or covering closing costs.
Working with buyers is already harder than working with sellers. You can have signs in 100 yards at one time, but you can’t show homes to 100 buyers at one time. Making it harder for buyers’ agents to receive fair compensation will make it harder to find buyers’ agents.
I don’t think any of us can really predict what this settlement will mean for buyers — who make up a fairly important half of the real estate market — but my instinct tells me that agents are going to be less inclined to work with buyers, and I do not see how that will benefit them in the long run.
Will Wood is a small business owner, veteran, and half-decent runner. He lives, works, and writes in West Chester.
