Residential realtors are going to have to figure out how to make more the same amount of money with fewer transactions. Meanwhile, brokerages look at alternative compensation structures verses the legacy split models, to retain talent as the realtor herd is expected to thin.
On Jan. 3, I sat in a room with other real estate brokers and listened to an update from the National Association of Realtors (NAR) lawyer following the loss of a monument case in November. The case alleged that realtors were violating antitrust laws by imposing inflated commissions on home sellers.
In that meeting the lawyer assured everyone that settlement and a subsequent change to the rules was not an option. The lawyer also indicated that the case would be appealed, and it would be five to 10 years before any actual resolution occurred.
The only question I asked the lawyer was if the lawsuit would have any impact on commercial property, land transactions or property management in any way. I was relieved that the answer was “no.”
Two months later NAR caved and settled the case.
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The settlement and rule changes are going to have a substantial effect on the real estate industry and home-buyers’ ability to have much needed representation. Many articles however, such as CNN’s “The 6% commission on buying or selling a home is gone after Realtors association agrees to seismic settlement” are flat out misleading.
More things will remain the same than are changing. The main difference is that residential agents who specialize in buyer representation have a lot of things to be anxious about.
The first misleading statement that has been propagated in articles nationwide is that the average five to six percent commission is going away. Commission rates are set by each brokerage and are market driven. NAR has never dictated what the commissions were to be charged.
Two main changes are coming. The first is that buyer agent fees will no longer be listed in the MLS. The second is that buyer agents must have an agreement in writing if they are going to represent a buyer.
The second rule has always been in practice, at least in Georgia. The effect from the first rule change remains to be seen.
“You can still offer compensation to a buyer broker. It just can’t be conveyed on the MLS,” Sears stated. “You will need to have a written agreement if you are representing a buyer. This has always been a practice but will now become a rule.”
If approved by the judge overseeing the settlement, the rules changes would go into effect July 1.
The market has a way of correcting course, though.
Home buyers need representation. Some naysayers might disagree with me here and point out examples of individuals buying or selling property by themselves. In my 18 years of working in the real estate brokerage world, I have never met a homebuyer who wouldn’t have benefited from working with a good realtor.
A home is the most important investment most people will ever make. The process of buying and selling is complicated and filled with landmines.
One thing that will not change is that sellers will still have broker representation. Those who don’t have a listing broker are fishing from a tiny pond while those who hire a broker have an ocean of buyers. The more exposure a listing gets, the more potential buyers see it. The higher the number of buyers, the higher the price. This is why for sale by owner (FSBO) homes almost always yield lower prices.
Realtors who specialize in listings are going to be largely unaffected by the rule change. Those listing agents will have to decide how to handle the buyer’s agent commission at the listing appointment. This is something where nobody knows what is going to happen. A listing agent’s job is to get the most exposure to a property. But if a buyer’s agent won’t or can’t show the property because there is no buyers agent fee then the seller will likely yield a lower sales price.
Buyers who go unrepresented are going to get screwed. It’s not a matter of if but when. It’s a matter of how hard and how much it’s going to cost them. Listings agents look out for the seller period and buyers are a dime a dozen these days. The market will truly turn into a buyers-beware zone.
Buyers who sign an agreement with a competent realtor have to figure out how to pay the agent. Current lending rules won’t allow buyer commissions to be classified as “buyer closing costs.” This puts the burden on buyers to come up with more cash to be able to purchase a home. In a time of increasing home costs and raising interest rates, paying a broker is going to price many buyers out of the market. This is likely to have an even larger impact on lower income buyers.
If lending rules change, the buyer’s fee could be negotiated and paid by the seller as a closing cost. That is a big “if.” That would result in a return to the status quo with the seller paying a market rate commission, both sides having representation and protection and buyers not having to come up with more cash to be able to complete the transaction. If lenders don’t provide this relief home sales are going to slow down.
Realtors are likely going to feel a huge impact as sellers attempt to negotiate lower fees. What most people don’t realize is that most realtors are buyer agents. Listing agents make a small percentage of realtors. According to NAR, the average realtor earned $56,400 in 2022 and completed an average of 10 to 15 transactions. NAR doesn’t break this out between buyer and listing agents, but my own experience is that listing agents perform much better.
The result is going to be many buyer agents leaving the industry. A thinning of the herd is not always a bad thing as long as the quality of those that remain is stellar. NAR statistics also indicate that 20% of realtors are in their first year in the industry, while the average years of experience is 11.
One last effect on the market is going to come from the brokerage side. Commission rates are market specific and so are fee structures between a realtor and a broker. Brokerages are going to have to get more creative to enable their realtors to earn enough to stay in the industry. This means the traditional splits that have been offered in the past are going away. In many markets this has already occurred. These legacy structures are going to be a thing of the past as the industry tightens its belt and holds on for what are going to be turbulent times.
