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A few weeks ago, an anti-trust lawsuit against the National Association of Realtors (NAR) was settled for 419 million dollars. News reports announced this would slash commissions by 25% to 50%. How would that happen?
First, a quick look at how selling and buying through an NAR realtor has worked. A seller offered a commission (6% being standard) from which both their broker and the buyer’s broker were paid, with the typical offer to the buyer’s agent at 2.5% to 3.0%. That information was displayed on the listing so buyers’ brokers would know what they would receive. The plaintiffs argued that sellers who offered a low amount to the buyer’s broker disincentivized the agent to show their property, so sellers would want to offer “the going rate” that buyer’s agents expected to be competitive.
Going forward, NAR will not allow sellers to advertise how much they will offer the buyer’s agent. The idea is that buyers’ agents are not going to agree to what will essentially become a raffle to see what they will be paid when they sell a specific property. Instead, the agent will sign an agreement to work for the buyer for a set fee or percentage of the sales price that will come directly from the buyer’s pocket. The seller will most likely continue to pay 2.5 to 3.0% to their agent. Basically, the court is seeking to move the burden of paying the buyer’s broker from the seller to the buyer.
Is that good news for sellers? Maybe.
The problem is that most buyers don’t have funds to pay their broker out of pocket. Current lending practices don’t allow buyers’ brokerage fees to be added to the cost of the home. They need to be included in the price of the house so they can be paid out of the proceeds of the mortgage loan.
The settlement hopes this change will force buyers’ brokers to work for less. As with so many well-intended regulations, there will be unintended consequences. Faced with the prospect of doing the same work for a 25% to 75% pay cut, how many buyers’ brokers will even stick around to show the homes of sellers who list with a realtor?
Another important point: this only applies to real estate agents who are members of the NAR. Agents who are not members can advertise what the seller is offering buyers’ brokers. This gives a competitive edge to properties listed with non-NAR agents.
In the past, brokers who were not NAR members could not list their properties on the NAR-owned Multiple Listing Service, which is to real property what the New York Stock Exchange is to stocks. It provides an efficient marketplace in which to buy and sell property and is a significant advantage of NAR membership.
That is no longer the case. Another little reported requirement of the settlement is that NAR can no longer exclude non-members from using the MLS. Does that mean a non-member can put a listing on the MLS that advertises what the seller will pay a buyer’s broker? Right now, I don’t know.
A lot of real estate agents will be cancelling their NAR memberships. In part that will probably be a reaction to the higher membership costs that will be needed to pay off the $419 million settlement. As one realtor put it, “This probably means the end of NAR as we knew it.”
If NAR dissolves, its robust education, ethics requirements, and the MLS platform will disappear as well. The process of buying and selling property could be set back by 50 years.
Rick Kahler, MS, CFP®, CFT-I™, CeFT®, CCIM, is the founder of Kahler Financial Group, a Rapid City, SD-based fee-only Registered Investment Advisor.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
