What the NAR Settlement Means for Real Estate Investors
Real estate agent fee structures may be changing. And that could have a big impact on real estate investors…or not.
Last month, the NAR (National Association of REALTORS) proposed a settlement to resolve litigation brought by home sellers regarding real estate agent commissions. Home sellers accused NAR members of colluding to keep real estate agent commissions high and to force sellers to pay the fees for the buyer’s agent as well as their own agent.
In reality, agent commissions have always been negotiable between the seller and the seller’s agent (aka, the listing agent). There was never a “6% rule” stating that the seller had to pay 6% of the sales price in real estate fees. It just happened that most local markets settled at the 5-6% range, which is the amount sellers were willing to pay, and agents willing to accept. The seller’s agent would then split this fee with the buyer’s agent. This is because most buyers don’t have liquid funds to pay their own agent after paying the down payment, closing costs, and moving expenses. But we, as a society, felt buyers deserved professional representation. That’s why this commission structure has been in place for so long.
So it was surprising when the NAR proposed a $418 million settlement and agreed to make some changes in how agent commissions are handled.
Let’s look at those changes and what they could mean for real estate investors.
What Are the New Rules Under the Settlement?
The settlement hinges on two new commission rules:
- Listing agents can no longer publish a buyer’s agent fee on the MLS (Multiple Listing Service). The MLS is the database of homes listed for sale. Traditionally, the listing agent would publish the commission a buyer’s agent could expect to receive once the deal closed. This information is no longer allowed. However, there is no rule saying that listing agents can’t offer a buyer’s agent commission. The information simply can’t be listed on the MLS.
- Buyers must have a signed agreement with a buyer’s agent before seeing any property. Traditionally, buyers could have an agent show them properties without committing exclusively to that agent (although experienced buyer’s agents typically requested a commitment early in the home search process to protect themselves). The settlement requires buyers and agents to have an agreement in place upfront, and this agreement must address the agent’s compensation.
What the Proposed Rule Changes Mean for Investors
It’s difficult to say at this point how the market will respond to these changes, but here are the likely scenarios:
Scenario #1: Business as Usual
There is nothing in the settlement rules preventing sellers from helping cover the cost of the buyer’s agent. And, with so many buyers struggling to purchase homes due to high upfront costs, motivated sellers are likely to offer concessions to buyers to help them pay for their agent so they can complete the purchase. This would incentivize other sellers to do the same to remain competitive.
Instead of paying 5-6% to their agent, who would split the commission with the buyer’s agent, the seller might pay 2.5-3% to their agent plus another 2.5-3% to the buyers so they can pay their agent.
For real estate investors, this would mean that some of the language in the purchase agreement would change, but this would make no tangible difference to the transaction.
Scenario #2: Real Estate Commissions are Dramatically Disrupted
Some of the home sellers who brought suits against NAR are aiming to force buyers to pay for their own real estate agent fees. In fact, as of mid-April, there is some concern that the Department of Justice (DOJ) will step in to amend the settlement and require buyers to pay their own agents.
This would be a major disruption to the real estate industry, which could lead to any or all of the following:
- Real estate agents could accept lower commissions. Real estate is a more difficult profession than outsiders realize. Most industry insiders believe a 5-6% total commission is fair because the amount is split between buyer and seller agents, each of whom must pay a large cut of that (often 25-50%) to their supervising brokers. And, since agents are not employees, they cover their own self-employment taxes, retirement, and healthcare expenses from their earnings. Many agents are not in a position to work for less. However, we could potentially see more tiered packages from buyer’s agents.
- More buyers would be forced out of the market. Vulnerable first-time buyers would have another substantial hurdle to homeownership. Military service members, veterans, and their surviving spouses would be unable to use VA funding to purchase a home because the VA prohibits VA buyers from paying any real estate fees.
- Property values could drop. The attorneys in the suits against the NAR argued that home prices would fall if sellers didn’t have to pay such high real estate commissions. One could argue that it’s more likely the sellers would pocket the extra money saved on real estate fees rather than voluntarily reduce the home price. However, with more buyers forced out of the market, it would be possible to see falling home values.
For small-scale real estate investors, this type of disruption would make it harder to buy an investment property. On top of the down payment, closing costs, and renovation expenses, you would have to pay out-of-pocket for your real estate agent.
For larger-scale investors, this would increase your acquisition costs if you have to pay your own buyer’s agent, but it is possible that home prices could come down if there is less buyer competition.
All real estate investors could be hurt by falling home prices, which would reduce the value of their real estate portfolios. A declining market could be a good opportunity to buy new properties, but the savings could be offset by the buyer’s agent fees. And all investors could save money on the back end if they don’t have to pay for the buyer’s agent when they sell a property.
The Bottom Line
With the uncertainty about how real estate agent fees may change in the next few years, now is a good time to diversify your real estate portfolio. You might consider buying a property before the NAR settlement rules go into effect (estimated for July 2024). Or you might choose an alternative real estate investment like real estate syndication to give yourself some protection against changing markets.