There is a total uproar in the real estate industry right now as headlines have emerged from every small, medium and large media outlet across the country about a $418,000,000 settlement that will change the industry forever. The problem is, no one knows the truth…
There have been several lawsuits involving the national association of realtors or NAR as i’ll call them going forward, that really didn’t get that much mainstream attention and were handled without this domino effect we see in the media today. Before I break it all down, I want to take a step back and talk about who the national association of realtors is, what their involvement is, and how it affects buyers and sellers like you going forward.
For those of you that didn’t know, A realtor and real estate agent are two different things, but the term is used interchangeably in and outside the industry. A real estate agent helps clients buy, sell and lease just like a realtor, has all the same required education and is licensed, but they just don’t belong to an association and may not have access to the multiple listing service or MLS system used to find property for clients depending on the state their licensed in since they wouldn’t be able to be apart of their local NAR board which gives access, some states provide private access though. A realtor is a trademarked term for a real estate agent who pays into being a part of the national association of realtors, has access to the local MLS through a local NAR membership, and must adhere to the strict code of ethics. All that to say realtors are held to a higher standard, and will be faced with repercussions if that code of ethics is broken, whether it be with a fee, court, or banishment from practicing real estate. As a Realtor, we pay membership fees to NAR as well as our local NAR board to get access to the MLS as well as receive support from the association when needed. NAR was founded in 1907 and has over 1.5 million members, making it the largest trade organization in the United states.
MICHIGAN REAL ESTATE PROFESSIONAL PAY STRUCTURE
With that background in mind, I want to touch on the pay structure that’s been around for a very long time in the real estate industry. For those of you that don’t know, when it comes to buying and selling real estate, the commission to do so has been an average 6% (I say average because it supports a point I'll touch on later), 3% to the listing agent, and 3% to the buyer's agent. The seller would pay 3% to compensate the listing agent for marketing the home, and 3% to the buyer's agent for bringing a buyer to purchase the home, and the buyer would pay the agent nothing for their service.
The problem with the dumpster fire we call modern media is, they blow everything so far out of proportion that it’s creating nationwide confusion, which makes their decisions and the real estate process much harder on them. It’s like telling your friend you scraped your knee at recess and had to go home, by the time it gets to the whole student body, your leg was amputated on the swing set and now you’re in a coma fighting for your life. It’s a views game, negativity performs much better than positivity. News articles saying buyers agents are no more, 6% commissions are gone, Realtors are now fighting over the last package of ramen noodles at the grocery store, it’s just all too much, and I’ve been asked and have asked people’s thoughts on the matter and their responses can’t be any farther from the truth. “So Andrew, are you looking for a new job now? Absolutely not, it’s just a change we have to adapt to.” So here’s the story.
NATIONAL ASSOCIATION OF REALTORS SETTLEMENT
NAR has agreed to pay $418 million dollars, after reaching a settlement in a lawsuit where a federal jury ruled that NAR had conspired to inflate commissions. Does the settlement mean they admitted to the allegations? No, it actually makes clear that NAR denies any wrongdoing in the cooperating compensation model on the MLS. This case has been going on for quite awhile as a group of home sellers in Missouri according to the NAR case alleged that commission rates are too high, buyer brokers are being paid too much and NAR rules lead to fixed pricing. The sellers argued that buyer representation is obsolete and should only be afforded to wealthy buyers who can pay for the services out of pocket. Essentially, in and outside of this lawsuit, sellers are coming together stating they shouldn’t have to pay both commissions, saying it’s not fair. And believe me when I say I feel for them, especially in a world where everything is so expensive and every cent counts, but they were once a buyer too who didn’t have to pay their agent for the home they are in now.
They make the money, they dish out the commissions, the buyer is paying the money, so they don’t.
That’s been the thought process behind this structure for decades and decades. Again, I get it, seeing that dollar amount going to the agents on your closing documents probably feels like a kick in the pants, and it’s a double edged sword because the agent doesn’t pocket all that money, the brokerage takes a large chunk for their commission split as well as monthly fees for their marketing, services and platforms, the franchise takes a chunk (if the agent works for one), taxes take a huge chunk as a 1099 employee, and then their left with X amount after all that. At the end of the day I get that it’s still your lump sum of money paying them, but realize the agents themselves aren’t getting paid as much as you think. I’m not over here begging for sympathy, i’m just shedding light on the argument of when people say agents get paid too much, and why they’re confused when an agent says their not, but it’s not your problem of course, I just think if the fees and overhead could be drastically reduced for agents from brokerages and associations, it would help consumers tremendously and be a win-win for agents, buyers and sellers.
NAR SETTLEMENT MISCONCEPTIONS
Jumping back to the settlement, Where the information is skewed is the media stated that 6% was the standard rate, when in reality, the percentage was always negotiable since day one, and if you read through the NAR handbook it doesn’t say anything about there having to be a 6% commission or 3% to each side. Even president Joe Biden said this settlement will make commissions negotiable for the first time even though they have always been. NAR does not set the commissions, and they will remain negotiable between realtors and their clients, and home prices are dictated by the market, and are far beyond NAR’s control.
HOW DOES THE SETTLEMENT CHANGE BUYING AND SELLING REAL ESTATE GOING FORWARD?
With all that being said, how does this settlement ACTUALLY change things for real estate transactions going forward? Glad you asked.
COMPENSATION OFFERS ARE NO MORE
The main thing is, compensation offers are going to be taken off the MLS in mid-July of this year, which I think is a great thing to do, coming from a Realtor myself. When we look up properties on the MLS, we can scroll down and see that the listing broker is offering a cooperative compensation of a certain percentage, whether it be 3, 2, 2.5, or anything in, around and in between, and we see that before we even show a home to a potential buyer. The reason I think this is a great change is if there were sleazy agents out there who saw the commission percentage being less than 3%, they could steer the buyer away and say “hmmm the foundation could get some water” as a buyer trusting that expertise you agree and maybe go look at a house offering 3% instead. Does this happen? No idea, I do want to believe most realtors are good, but if it’s reality, that business practice is disgusting, disappointing and any realtor who does that should have their license taken away in my opinion.
The question is, how will buyers agents be compensated then? And it can come in a few different forms, one being a fixed-fee commission paid directly by consumers, a concession from the seller (for example, concessions for buyers closing costs which then would be put toward their agents commission), or simply stated as a portion of the listing broker's compensation as it was before but this time in a contract or document between the parties and off the MLS. So again, buyers agents aren’t going anywhere, the way they are paid just has the potential to change, and it all is negotiable, as it’s always been.
REQUIREMENT OF WRITTEN AGREEMENTS
The second change is the requirement of written agreements for buyers agents acting on a buyer's behalf. We have buyer agency agreements already In Michigan and that’s why I think we will be least affected by this news, that state we are representing you and you choose to use us, which wasn’t ever required, but has been suggested by NAR to utilize for a long time, as it protects the buyers agent. I think this is a good requirement as well, not only because it protects buyers agents, but it creates more transparency and an outline for the services to be provided to buyers out there. Unfortunately, headlines like these that are blown way out of proportion, drive a bigger wedge between agents and consumers, which is something I myself have tried to combat since getting into the industry in 2017, demonstrating to consumers that I’m just a normal person, not an overly proper, dry personality, suit wearing sleazy salesman that is intimidating to talk to. I pride myself in the image I've created that I can assure you is the same on and off camera, and I wake up everyday loving what I do and what I provide to help buyers and sellers like you. Despite the larger wedge being created, I’m glad this second change combated that with more transparency.
WILL HOME PRICES DROP NOW?!
A misconception I wanted to make sure I reiterated is people think this settlement is going to drive prices down and make homes more affordable or make the transaction cost overall to decrease, which is very far from the truth, despite this change in compensation it’s not going to make the transaction cost any less, it just shuffles around who pays for what. Realtors do not determine the value of a home, buyer behavior (aka supply and demand does), and the biggest factor that is hindering affordability today are the mortgage rates which realtors and NAR have no influence over.
HERE ARE MY THOUGHTS ON IT AS A REALTOR
People have asked my thoughts on this outcome and what we will see more of going forward. Many news sources and Realtors have made videos, and sat in on interviews saying this won’t change much in the industry, business and usual, and that may be the truth that I'm leaning toward, but what if anything would? And In my opinion, I have a few thoughts in my head, but the uptick in these theories of mine would be so miniscule that it wouldn’t really affect anything anyway. Just topics of conversation at this point.
MORE DISCOUNT BROKERAGES
I think these headlines may cause the possibility of more discount brokerages to emerge, who agree to list your home for a major discount but ultimately not do very much to help the process and most often have sellers regretting their decisions.
MOM & POP BROKERAGES
I also think there could be an uptick of mom and pop brokerages, ya know the for sale signs you drive by and haven’t heard the company name before, yeah those ones, which allows the buyers agents to reduce overhead a little bit (but take on much more liability as a result) if for some reason commissions are negotiated more often below that 3% average amount.
DUAL AGENCY
And lastly, the biggest potential change or result is an uptick in dual agency. Dual agency is something I thought would’ve been removed as a result of this settlement, and that’s the ability for an agent to be the buyer's agent AND the listing agent within the same transaction. Of course we are required to disclose we are the agent on both sides of the transaction and both parties need to sign agreeing to that representation, but at the end of the day, how could you possibly work in the best interests of both parties? Again, I’d like to think all realtors are good, but if a seller's goal is to get as much money as possible for the home, while the buyer’s goal is to get a deal, more times than not there’s not going to be a perfect meeting of the minds. Even though in a perfect world, that’s an ideal situation.
And that’s why I think change number two is important for singing buyer and buyer agent agreements, as buyers may walk around buyers agents and go right to the listing agent, and the agent then tells the seller they will do both sides of the transaction for less, but again, that would not be in everyone’s best interest, and when it comes to a large financial decision like a house that you’ll spend an average of 7-10 years in, representation is crucial, even if the upfront cost is more, because in the long run, you will be paying less if you have someone working solely on your behalf.
For all of you out there who see the headlines or simply read this blog post, what are your thoughts on the settlement? Drop them in the comments below.
Cheers,
Andrew
Andrew McManamon is a Michigan REALTOR® with Signature Sotheby’s International Realty and provides real estate services to Buyers, Sellers and Investors throughout SE Michigan including Livingston County, Oakland County, Washtenaw County, Genesee County & beyond. Andrew has become one of the pillars of Michigan real estate. Prior to his real estate career Andrew was responsible for managing a senior living facility in Brighton, Michigan as a dining supervisor and an activities assistant. Andrew’s passion to help people is unlike any other, and he continues to strive to be best resource he can be. Andrew graduated from Cleary University in Howell, Michigan with a double major and currently resides in Brighton, Michigan.
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