Separating Fact From Fiction for Home Buyers

The recent settlement between the National Association of Realtors (NAR) and plaintiffs represented by class-action lawyers has garnered much attention in the media and elsewhere.

Unfortunately for home buyers, many in the media and individuals up to the President of the United States have misspoke and made inaccurate and misleading statements about what the settlement means for consumers.

Home buyers must have accurate information about the settlement. Buying a home is already complex and especially difficult when searching and buying in a real estate market favorable to sellers.

Consumers should know that the U.S. Department of Justice advocated for some of the “practice changes” agreed to in the settlement agreement.

What Did the Parties to the Lawsuits Agree Upon?

The NAR and plaintiffs agreed to a lengthy settlement agreement, which includes, among other things, who was and who could be covered by the settlement and the creation of a settlement fund. Of course, money is part of the settlement, and it’s a lot of money ($418 million).

What’s essential for home-buying consumers to know are the “practice changes” agreed to in the settlement. Those changes may profoundly affect home buyers, especially first-time and lower-income home buyers. These changes will take effect in July at the latest, possibly sooner.

In a nutshell, these are the two practice changes prospective home buyers should know about. 

• NAR agreed to create a new multiple listing service (MLS) rule prohibiting compensation offers on the MLS. This change would mean listing agents could not make compensation offers for buyer agents via an MLS; however, compensation offers could continue to be an option consumers pursue off-MLS through negotiation and consultation with real estate professionals.  

• NAR also agreed to create a new rule requiring MLS participants working with buyers to enter into written agreements with their home buyers before the buyer tours a home with their buyer agent.

The 108-page settlement agreement, which a federal judge must approve, goes into greater detail, but the above summarizes some key points for consumers.   

Are Real Estate Commissions Now Negotiable? 

The biggest misconception is that real estate commissions were not negotiable before the settlement. They were always negotiable, and all real estate brokers do not charge the same or “standard” commission rate. Even President Biden got this fact wrong.

Real Estate market conditions, agent experience, service levels, and other factors have resulted in various compensation and business models. Consumers also have choices regarding the type of real estate buyer agent they work with.

Despite all the talk about the 6 percent commission, few real estate listing agents receive a 6 percent commission from home sellers in Massachusetts, New Hampshire, or Rhode Island. As for buyer agents, the majority of compensation offers are 2 percent, and some buyer agents offer consumers rebates under certain circumstances. There is no standard commission rate. 

Will the Settlement Result in Lower Real Estate Commissions? 

Real estate commissions across the United States may trend lower over time, but market conditions will likely have more to do with that than these practice changes. Commissions have decreased over time in expensive real estate markets like Greater Boston.

For home buyers, the settlement might result in higher costs or, even worse, no professional representation. For individuals who have purchased homes, they were likely happy to have the seller compensate the buyer. 

For home buyers who had to save for a down payment, home inspection, and closing costs, having the commission paid by the seller and incorporated into the home price allowed them to finance the commission over time instead of needing additional cash at closing.

With the added burden of saving for a buyer agent commission, home buyers will either forego the American Dream or professional representation. The practice changes will most impact lower-income and first-time home buyers. Also, sellers might benefit most from the changes in a seller’s market, and home buyers might benefit most in a buyer’s market. In other words, market and economic conditions will prevail, as they should. 

Are Real Estate Commissions the Reason for the Housing Affordability Crisis?  

Sellers will continue to market their homes for what they think the property is worth. Home prices have risen substantially in Greater Boston over the past five years due to dwindling inventory.

According to a report published a year ago, the Boston Metro area ranked 35th out of the nation’s top 50 largest metropolitan areas in building housing. Axios reported in July that “Boston significantly trailed the national average for building new homes, showing that Massachusetts has a long way to go to increase stock and confront its housing crisis.”

There isn’t any connection between housing affordability and real estate commissions.

The media’s speculation that the settlement will cause home prices to decline is just that – speculation. The free-market economy determines home prices, driven by supply and demand.   

Does the Settlement Do Anything to Reduce Dual Agency? 

Unfortunately, the settlement might increase dual agency, which occurs when the same real estate agent or brokerage represents the buyer and the seller in the same transaction.

Some home buyers will believe their only option under the proposed practice changes is to go directly to the listing agent to tour and make an offer on a home. The conflicts of interest are apparent when a real estate agent has one client negotiating against another. In such a case, the agent’s ability to provide proper fiduciary duties to both parties is limited. A real estate agent cannot simultaneously negotiate the highest price for the seller and the lowest price for the buyer.  

Are There Any Positive Changes in the Settlement Agreement for Home Buyers? 

The good news is that prospective home buyers will still have the choice to work with a real estate buyer agent. In addition, sellers can offer to pay buyer agent commissions off the MLS and other concessions, such as closing costs, via the MLS.

The settlement will make the details of how real estate professionals receive pay more transparent. Also, real estate offices covered by the settlement must “develop educational materials that reflect and are consistent with” the practice changes. Given some of the current practices of real estate firms, such as suggesting buyer agent services are free, updated and accurate educational materials are needed.

Changes seeking transparency are good for consumers and the real estate industry.

More than ever, home-buying consumers need to select their real estate buyer agent carefully.