In a significant development this month, the National Association of Realtors (NAR) agreed to a settlement in the class-action lawsuit known as Sitzer | Burnett, pending judicial approval.
This lawsuit centered on the practice in U.S. residential real estate transactions, where sellers hire an agent for a fee to represent their interests. In turn, the seller’s agents offer a PORTION of their fee to the selling agent (the buyer’s agent).
Sadly, there are a lot of agents that do not fully explain this to their clients nor sign agreements with their buyers, explaining the commission to BOTH sides.
That, coupled with a flurry of media coverage which demonstrates a skewed understanding of the real estate industry is propagating various misconceptions.
It’s crucial to dissect and address these inaccuracies for a clear perspective on the settlement’s real impact and what the potential impact could be to sellers AND buyers…
NOTE: I will be using 3% as the illustrated commission for each the buyer side and seller side in this illustration. But, as has always been, commissions are 100% negotiable and can be negotiated up or down from there, a flat fee, etc.
Myth #1: Sellers Will No longer Pay Buyer Agent Fees.
On the surface, this sounds
GREAT for sellers out there who can save 2%, 3%, 4% (or some other negotiated compensation rate for the buyer’s agent). Heck, I’ve been investing for 20+ years and would have LOVED to save the ~3% I always paid to a buyer’s agent… BUT there’s more this story!
While sellers may choose not to directly pay these fees, the financial implications cannot be entirely circumvented.
Buyers may negotiate for sellers to cover these costs through other means, such as incorporating the fees into the offer price (aka reducing the offer in the amount of the commission) or requesting concessions that effectively shift the financial burden back to the seller.
If a seller DOES not agree to pay a fee, and the buyers comes unrepresented, there are a whole host of other considerations the seller needs to consider including the potential for increased lawsuits, additional work and liability for the listing agent, which may increase the fee the agent collects.
Additional Context
The negotiation of buyer agent fees is an intricate aspect of real estate transactions, with potential economic ramifications for both parties.
Sellers aiming to maximize their net proceeds might choose not to offer buyer agent compensation directly. However, many buyers simply don’t have the cash to pay these costs out of pocket and can reduce the potential buyer pool for sellers and INCREASE potential liability.
NOTE: I’ll discuss more below in Myth #3, but some loan programs simply will NOT allow a borrower to pay commissions/fees at all!
Myth #2: Sellers Are Prohibited from Paying Buyer’s Agents
Some buyers may choose not to compensate a buyer’s agent, but the idea that they are prohibited is a misinterpretation of the proposed settlement. The seller still has discretion when it comes to compensating the buyer’s agent. This practice has been key in increasing exposure and promotion for listed properties.
One of the key components of the settlement is that all buyers’ agents will be required to sign a Buyer’s AGREEMENT prior to showing them a home. The intent is to provide more transparency, explain how agency works, and to define the agent’s compensation.
If an agent enters into an agreement with a buyer for 3%, let’s say (since that’s the number many of the “articles” are using for each side in their hypotheticals), a buyer may request to ONLY see homes where the seller is willing to cover a portion – or all – of the fee because they either can’t – or are unwilling to – pay it out of pocket.
Did you Know? Most agents in Texas don’t tell their buyers that WITHOUT a signed Buyer’s Agreement, they are technically a sub agent of the seller!
Additional Context
I touched on it above, but having a buyer’s agent involved in the transaction helps protect ALL parties! First off, it aligns with the goals of selling the property efficiently and at the best possible terms for the seller.
Myth #3: Buyers Gain Leverage to Negotiate Agent Fees Represents a Major Victory for Consumers
First and foremost, ALL fees have been, and continue to be, negotiable when it comes to commissions. The settlement does decouple the commission to a degree, but competent real estate agents have been using Buyers Agents and discussing commissions for decades.
This “victory”, if you will, is that the seller and buyer are BOTH agreeing to the commission they will be responsible for on their end. If seller isn’t willing to pay the agreed upon rate in the agreement, the buyers are responsible to pay the difference. (Again, this has been the case where agents are using Buyer’s Agreements already!).
So, nothing changes here other than agents will be REQUIRED to have this conversation and have a signed contract… which, incidentally, is a good thing in my opinion.
HOWEVER, while this seems beneficial, the reality of how “financing” works is much more complicated, especially when a buyer is stretching to afford down payments and closing costs. Most conventional lenders do NOT allow the inclusion of agent fees in loan amounts, presenting a significant obstacle for buyers.
In addition, let’s say lenders DO agree to roll those costs into a loan in the future, how will this impact the amount that they’ll lend on a property? For example, let’s say a borrower is putting down 3% on an FHA loan, but then having to pay 3% in commissions, the lender is sitting at 100% loan to value essentially.
Fun Fact: As it is currently understood, a Buyer’s agent will NOT be able to earn a commission higher than the agreed upon amount in the buyer’s agreement.
In other words, if the buyer negotiated a 2% commission, but the seller was willing to pay 3%, the buyer’s agent cannot get more than the 2%. Where that “difference” goes is unknown. In the CURRENT form, the listing agent would get the difference in commission since they are paid the full fee and offer a portion of their commission to cooperating brokers.
Additional Context
From a practical standpoint, when a seller offers compensation to the buyer’s agent, it is all factored into the overall price of the property and is essentially rolled into the loan.
Changing this dynamic could impose upfront financial barriers to buyers, potentially affecting their ability to secure adequate representation or even enter the market. Special considerations, such as those for veterans under VA loans, further illustrate the challenges and limitations buyers might face in a landscape where the buyer’s agent fees become an out-of-pocket expense.
Sellers who are looking at this as a win are expecting to maintain property prices (aka NOT discount them to account for not having to pay buyer’s agent fees), AND not have to pay the buyer’s side of the transaction, keeping 3% more in their pocket.
NOTE: The argument has been made by many that this will reduce home prices across the board! Sellers are more thinking that they’re going to “keep” more profit. So the prices may well stay the same, but now the buyer is going to be required to pay the commission on TOP of this.
NOTE: A good agent will also look at listed offers of compensation for buyers’ agents and help price the property factoring in all of this for the list price. This change may also complicate appraisals in terms of factoring in commissions in the value.
Myth #4: Buyers Can SAVE 3% By Not Using a Realtor®
This is an option NOW!
Some buyers currently choose to work with the agent themselves in exchange for a discount on the purchase price.
However, an unrepresented buyer poses a lot of risks to a transaction.
In the event there are more than one offers, the listing agent may advise the seller to choose a represented client OVER an unrepresented buyer simply to reduce exposure and liability.
Listing agents may also choose to charge a higher fee for the added liability, extra work, the need to have more attorney involvement, etc.
Additional Context
Sure, I’ll be the FIRST to agree that there are a lot of bad agents out there… BUT a good agent brings a lot of value to a transaction.
First off, helping a buyer determine the price and terms to get their offer accepted!
For example, I was just helping a client who tried to go it on her own with an attorney and wrote an initial offer to overpay by at least $30,000 (on a $600Kish home). The seller’s agent also wanted her to pay al the seller’s closing costs AND lease back to the seller for 60 days at $50/day!
That’s 5% MORE on the price + an additional $7000-$10,000 in additional closing costs and negative cashflow post-closing.
When we sat down to go over the property, we came in at a lower offer price, no seller closing costs which the listing agent was trying to negotiate on her client’s behalf, AND the seller agreed to pay the full commission. So, the NET effect to the buyer was that she was paying LESS money for this home WITH representation included.
A good agents should MORE than cover his/her commission in negotiation and expertise.
(See the article on the History of Buyer Representation ß LINK)
Myth #5: Real Estate Prices Will Drop, Making Homeownership More Affordable
The assumption that the settlement will directly lead to lower real estate prices and increased affordability overlooks the complex factors influencing property values.
The real estate market is fundamentally driven by supply and demand, with commissions being just one of many transactional expenses.
Myth #5: Real Estate Prices Will Drop, Making Homeownership More Affordable
The assumption that the settlement will directly lead to lower real estate prices and increased affordability overlooks the complex factors influencing property values.
The real estate market is fundamentally driven by supply and demand, with commissions being just one of many transactional expenses.
Even if commissions were to decrease marginally, the impact on overall affordability would be minimal, given the multitude of other costs and the significant influence of market trends on pricing.
Additional Context
Real estate values are a product of numerous variables, including location, property features, economic conditions, and, fundamentally, the balance between supply and demand.
The notion that a minor reduction in commission fees would make homeownership significantly more accessible is overly simplistic.
In many markets, the rapid appreciation of home values has far outpaced any changes in transaction costs, underscoring the broader economic and societal factors at play in housing affordability. The settlement’s potential influence on commission structures is unlikely to alter the fundamental dynamics that make homeownership challenging for many.
Spoiler Alert: Potential and future sellers are reading this settlement as a way to “keep an extra 3%” so they’re not looking at this as a way to reduce the list price of their home (at the time of this writing) so buyers may not want to get TOO excited about the possibility of “cheaper housing” in the next few months.
Myth #6: Brokers Will Be Required to Reduce Their Commissions
Contrary to widespread belief, the settlement does not impose any new standards or caps on what Realtors can charge for their services.
The fact that Realtor fees are negotiable remains untouched, reflecting the industry’s inherent competitiveness and independence.
This misconception likely stems from a superficial comparison of fee structures in the U.S. to those in some other countries, ignoring that in many places abroad, real estate professionals are salaried employees with additional benefits, unlike their U.S. counterparts who are compensated solely on performance via commissions.
Additional Context
Realtor fees are a reflection of the services provided, ranging from basic listing services to comprehensive marketing and transaction management.
The competitive landscape ensures a wide spectrum of service levels and pricing, enabling sellers to choose representation that best suits their needs.
It’s like using Legal Zoom vs a high-end attorney. Both have their niche, level of risk, and pros and cons associated with them!
There have been “discount” brokers for decades who will provide minimal service in exchange for a greatly reduced commission. There are also flat fee brokers who will simply charge a small fee to list your property on the MLS, but will not provide any level of service beyond that.
The autonomy of Realtors to set their fees encourages innovation and service diversification, catering to varied consumer preferences and market conditions. This has NOT changed!
Myth #7: By Eliminating Buyer Agent Fees, Total Transaction Costs Will Be Lowered.
This assertion misinterprets the settlement’s impact on the overall transaction costs.
If sellers decide solely to compensate the listing agent, the financial responsibility for securing buyer representation shifts to the buyers.
This change does not inherently lower transaction costs but redistributes who bears the cost of representation, potentially impacting how buyers approach property purchases.
Additional Context
The potential shift in financial responsibility for buyer representation introduces new considerations for both buyers and sellers.
Buyers may need to assess their ability to directly fund their agent’s commission, influencing their property search and negotiation strategies. Certain buyers will be unable to have representation under the current rules and laws.
Sellers, on the other hand, might reconsider their pricing and marketing tactics to accommodate these changing dynamics, ensuring their properties remain attractive to a broad buyer base.
But this is going to take time to see where it goes, and in the end… it’s not likely this is going to move the needle in terms of housing prices.
Myth #8: The Settlement Offers Significant Restitution for Real Estate Consumers
The perception that the settlement will deliver substantial financial restitution to consumers overlooks the mathematical reality of distributing a large settlement across a vast number of potential claimants.
While the headline figure of the settlement might seem impressive, the actual distribution is likely to be nominal, hardly compensatory for individual transaction experiences.
The amount that NAR has agreed to was $418M. While that sounds like a big number, when you factor in that the lawyers are likely going to get somewhere between 25% – 33% from that, that number goes down to < $300M!
The substantial portion of the settlement earmarked for legal fees highlights a common criticism of class-action lawsuits, where the benefits to individual class members are minimal compared to the legal apparatus surrounding the case.
Additional Context
The mechanics of class-action settlements, particularly in complex industries like real estate, often result in outcomes where the perceived justice or financial restitution is significantly diluted when applied individually.
While such settlements can drive industry change or highlight practices needing scrutiny, the direct benefit to consumers — in this case, real estate buyers and sellers — is frequently marginal.
This reality underscores the importance of broader industry shifts towards transparency and fairness, rather than relying solely on legal settlements to address issues.
More transparency is a great thing! And buyers agents SHOULD be demonstrating their value (and bringing that value). They should be having discussions on their commissions. Listing agents should be clearer at explaining how the commissions work with regard to the offer of compensation for buyer’s agents.
This is all true. But this settlement, in and of itself, will have little impact on the industry as a whole.
At the end of the day, only time will tell if/how the industry changes.
I expect it will elevate the level of service and competency and will make the barrier to entry a bit harder.
A buyer may think twice about hiring their sister-in-law who got her license last week to represent her in a transaction when she’s got to pay 1-2-3% or more. They’ll look to someone who has the experience and can help them negotiate the best deal vs simply open doors and fill out some paperwork.
It’s essential to recognize the underlying truths about the complexity of real estate transactions, the varied roles of agents, and the ongoing evolution of industry practices.
Real estate professionals are often on the frontline, navigating not just the technicalities of buying and selling properties but also the emotional and financial intricacies involved in what is, for many, the most significant transaction of their lives.
As we move forward, the industry’s response to this settlement and its implications will likely reflect a broader trend towards adaptability, client-centric service, and innovation. This evolution, while challenging, presents an opportunity for all stakeholders to contribute to a more transparent, equitable, and efficient real estate marketplace.
For professionals, staying informed and proactive in addressing misconceptions and adapting to new expectations will be key.
For consumers, gaining a deeper understanding of the real estate process and advocating for their interests remains paramount.
