THE BASIS POINT

Are Homebuyers Hit Hardest By Landmark Realtor Lawsuit?

 

If buyer commissions are 3% on today's median prices for existing ($379,100) or newly built ($420,700) homes, that's $11,373 or $12,621 in extra closing fees for buyers.

 

Last year, the NAR was sued over Realtor commissions, and on March 15, agreed to pay $418 million to settle commission lawsuits, plus change rules about how 1.5 million NAR real estate agents get paid.

If approved in Federal court, this settlement has 3 huge implications.

1. SELLER COMMISSIONS CUT IN HALF

First, commissions sellers pay to agents are likely to be cut in half from the current range of 5-6% (of sale price) nationwide.

This may happen because the NAR said they’ll no longer require listing agents representing sellers to offer a commission to agents who bring in buyers.

Before this settlement, an NAR listing agent would have a seller agree in writing to pay half of a 5-6% commission to an agent who brings in a buyer.

This NAR industry structure held commissions at around 5-6% for decades, and asked sellers to agree to pay half of this commission to agents representing buyers.

Now, sellers will likely only pay for their side of the deal, thus lowering fees sellers agree to pay by about half.

2. HOMEBUYERS HIT HARDEST

Second, this means homebuyers may pay more to agents representing them to find and close on homes.

Until now, agents representing buyers could work at no cost to buyers because buyer’s agents knew they’d get paid half the seller commission.

Now, a buyer’s agent may be required to ask a buyer to sign a commission agreement before working with them.

If this fee is 2-3% of a home’s purchase price, this is thousands more buyer dollars due at closing.

If buyer commissions are 3% on today’s median prices for existing ($379,100) or newly built ($420,700) homes, that’s $11,373 or $12,621 in extra closing fees for buyers.

Some closing costs can be financed as part of a mortgage today, and now GSEs and regulators must determine if they’ll allow buyer’s agent fees to be financed.

I comment more on this critical topic below, and will add more as the regulatory response plays out.

3. ENDGAME IS LOWER FEES OVERALL

Third, a less rigid industry commission structure means more negotiating power for home sellers and buyers.

If a non-presumed commission structure can be more easily negotiated by sellers and buyers, real estate agents must work extra hard to articulate their value – and probably lower their prices – to win business.

This will be a tough adjustment for realtors, and smart realtors will adjust fast and win more business.

Also, it could create a cash crunch for buyers until federal mortgage closing rules evolve to allow financing of buyer’s agent fees.

FUTURE BRIGHT FOR NEW MODELS

But industry disruption like this will also reveal new business models that work for both consumers and agents.

Here are 2 quick predictions for now.

1. On the home buying side, great businesses will be built — by real estate firms, mortgage lenders, and startups — with streamlined and/or a la carte buyer representation services. Think smaller fees (like way less than 3% of a home’s sale price) for select services like home search, offer writing and negotiating, or reviewing inspections and appraisals. Also smaller buyer agent fees are more likely to fit into today’s existing GSE-approved seller credits to buyers. And if so, smart dealmakers (on buy and sell sides) can adjust home prices to accommodate these seller credits to buyers so both sides win.

2. On the home selling side, it rekindles lots of discount real estate brokerage models. Most of these models failed this era partly because buyer’s agents didn’t participate nearly as much in homes listed by discount brokerages. Instead, buy side agents would focus more on showing buyers homes listed with larger buyer’s agent commissions. All this is different now. If buyer’s agents will make less overall now (see item 1 above), they’ll get more competitive on prices for taking listings. And they’ll also master the craft of educating sellers on offering smart, lender-compliant seller credits to cover buyer fees to get deals done.

This NAR settlement creates massive new opportunities for real estate agents, lenders, and entrepreneurs in the American housing market.

Lots of fun ideas will play out as 5.1 million homes sell this year and 3.7 million of those sales are financed (per MBA).

Please jump in with your notes and questions on any of the topics above.

Look forward to your feedback.

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