What Will Be the Effect of the NAR Lawsuit on the Real Estate Industry?

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Commentary

Whether pertaining to real estate agents or to sellers and buyers of homes and other real property, the future impact of the recent National Association of Realtors (NAR) lawsuit settlement is still unclear. Even though some industry pundits can’t help themselves but to make predictions, there are currently too many unanswered questions and unaddressed practical matters to accurately predict how things will ultimately end up in the real estate marketplace.

Indeed, the court decision (which led to the settlement) may yet be overturned. Unlike the NAR and certain other defendants which settled with the plaintiffs, some defendants did not settle and are continuing to appeal the court decision. Consequently, while it is expected the fundamental structure of the NAR settlement will become effective by July, it may be some time thereafter before it’s clear what practical day-to-day changes, if any, will occur.

And, of course, what happens if the non-settling defendants prevail on appeal? The NAR settlement would apparently still be valid, yet predicated on a court decision that would no longer be valid.

Also keep in mind that the fundamental premise of the lawsuit was that if sellers only pay their own commissions, and buyers pay their own commissions, overall commissions will go down and, ultimately, result in the sales price of the property going down as well. Simplistically, on the surface, all that may seem to be the case. But when you look deeper, I don’t think that the realities of the real estate business support these assertions.

Nevertheless, given the NAR settlement, is it likely that the real estate industry will look and behave dramatically differently six months to a year down the road? I think not. And that’s because, generally, the fundamental factors that dominate the ongoing and dynamic real estate marketplace will remain the same: sellers needing to sell, buyers needing to buy, and real estate agents—for a fee that has always been (and always will be) negotiable—working to facilitate the process.

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Under the settlement, will the amount of sales commission sellers will have to pay go down? Yes. However, buyers are likely to resist paying their own commissions. Why? Many—most—buyers typically are on a strict budget and don’t have money to pay a commission, in addition to their down payment and other transaction closing costs.

And, as it stands now, mortgage lenders are not able to include the cost of a buyer’s purchase commission into loan fees or the loan itself. All of which means that until mortgage lenders Fannie Mae and Freddie Mac change the conventional mortgage rules, major pressure will remain to include the commission expense in the price of the house.

One way around all this, as it stands now, will be for buyers to sign commission agreements with agents per the NAR settlement and then make a condition of the purchase offer to (and eventual contract with) the seller that the seller “cover” the buyer’s commission obligation.

Might it be that real estate agents will receive lower fees resulting from the commission-shift from seller to buyer? I believe that’s highly unlikely. One of the longstanding myths about the real estate business is the public perception that real estate agents make a lot of money. And it’s true that a small percentage of the very top agents do make good money. The industry-wide norm, however, is just the opposite. It’s hard (and expensive) to be successful in real estate sales, and the vast majority of agents struggle to earn a living.

Nevertheless, whether because of the NAR lawsuit or any number of market-related factors, some agents will work for less. There will always be discount agents—the ones who know less and do less—but like in all walks of life, you get what you pay for. And the fact remains, the amount of sales commission to be paid in any individual real estate transaction is (and should be) negotiable. As for individual real estate agents—and this is a crucial point—in these changing times the need to upgrade one’s skills for more success is more important than ever.

In any case, the amount of agent commissions to be paid by buyers and/or sellers isn’t ultimately for the courts or government entities to decide but, just like the price of homes themselves, for the marketplace to sort out. The longstanding fact is that sellers, buyers, and agents have, based on the prevailing market forces, always been able to effectively negotiate the total amount of commission to be paid for any one transaction. I believe that should, and will, remain the same. As for the how-to of it all concerning any potential commission shift—who pays whom and what amount of the total commission—again, only time will tell the ultimate effects of the NAR lawsuit.

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