Seppuku, NAR ?

(This is an opinion piece and is based on information available as of 3/15/24, actual actions may and probably will change as time goes by, I repeat, this is strictly opinion and in no way is to be construed as advice or instruction in any way, and I may rewrite it as things progress)

Today the National Association of Realtors, NAR, announced that as of mid-July, as part of some kind of litigation settlement offer, if it goes through, there will be no more offers of compensation to buyer’s agents posted in the MLS. Buyer’s agents who operate under the rules of the MLS and represent entities wishing to purchase homes will now have to negotiate directly with their buyers to get paid for the work that they do on behalf of said buyers. Sounds simple, but let’s break it down.

An example, under the current system, a home with a fictitious desired closing amount for reference of $1,300,000.00, a not unreasonable amount in California:

The seller wants to sell, and they want top dollar in a seller’s market for their location. They sign up with a seller’s agent with an exclusive right to sell listing agreement to handle things for them. They agree on a compensation fee of 5% of the selling price ($65,000) to the brokerage that is going to represent them. In this case, the agent stipulates in their agreement that, for this example, half of that amount, 2.5%, ($32,000) will go to the selling broker and half to the agent (broker) that produces a willing and able buyer that ideally closes the transaction. They publish this amount in the MLS along with the pertinent information regarding the property offered for sale, this is the incentive for an agent representing a buyer to present them with an offer on the property. Note, while it can be argued that the commissions paid really originate from the buyer via the amount paid for the home, be it a loan or cash, the money actually being paid out in commissions starts from the seller’s account at closing after their escrow holder receives all funds. That the seller is paying the buyer’s agent out of his gross proceeds has long been a part of the deal. When the 5% in this example was negotiated, this was understood and put into the listing agreement.

Now the new rules:

Starting with the seller’s side of things. The new proposal is that the only agent fee the seller is paying is to his own listing agent, whatever it is, be it a percentage of the sale or straight dollars, it is going strictly to the selling brokerage, and there is no option to offer compensation to the buyer’s agent via the MLS. Things like offering to pay some of the buyer’s costs are still allowed, and may be dandy for the buyer, but that’s not going to help the buyer’s agent in any way as far as compensation for their participation in the process.

Going on for the seller, let’s just stick with the 2.5% they would have paid towards the selling agent’s side anyway in our first example for now. They are happy, having just saved 32 grand under the new rules might keep them from wincing at the other 32 grand they are paying their own agent to represent them. In fact, sellers who hear about this new system coming online in mid-July may hold off on listing just to fall under these new rules. That happy feeling will inevitably go away, however, as this new system becomes the norm, and this will inevitably cause sellers to look closer at the actual numbers that they are paying for representation.

Now on to the buyer’s side of things. Compensation for the buyer’s agent paid by the seller and being offered in the MLS is off the table for now. While the seller can still offer compensation to a buyer’s agent outside of the MLS, it isn’t specified how they would offer such compensation or make it known that said compensation is available. The buyer’s agent can’t negotiate with the seller directly for it either, they have to negotiate a fee for their services directly with the buyer. This is going to be a new experience for them, as they have traditionally been paid whatever is in the MLS.  Buyers have always paid it indirectly, seeing it as just another number on the closing sheet, the negotiation of which they were left out of. Now they are going to be looking at a really big number, in dollars, paid directly by them, that they have every right to negotiate down, on top of the already ridiculous price being asked for every home on the market. This may to lead to buyers shopping agents based on asking fees and also looking at making offers directly and avoiding this cost altogether. A lot of today’s buyers already do most of their shopping on their own via the Internet, the days of agents researching for them and then driving clients all over the county in their cars to see homes is long over.

Also, In California, where dual agency has been allowed, with the selling agent getting paid on both ends of the transaction if they bring the buyer in, sometimes with a reduction in total compensation, this is now looking to be gone, at least from the perspective of the seller being asked to pay the fees for 2 agencies. I’m not being judgmental, but this has always been a bit dubious from an ethical standpoint, but it has worked up to this time. Now it’s a bit different.

It’s all in perspective, under the old system, with my 5% example, that was part of the cost to sell, with the listing agent getting it all if they represented both sides. (Sometimes that total was automatically reduced a bit in the listing agreement in such cases). Now it’s 2.5%, and the agent is faced with the prospect of somehow asking for more, up to another 2.5%, in a separate negotiation, as a buyer’s agent, on top of already being the seller’s listing agent, for doing the buyer’s side of the paperwork. The inevitable question will arise, “I thought you were working for me, that’s why I’m paying you, why do I need to pay you twice?” I’m not saying a gifted salesperson will not be able to overcome this objection, by negotiating it in advance as a possibility, but it will be a major challenge as the agent faces the prospect of potentially losing the listing altogether by appearing to be “greedy” when the seller will have a room full of other agents who want the same listing who are “willing to deal”.

So where does this leave the buyers and their agents? Keep in mind that nothing prevents a buyer, upon seeing a home for sale, from presenting an offer directly to the seller. It may not be the wisest move, a real estate transaction can be a legal minefield, but from a dollars standpoint, it’s going to look mighty attractive to some.

Let’s look at this possible scenario. You are a buyer’s agent working an open house with the above numbers, and are fishing for potential clients, a time-honored endeavor. A buyer looks the home over and says, “I don’t have an agent, and I want to buy this house” In the old days, this was the jackpot! The agent says “Awesome, how about I represent you, help you do the paperwork and present your offer for you, and guide you through the sale?” The buyer replies “Great, what will this cost me?” The agent tells them, “Well, typically I used to get around to 2.5% of the selling price, paid by the seller at close of escrow, but now I have to get paid by you”. The buyer say’s “Really, how much is that in dollars on this home?’ The agent replies”$32,000”. The buyer then answers,” I’m trying to scrape together the cash for the down payment, cover my closing costs, and now you want me to give you 32 grand out of my pocket for doing the paperwork for me? How about no, I already have my finances in order, I’ll just give my offer directly to the seller.” The numbers may vary, but this is going to be the subtext of this type of conversation.

Am I simplifying this process a bit, yes, but remember, the burden of disclosures and compliance with the mountain of laws and regulations regarding home sales falls on the seller, and their agent(s). Things like inspections are at the buyer’s discretion and the buyer’s relationship with a lender and their requirements, if any, is a separate one. All some law publishing outfit needs to do is make a generic “fill in the blank” buyer’s form and put it on the Internet. The buyer PayPal’s his $5 document fee to use it, adds in his info, grabs his proof of funds from wherever, and presents it directly to the seller who, if they have an agent, will give it to them to deal with anyway.  And poof, a once lucrative job, the buyer’s agent, has disappeared. Can’t, won’t, happen? We may find out in July.

With regard to agents who make a living working the listing side of things, the venerable 80/20 rule of sales has always held sway, with a lot of agents barely getting by after all the bills are paid. Getting a listing has always been something of a dogfight, now, with being a listing agent the closest thing to a guarantee of being paid to begin with, much less netting what they have been used to, it’s going to be full MMA, without the cage.

My prediction is that, after the one-percenters have crowded everyone else out, selling agent commissions will become straight dollar amounts negotiated upfront regardless of actual closing prices, with severe downward pressure on those numbers. On the other side of the fence, with these new rules, some buyer’s agents will jump into the fight with both feet, adding to the already intense completion, with the inevitable drop in yearly income for many of the agents as the fight to get listings heats up, and everyone’s share of the pie dwindles.

For the rest of them, well, being a Real Estate agent, even part-time, has always been an expensive proposition, with a lot of money paid upfront and on a continuing basis, for the nebulous prospect of a commission down the road, with zero guarantees. With the new rules, there may be a lot of people throwing in the towel when their thousand-dollar-plus dues come up next year and they have found that internet-savvy buyers who can do simple math are not going to pay them anywhere near what they were used to getting to represent them.

Up to now the main focus and definition of agent’s compensation has revolved around a percentage of the selling price which, for many years in many markets, hovered around 6% total. Competition has forced that down a bit to a more common 5%, or less, but it’s still the way it’s been defined. For listing agents things may stay this way for a while. For buyers agents, this will probably no longer be the case, as it’s going to be tough to negotiate a deal when there is no percentage being offered and no idea upfront what the actual selling price will be, especially on an as-yet-to-be discovered property.

Like it or not, for a long time now many, but not all, buyers agents, in justifying their paycheck, came down to the attitude that, ‘hey, you’re not paying me anything, I’m working for you for free’, ‘and the other party to the transaction will pay me if we close a deal.’ Kind of a dodge, but that’s how things were perceived in many cases. It’s not so simple now. For example, in the California market, agreeing to pay 2 to 3 % of million-dollar-plus homes translated into cash, ($20 to $30 thousand dollars) paid out of the buyer’s pocket on top of everything else, is going to be a tough sell.

Various buyer-broker agreements have been a thing for a while now, once optional, they are going to be a must if a buyer’s agent wants to get paid. When it comes to a blanket agency agreement to represent a buyer while they shop the market the only practical thing left will be to agree on a price to be paid for services rendered, irrespective of any selling price. Going for a percentage of the selling price when it can’t be known in advance will be a clumsy negotiation at best. In the case of sellers offering compensation outside of the MLS the path of least resistance will lead to offering a set amount of cash, take it or leave it. Everything else will be up to the generosity of the buyers who are, let’s face it, looking at record-high prices already. The sellers are still going to ask for as much as the market will bear, the buyers, who were looking at price X, are now looking at X, PLUS thousands more upfront for a buyer’s agent fee that used to be washed into sellers X price spread out over 30 years, ouch.

From the seller’s perspective they are still going to list and try and get top dollar for their homes, they have little to no incentive to set aside 2 to 3 % of their net just to offer it in separate agreements to buyers’ agents, especially in the current sellers’ market, if it isn’t already an understood part of the listing agreement. The sellers need prospective buyers, hopefully multiple numbers of them, buyer’s agents, not so much, and attracting buyers is the listing agent’s job.

And the nature of the game for some realtors will change as well. It’s always been a competitive business, with a lot of cutthroat bargaining going on in the background in order to sign up clients. Up until now only the seller’s agents had to compete for clients by negotiating fees, now the buyer’s agents will face that hurdle, facing off against literally hundreds of other agents eager for the business, any business. Just wait for the ads to come out, plastered on all the busses in the city, saying things like, “I’ll represent any buyer on any transaction, for only 1/2 % or $10,000, whichever is the lessor” Fun times ahead, indeed.

I’m going to throw another wrinkle in her, just for fun. A seller (or seller’s agent) can’t offer a buyer’s agent compensation through the MLS, the main source of information to both agents and buyers. Compensation offers if available now may be done through individual negotiations that are off the MLS. The lawsuits that brought all of this on are apparently supposed to be about fairness of some sort, I am by no means an expert on them so my question is “How is this new situation going to be perceived as fair?”

For example, if a seller can negotiate one fee amount for one buyer’s agent presenting an offer and a different amount for another when both of them (the buyers agents) are performing the same service, i.e. representing a buyer in an offer, any difference in price or terms offered does not change the nature of the services being rendered by the agent(s). I see nothing in what I have read so far that precludes this from happening, but maybe I’m missing something. This can be perceived as being inherently unfair to any agent involved who may be offered less for identical services and leads open the possibility of litigation based on perceived bias. This is especially true as any compensation being offered is not transparent anymore, subject to change from offer to offer, and being separately and individually negotiated rather than openly stated in the MLS, which, as noted, has up to now been the primary source for this information and available to all.

In addition, what incentive does a seller have to offer any kind of concession to a buyer’s agent? They have a listing agent to handle the details of the transaction for them, why can’t they review and accept an offer from a buyer directly and just tell their listing agent to deal with it, in what way does the seller need a buyer’s agent participation?

 Also, as I mentioned earlier, it looks like dual agency, as currently practiced in California at least, is dead. Allow me to offer another illustration. The seller’s agent has an open house, meets a buyer not under contract with anyone, and offers to be their agent in presenting an offer to the seller, for a fee for acting as their buyer’s agent. The buyer declines, and writes their own offer, and then presents it directly to the seller with their credentials. In the meantime, same scenario with another new buyer with similar credentials, who agrees to the agents proposed deal for compensation. An offer is written and submitted, their offer is accepted and they open escrow. The first buyer who submitted their own offer then sues, alleging bias and conflict of interest, contending that they didn’t get the house because they would not agree to the agent’s terms for representation as their buyer’s agent. There is no way this would not get ugly for the listing agent, so why invite trouble.

Regarding the big picture, NAR has stated that their membership has nothing to worry about regarding the money they are proposing to pay out to settle their legal issues, their membership dues, for 2024, will stay the same. The question for this is, “Who will be paying them?” Membership fees for all the various organizations are typically paid in advance, on a yearly basis, for the privilege of working as a real estate agent under their umbrella. When it comes to the numbers of agents working in the business, there has always been more buyers agents than listing agents and many agents are essentially part-time, getting a transaction when it stumbles into their lap is not uncommon. Lucrative potential commissions have kept quite a few agents in the business even though for many they just break even on a yearly basis. That enticement is going to fade for many as this plays out.

I can foresee other repercussions as well, revenues for an entire industry that feeds off of the money people have been paying to be allowed to play in this game are going to fall through the floor as agents either quit or get starved out. This is a sea change for a huge industry, time will tell how it finally settles, if at all.

Of course, lest I forget, there is still some money being passed around, millions in fact, in “settlements”, all over the country. It’s hard to not believe that underneath all this was someone stroking the public’s feeling that Real Estate agents make too much money for “just doing some paperwork”, something I’ve heard more than once over the years. And yet, the lion’s share of these types of “settlements” will wind up in the hands of the law firms, just for “doing some paperwork”. I haven’t heard of any complaints about that, but I guess that’s a rant for another day.

P.S.

In the interests of full disclosure, it should be noted that I am a Real Estate licensee, so I can’t say that I am a disinterested party to all of this. However, as I have stated in the past, this is a personal blog consisting mainly of my opinions and commentary on the news of the day as I run across it, along with other crap I feel like writing when the mood strikes me, and nothing of what I say here is to be construed as professional advice, recommendations, or definitive statements in any way, shape or form.

As always, I am

NADOA

Cheers