How the new era of commissions will change your real estate purchasing costs

Impacts of recent NAR settlement

Immediately after the decision was announced in the media, I was able to mention it in my email to clients but promised to expand more in an article, so here we go.

As I reflect on the recent $418 million settlement by the National Association of Realtors (NAR), I am compelled to consider the profound changes it may herald for residential real estate in the United States.

I want to let you know but also need to speculate a little about the potential consequences of this settlement, draw comparisons with the UK’s real estate purchasing costs, and take a look to the future of real estate transactions.

Embracing the Winds of Change

The NAR’s settlement, necessitating the removal of blanket offers of compensation through the MLS, is a clarion call for change.

The MLS or Multiple Listing Service was originally created to allow all agents to place properties so other agents and brokers could find what’s on the market in one place. What few people know is that this system is organized like a club and agents and brokers have to pay a membership fee. If you are a member, you can call yourself a Realtor. ?

This MLS is also serving most of the data you find on Zillow or Redfin or Realtor.com

The settlement and everybody expects the court to accept it, signals the end of a seller-funded commission model, ushering in an era where buyer agents must negotiate their fees directly with their clients. This paradigm shift promises to democratize home buying costs, potentially leading to more competitive pricing and a reevaluation of the value provided by real estate professionals.

The NAR settlement is expected to have a substantial impact on the real estate industry, reshaping the roles of agents and altering the traditional home-buying process. Here are some key effects:

What are some possible outcomes of the changes?

• Increased Role for Loan Officers: Loan officers may gain a more significant role in the home-buying process, as they'll need to find new ways to approach listing agents and borrowers.
• Encouragement of Dual-Licensing: Housing professionals might be encouraged to pursue dual-licensing, allowing them to act as both mortgage lenders and real estate agents.
• Potential for Chaos and Consolidation: Brokers and agents will need to adapt to the changes, which could lead to a period of chaos and eventually consolidation within the industry as business models evolve.
• Impact on Local Agents: The settlement's effects will vary by region, but local agents everywhere will need to brace for changes in how they conduct business and interact with clients.
• Opportunities for New Business Models: The settlement could open up the market to genuine competition, creating opportunities for new players and business models, much like the internet did for stock trading.
• Lower Costs for Sellers: Future home sellers are likely to benefit from the settlement, as they should be able to keep more of the proceeds when they sell a house.
• Murkier Picture for Buyers: The impact on buyers is more complicated. They might no longer get a real estate agent 'for free' and could end up paying out of pocket for services, affecting their budget for down payments and other fees.
• Diminished Role for Buyer Agents: With the potential for buyer agents to negotiate fees directly with clients, their traditional role may be diminished, leading to a shift in how buyers and sellers interact.

Envisioning the Future

In this new landscape, I imagine a scenario where real estate commissions could be structured similarly to software applications.

Just as one might choose a basic version of an app and later upgrade to premium for additional features, real estate services could adopt a tiered approach. For example, a basic service package might include listing the property and basic marketing, while premium tiers could offer enhanced services such as personal home visits, offer development, and assistance with financing and insurance options.

Let’s consider the purchase of a $300,000 house. Under the traditional model, a 3% commission to both buyer and seller agents would total $18,000. However, with fixed pricing, the commission could be set at a predetermined amount, say $5,000 for basic services. Upgrades to premium services could be offered at additional fixed rates, providing clarity and flexibility to consumers.

Drawing Parallels with the UK

In contrast to the US, the UK’s real estate market operates with buyers shouldering the majority of transaction costs, including conveyancing fees, mortgage arrangement fees, and stamp duty. The purchase of a house in the UK can incur costs upwards of ￡33,070, based on a home costing ￡277,000. These fees are separate from any commission paid to real estate agents, which are generally lower and more transparent than in the US.

Impact on Real Estate Investors vs. Owner-Occupants

The impact of the NAR settlement will differ for real estate investors compared to individuals who buy to occupy.

Investors often purchase multiple properties and rely on the efficiency and expertise of real estate experts to handle transactions. The settlement could lead to lower costs for investors, as they might negotiate lower commissions due to the volume of their purchases.

In our case, when working with Ideal Wealth Growers, we aim to find deals that have no real estate agents and associated fees at all, so we have been saving our clients these fees for years already.

On the other hand, owner-occupants, particularly first-time homebuyers, might face increased complexity. They could lose the perceived benefit of having a ‘free’ buyer agent, as they may now need to pay out of pocket for these services, affecting their budget for down payments and other fees.

However, the settlement also presents an opportunity for owner-occupants to negotiate better deals and potentially save on commission costs, which could make homeownership more accessible.

Munawar Abdullah, Feb 2024

As I ponder the implications of the NAR settlement, I am inspired by the UK’s model, which offers upfront negotiation of fees and clear delineation of buyer and seller responsibilities. This model could serve as a blueprint for a more transparent and equitable real estate market in the US.

As the industry adapts to these changes, we may see a shift towards more for-sale-by-owner transactions or an increase in the use of flat-fee or alternative brokerage models.

The settlement is likely to bring about a more competitive and transparent real estate market, with both challenges and opportunities for industry professionals and consumers alike.

I have always felt that the system was not fair. I had a friend in New Mexico when I was stationed near Alamogordo and most of the sales he made through his Coldwell Banker brokerage were between $80K and $280K. That meant he could get about $4000 - $14000 when we moved to Santa Barbara after my retirement from the military, houses sold for $600K - $3 million. The agent, who did the same work made between $30K and $150K. Some only needed one deal per year to be happy while my friend in New Mexico works 6 days a week to make ends meet.

The full impact of these changes remains to be seen, but they promise to reshape the American dream of homeownership, making it more accessible and affordable for all.

For investors it should become easier to get deals without agents as sellers and investment property providers will no longer feel that they are circumventing the markets.

What’s unclear is the impact on the number of agents and brokers overall. I suspect there will be a reduction in people working in this field. It will be important that the qualifications remain high.

In some countries, anybody can state that from tomorrow on they will be offering real estate and that leads to bad service, shady deal-making, and bad service for investors and owner-occupants. We definitely don’t want to get into a situation where the is no more assurance that if we pay for agents, we get people with a verification and some experience under the support of a broker and agency.

What’s also still open is the impact and potential for the integration of AI into real estate services. We can see 3D virtual visits, easy contract generation, and tracking of all aspects of property management, but maybe there are more features we can’t even imagine yet, that AI might introduce, and brokerages can use to offer high-premium services for busy buyers and investors.

In conclusion, the NAR settlement is a watershed moment, heralding a new era of real estate transactions that emphasize fairness and transparency.

While the full impact of these changes remains to be seen, the promise to reshape the American real estate industry is real.

What do you think the changes will be?