N.A.R.’s Settlement and What It Might Mean

I was on a listing appointment yesterday with the most sophisticated of sellers selling a $2.3M home in Calabasas, CA.? We discussed everything normally discussed on an appointment and confirmed I would be charging a 5% commission which I would be sharing with the buyer’s agent 50/50.? My client being in finance asked me, “Before we finish, what are your thoughts on the N.A.R. settlement?”? Now you may be thinking I might not know how to answer this, or maybe I was nervous or even dreading the question.? I was not and knew exactly how to answer this because commissions have always been talked about at listing appointments and they are always negotiable.

Before I dig into the response to the question, just a quick background on the case itself, and let me repeat – commissions have always been negotiable.? Sometimes there’s a seller who needs more than just a listing agent to sell their home.? Sometimes they require a project manager to get it ready.? Sometimes they need someone to deal with family in a contentious dissolution of marriage or probate.?? In situations that aren’t normal and straightforward, it is not uncommon for top agents to get 6% and even 7% commission. ?Other times an agent might accept less than 5%.? As the job changes, so does the compensation.? The same is true in every other industry.? Sometimes the commission is tiered. ?Ie: If I sell for asking, I charge ‘A’ but if I get over asking by ‘X’ amount, I’ll be paid ‘B’.? There are many different structures of Realtor compensation, so this idea that N.A.R. was unable to defend the existing system where commissions have always been negotiable, was nothing short of incompetence.? So, when we were told there would be an appeal, most of us were thinking, good… and then they settled.

Perhaps you read the above and said, “Negotiable commissions was only part of the case!? Why should I the seller ever pay the buyer’s agent’s professional services fee?”? This is a great question and one often asked at the listing appointment when discussing commission.? Of course, the answer is obvious: Because you want to incentivize an agent to bring their qualified buyer to your home and get you a competitive offer.? Why does a car dealer discount a car or offer special financing?? To incentivize a shopper to come into the dealership and buy their car.? But wait you say, “The buyer didn’t get to negotiate what their agent gets paid to represent them.? Maybe the buyer doesn’t want their agent getting that much or could get someone else to do it for less and get a lower price.? Guess what, there already are services like Redfin for example that do exactly that, namely, they discount or rebate a portion of their commission.? There has for as long as I have been selling, someone offering discount brokerage services.? Go hire that person I say if that is your primary focus.

Very often an agent will carry with them on their listing appointment, what’s called a seller net sheet.? This shows the seller exactly what they will net after costs and commissions based on an estimated sales price.? Does the seller consider the cost vs. benefit of hiring one agent over another?? Sure, happens all the time.? Does that net sheet affect the market value of the home?? No.? Does everyone having the buyer’s agent fee included in the sales price affect market value?? Since that’s the way it’s been done for a long time, it does… so?? And don’t forget, every seller in the class action suit, bought the home they were selling with the help of a selling agent paid for by the seller and their listing agent.? I guess double dipping is ok for real estate, just not when eating chips and dip.? I think there was a Seinfeld episode that went over this in detail.

Let’s say a seller no longer wants to pay a buyer’s agent fee.? Do you think they will say to their agent, “Go ahead and reduce my price so the buyer can pay their representative?”? Unlikely.? We have this conversation anytime we speak with a For Sale By Owner.? The FSBO always thinks that they will get to keep the whole 5% fee by selling the home themselves, without the benefit of Realtor representation.? But what do you think the buyer who is choosing to represent themselves think?? They figure they’re entitled to half that fee since they must represent themselves.? In this scenario did either buyer or seller save any money?? Yes, of course: neither paid for representation.? Now ask yourself, if you are preparing to market and sell your single most important asset, do you want to do this all on your own?? If the answer is yes, you can.? You always could, which is one of the key points the N.A.R. attorneys failed to successfully explain.? So, why do the vast majority of educated, sophisticated, and affluent sellers around the world hire a professional to sell their homes?? Because there is too much at stake to blow it with your own inexperience [Contact Tim].? Too much liability. Too much risk of not doing the things to maximize value and too much risk of being taken advantage of by someone unscrupulous or clever.

When my client asked me “What do I think about the case,” I said, sellers will still be allowed to incentivize agents to bring qualified buyers by offering a commission.? If the word commission or compensation cannot be used in the MLS, buyer’s agents can call the listing agent and ask, or a seller can instead, yet still consistent with the terms of the settlement, offer a buyer 2.5% or 3% credit.*? Remember, the seller is the one who wants the qualified buyer and qualified buyers almost always want representation for all the same reasons the seller does.? There’s just too much at risk to go it alone.? If the seller says no to paying anything and won’t lower the asking price commensurate with that fee, a buyer will almost certainly offer 2.5% or 3% less or ask for a credit in that amount.? It’s up to the buyer to negotiate a rebate if they so choose and equally up to the agent to decide for themselves, often at the advice of their broker, what they are willing to do the representing service for.? Again, there is nothing new here.? What is new is now it’s inefficient and may well lead to unforeseen and undesirable consequences.

“Like what?” you ask.? How about buyers only go directly to the listing agent?? Experienced and ethical agents do this all the time.? But many agents are simply ill-equipped and incapable of dual agency.? So, it safe to say the resulting conflicts of interest and liability lawsuits will increase at the rate consistent with the increased number of dual agency transactions.? Does that in any way benefit the consumer?? Hell no.? Will 10’s of thousands of agents go out of business?? Yes.? Do fewer agents benefit the consumer or does more competition?? Exactly.? The unforeseen consequences of this settlement will be hugely beneficial for older experienced agents with a solid book of business and disastrous for new agents.

And then there’s the required Buyer Broker written agreement that the settlement mandates every buyer agent have.? This will lay out in writing what a buyer guarantees their agent will receive as compensation.? What do you think first time buyers will say when signing an agreement that states they agree to pay 2.5% or whatever, to their agent… in addition to their down payment, closing costs and reserves?? How about, ”I don’t have that kind of money!”? So, what will they likely do?? Go to the listing agent that’s what.? Again, is that the outcome the suit sought, or the courts sought when they rendered their decision?? For the buyer agent and broker, this is both good and bad.? Good because no longer will a buyer without a contract with a buying agent, go behind their back after being shown a dozen properties and have their buddy write the offer.? Nor will they be able to go directly to the listing agent.? The bad is all the lawsuits buyer agents and their brokers will be compelled to bring when that exact thing happens, and buyers circumvent their buyer’s agent, ignoring the buyer-broker agreement by using someone other than their contracted and licensed fiduciary. ?Yet just one more unforeseen consequence.

In the end, my client said, ”That’s good information, thanks.? Now Tim, do you think we can really get over ask?”

*In an earlier post I stated that one work around would be that the seller could “Offer a buyer 2.5% or 3% credit for their costs for professional, legal or fiduciary representation.”? Based on the settlement page 27 H.58.ii Practice Changes: “Prohibit Realtors… brokers…agents… AND their sellers from (a) making offers of compensation on the MLS to buyer broker or other buyer representatives,” it appears that the addition of “And sellers,” may make the afore work around prohibited.