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By now, I am sure you’ve read the headlines about the landmark settlement agreed to by the National Association of Realtors (NAR) that will rock the real estate world this Summer.
NAR is the trade group that has been the centerpiece of residential real estate in the United States since 1908 and is the group that created the Realtor Code of Ethics.
The pending settlement avoids a barrage of lawsuits, past, present and future. The overall issue at hand was the way in which residential real estate commissions were determined and who paid said commissions to the involved brokers/agents in a deal. NAR will enact their proposed settlement changes regardless of whether a judge agrees with the terms.
So, sometime in mid-July the world of residential real estate will significantly change, forever.
The changes are that (a) promise of real estate commissions will no longer be placed into the MLS and (b) members of NAR must now have a written agreement of compensation when working with a buyer.
Until now, a broker (or usually an agent of that broker) would sign a listing agreement with an owner to place their property into the MLS, thus putting the home up for sale in the marketplace. It was the seller who would agree upon the overall commission that they would pay at closing to the listing broker. In turn, the listing broker would identify which portion of the overall commission would then be offered to a buyer’s broker/agent in the MLS, typically half of the overall commission.
This model worked well for two primary reasons. First, and most critical, it allowed the commission to be baked inside of the purchase price, and thus allowed it to be financed.
Second, with the commission agreed up front, the listing broker would share the listing to ‘the entire world’ via the MLS along with a promise of shared commission, rather than trying to sell it themselves. This gave the property maximum exposure and provided all agents and brokers transparency as to what commission they would earn when they created a successful sale.
With regard to the mechanics of paying commission, when the commission is incorporated with the purchase price, a lender provides a loan to allow the buyer to close and the buyer does not have to pay commission directly out of pocket. This is critical to our existing way of doing residential real estate because most buyers have difficulty coming up with a down payment and closing costs, let alone paying a commission as well.
While I recognize that it makes more sense for anyone who has hired an agent to then directly pay their agent (buyer pays their buyer’s agent and seller pays their listing agent), it seems that this may prove very difficult in real-world conditions. A typical commission on a $1,000,000 home for a buyer’s agent is $30,000. If the buyer has to put down 20 percent and has closing costs, that alone is about $225,000 out-of-pocket. Another $30,000 on top could prove insurmountable.
In the settlement, commissions will be completely removed from the MLS. With that change, my concern turns to proper exposure, transparency and motivation for the listing.
The current norm is for a buyer’s agent to find appropriate candidate properties for their buyer to see. Agents do this knowing that they will get compensated for the hard work they are doing. Without a commission promise for buyers’ agents, those agents will need to seek and secure compensation separately (read: have the buyer pay them). By the way, it does not eliminate the ability for a seller to pay a buyer’s agent, but the transparent guarantee in the MLS is removed. And who’s kidding who, sellers will most likely stop offering that buyer agent commission as soon as this settlement goes into effect.
This will cause chaos in our marketplace in the short-term. I believe it will significantly reduce exposure and transparency. It will also force many agents/brokers who are typically on the buy-side of transactions to either adapt or die. I think we will see a major reduction in the number of real estate professionals. In turn, this will bring down the level of professionalism in our industry.
Many buyers will likely choose to go it alone, using the Internet not only for their initial home searches, but also to contact the listing agent or seller directly. They may even try to read and sign offers and contracts on their own (dangerous), conduct inspections, etc.
Since buyers are inexperienced, as compared to agents/brokers who do this every day, a lot more mistakes and unprofessional situations will arise. It may be months or years for the industry to adjust to the new way of doing things.
Listing agents will still have opportunity and work, but everything will be harder when there is so much confusion on the buy-side.
Yes, it appears that major lawsuits will be avoided. Yes, NAR has protected millions of agents/brokers from further litigation, but to what end. NAR itself may fade away, along with its very strong Realtor Code of Ethics. Buyers will have far less choice in the market to work with professionals who can assist them. And, this change may lower the exposure that a home receives when up for sale.
How will the lenders, attorneys and other real estate-related professionals adapt? Will buyers sign agreements to pay for a full-service buyer’s agent? Will new limited-service agents rise up to work under different pay structures? Can lenders finance a commission?
Time will tell. What is your opinion? Please contact me and share your thoughts.
Real Estate Update
As of 3/27/24, there were 115 properties for sale in Pinecrest, 32 homes pending sale and 5.8 months of inventory. If you’re ready to move, contact me to get the best local expertise, truthful guidance and realistic expectations. It’s easy to get started at miamihal.com/getstarted. I invite you to view past episodes of my The MiamiHal Real Estate Show at miamihal.com/the-miamihal-real-estate-show to hear from experts and get the latest real estate news.
Hal Feldman (MiamiHal) is a Realtor with RE/MAX Advance Realty. You can contact him with your story ideas or real estate questions at www.MiamiHal.com, Hal@MiamiHal.com or www.facebook.com/MiamiHal
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