March 2024
- Three key changes are highlighted:
- Because of the elimination of automatic co-fee sharing between sellers’ and buyers’ agents, buyers would now be responsible for directly compensating their agents. This may lead to higher upfront costs or opting out of agent representation.
- Beau says even though sellers do not have to pay the buyer’s agent, it is unlikely they will lower their home price just because of that.
- Despite potential benefits for sellers in the short term, there is uncertainty about the long-term effects on the real estate market, including the possibility of freezing the housing market further due to increased costs for buyers.
Watch previous episodes here:
Ep. 77 Estate Tax Changes: Will They Affect You?
Ep. 76 March Economic Highs & Lows: Should Investors Worry?
Hello, everyone, and thank you for joining us for another episode of THE FINANCIAL COMMUTE. I'm your host, Chris Galeski, joined by wealth advisor Beau Wirick. Beau, thanks for joining us.
Thanks for having me on. Super excited to chat with you today, Chris.
This is everybody's favorite spot to better understand what's going on in the world, how it affects you and here's what you can do about it. Today's topic has to do with this National Association of Realtors settlement that is sort of taking place as we speak. There was a lawsuit that was basically filed and then a decision was made.
They're going to work through the details over the next couple of months. But we're here to talk about how this decision on fee sharing and what you're paying a buying or selling real estate agent could potentially affect people that are trying to buy real estate today or potentially in the future.
Yeah, so admittedly, we're in the middle of this process right now. So technically, a federal judge still has to approve of the settlement. And then the ramifications of this ruling, I mean, we really don't know what's going to happen. It's all conjecture at this point, but we can take people through what's happened up until now and what we could see as immediate changes.
And so let's talk first and foremost with what happened. So there's this class action lawsuit out of Kansas City, Missouri. And it had to do with the National Association of Realtors and their control over MLS. And, you know, this two and a half percent commission that they said, look, you shouldn't list a property on the MLS if you don't have at least a two and a half percent commission.
Yeah. So just to break that down, this was essentially the common practice. So the National Association of Realtors still denies that this was ever a rule. But in practice, what the jury found is that this was enough of a reality that it constituted a rule, it constituted collusion. So when you sold a house, usually you would sign a contract with your selling agent.
And in that contract, you would have to pay for the buyer's agent commission. So you have to pay two and a half or 3% to your agent and two and a half or 3% to the buyer's agent. The buyer didn't have to pay out of pocket for that. And then when, when they would post the listing on the MLS, the multiple listing service, it would say this house is for sale.
And if you bring a buyer, you're going to make 3% commission or two and a half percent commission. You have to be a member of NAR to get on to the MLS to see that. And so it constituted essentially a monopolistic scenario, right? That's what's being broken right now. And so there were five plaintiffs in this case in Missouri.
And some of the stories are a little funny. In their contract of selling the house, one of them said “I was given the option of what fee do you want to pay your real estate agent, six, seven, eight or 9%? And so they chose the lowest. But it never occurred to them and it was never communicated to them that you don't actually have to pay the buyer's agent part of this.
That's all negotiable. And since that was not known to the sellers, that's what prompted this entire case. Since then, a bunch of copycat cases came out like 20 different, you know, antitrust lawsuits came out against the NAR. And they eventually have settled for $418 million. They're going back to home sellers. So if you've sold a house in the last four or so years, you're probably going to be getting a letter in the coming months and coming years saying, hey, if you didn't know that you were paying the buyer's commission, you might be part of this class action settlement.
Yeah. And so this is sort of interesting how a case in Missouri kind of affects the entire country. Yeah. I mean, we're in California with some of the most stringent rules and, you know, legal things or structures already put in place, especially in these contracts, if anybody’s bought a home in the last few years in California.
I mean, these documents are thick.
I'm going to read through every page of that for sure.
But it was always, at least from my perspective, it was understood that, you know, the seller, the selling agent, is fee sharing a commission with the buying agent. Right. But what's likely to take place in July or by July is basically like three things, right? This settlement, if it goes through, it's going to ban a seller's listing broker from offering a co fee sharing agreement.
It's going to require buyers of properties to go into a contract with their real estate agent that's going to help them buy with a pre-negotiated, you know, fee or compensation associated with them helping buy. So the selling party's not going to share in that, right? You have to negotiate this. And then the third that's going to prohibit the practice of a realtor telling a seller that they have to offer compensation of any kind to a cooperating broker.
So that's the intention. How this actually plays out, man.
That's the question.
You're in California, million dollar homes if you want to you know, if buyers are going to put down a 20% down payment. And it's one of the, you know, first times that they're buying a property, they may not have an extra 20 or $30,000 in their pocket to go with a down payment to move for closing costs and then pay their agent as well.
I think the buyer side of the equation specifically first time homebuyers, might be the ones that lose out the most on this and exactly what you just said. So if you've been saving up for these years to buy a house, you find $1,000,000 home and you have your $200,000 down payment.
You know, I'm going to put this down. But then on top of it now you have to pay, let's call it a 3% fee, which is $30,000 on that million dollar house. All of a sudden now you're put into this position where you can't afford $1,000,000 house. You can only afford a $940,000 or you have to get PMI insurance in order to cover the difference.
So it's making it more expensive potentially for those buyers.
Well, it's making it more expensive upfront. I mean, it nets out the same because with the old contract where there was fee sharing. I mean, you paid $1,000,000 for a home, your broker got paid, your real estate agent got paid, their real estate agent got paid, but you were able to amortize the cost of that over the length of your loan.
You know, similar like when we buy a car and get a five year car loan, people are coming out of pocket paying the taxes. They're rolling the taxes into the car loan or the number of years. So this... the theory around this is that this can drive real estate prices down. But I don't really see that being the case.
I think most economists think that it will eventually drive real estate prices down. I do think that the lack of supply, the constraints still put the sellers in the powerful position right now, especially in a place like California, where if you are no longer paying the buyer's agent and you're selling $1,000,000 house, are you really going to drop the price from 1000000 to 970?
No, no. You're still going to pay a million dollars.
And so eventually, if the market ever switches to being, you know, a higher inventory, I could see that happening. But I think in the near term, it's more likely that first time homebuyers will take the risk of not hiring a real estate agent or negotiating a flat fee or just hiring a real estate attorney or something because they can't come up with 20 or $30,000, which is the standard commission.
So that's a potential ramification of it. And then on the seller side, I do think that currently it's likely that sellers might just walk away with a couple extra $10,000 from the sale as as it is now. I don't know. What do you think if you're selling the house, do you think that it's going to come out on top for them or what?
I don't know. I know that there's a lot that's still going to come from this. Yeah. And the way in which we transact doing business or making deals as it relates to homes and how you pay your buying agent versus listing, it's now likely to change or be very different. This is where the creativity of things happen.
Yeah, and sometimes it can be, it can work out being better. Yeah. I don't know what's going to happen. My fear is I'll tell you what my fear is. My fear is that now this puts more strain into the Redfins and the Zillows of the world that technically tell people what they think the value of a property is.
Right. You know, they list this value online. They could somewhat control prices because they can change algorithms if they raise enough money and they continue to go down this path of saying we're going to buy up inventory and then sell it ourselves. They have access to capital, they've got cheaper fees now that's associated with purchasing properties. They've got the same fee that they would receive by selling these properties.
Yeah, and they control the perceived value of price, which is always been my biggest issue with them being allowed to buy properties themselves. Right. They can one day say your homes worth 700,000, they acquire and then all of a sudden the algorithm changes six months later, the homes in that neighborhood are 850. Everybody set their new baseline. That's my fear.
I think that, yeah, because housing is priced at the margin, you know, if you're in a neighborhood, only one house has to sell for the comp to affect your house value. And so it doesn't take a lot of volume in order to change the perceived real estate. So I think it's a valid concern.
Beau, thank you so much for coming in and talking about this interesting topic. A lot still to come out. But, you know, the headlines have all said, you know, the guaranteed 6% commission is now by the wayside. That was a little misleading because it was never really guaranteed. Anyways, I've heard plenty of people saying, hey, if I represent both sides, I'll take a 4% commission or we'll do it for two and a half, two and a half.
So five total. So it was always just sort of understood that that was recommended, but there was some wiggle room there and it was just what the realtors were comfortable with, with making some tradeoffs. Well, yeah, yeah.
One thing that I'll add to it, I think it opens up a little bit of creativity in the negotiation. On the buyer side, if I had an agent who's a buyer's agent who is getting 3% of the sale price, well, they're kind of incentivized for the sale to be as high as possible. Now, perhaps it's possible that I can go to a buyer's agent and say this is what I want to spend.
If you can help me get the price down by x amount, you can share in the savings by 50% of whatever you save me. I think that might create better market dynamics, but that also might be a pipe dream of mine.
Yeah, might also be a pipe dream. It'll be interesting to see what happens. I think it's going to be more creative in terms of how the deals are structured and how the seller actually helps, you know, with credits or discounts or credit back to the buyer in order to help cover the costs. Because look at these current real estate prices, asking the buyer to come out of pocket.
An extra two or 3% can limit deals from happening.
Yeah, it may even freeze up the housing market even more than it is now. So we'll see what actually happens. This is all just us kind of imagining the future, but we'll see.
Thanks.
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