After over a year of class action lawsuits and settlement negotiations, there are sweeping changes taking place in the real estate market. These changes primarily impact the relationship between buyers and their agents, with many news outlets claiming the changes will bring an exodus of real estate agents from the profession and significantly reduced commissions. The unfortunate reality, though, is that it likely means nothing more than more forms added to an already large stack of documents that are signed during real estate deals. In this article, we discuss the impact of the new realtor settlement rules on the relationship between buyers and their agents.
National Association Of Realtor Settlement Rule Changes
Last year, a Missouri jury found the National Association of Realtors and other big brokerages liable for $1.8 billion in damages based on unfair business practices leading to inflated real estate commissions. We wrote about that verdict here. The crux of the lawsuit was that big brokerages and the NAR forced sellers to pay the commission of buyers’ agents in real estate transactions. This allegedly led to inflated real estate prices and inflated compensation to real estate agents. After the Missouri jury rendered its verdict, a series of class action lawsuits were filed against the NAR and big brokerages throughout the country.
Earlier this year, the NAR reached a nationwide settlement agreement to resolve all claims. We wrote about that settlement here. In addition to a payment of $418 million, the settlement included a number of changes to real estate practices. Among those changes is the requirement that before showing a client a home, buyers’ agents will be required to enter into written agreements with their clients that specifically states the compensation a buyer’s agent will receive.
The realtor settlement changes went into effect on August 17, 2024.
How The Realtor Settlement Will Change Consumer Relationships With Real Estate Agents
The most important aspect of the realtor settlement relates to the way that a buyer’s agent compensation is negotiated.
Previously, the property seller decided how much to pay a buyer’s agent at the time that the seller entered into a listing agreement with the listing agent. The property was then marketed for sale, and the property marketing materials indicated how much the seller was willing to offer as the buyer’s agent compensation. Buyer’s agents would then represent their clients, with little ability to negotiate the buyer’s agent compensation.
The realtor settlement changes this dynamic by requiring the buyer and buyer’s agent to enter into a written agreement that specifies the buyer’s compensation. An agent must obtained a signed, written agreement with his or her client before showing them a home, meaning the agreement must be negotiated at the beginning of the relationship. Technically, the buyer is then responsible for payment of the compensation to the buyer’s agent. In theory, this will create pricing competition between buyer agents.
Conceptually, the changes make sense – buyers should decide how much their agents get paid. The reality, however, is that most buyers, who already struggle to accumulate a 20% down payment in high cost of living markets like Los Angeles, do not have sufficient additional fluid funds to pay an agent for the time and effort needed to assist with purchasing a home. This is particularly true in the non-luxury market and with first time home buyers. The prior arrangement of sellers paying both agents’ commission existed for a very good reason – a seller of real property is in a much more “liquid” position cash-wise than a buyer, and the seller paying the commissions guaranteed that a buyer could be adequately represented by an independent agent. From a seller’s perspective, this arrangement makes sense because it allows the buyer to use more funds for their down payment, thereby increasing their purchasing power, rather than increased closing costs.
Practical Impact Of The Realtor Settlement Changes
The practical changes that are being implemented in the industry, and the paperwork accompanying those changes, acknowledge the reality that it is often in the interest of both buyers and sellers for the seller to pay the buyer’s agent. As a result, the new standard purchase agreement documents include a simple checkbox and addendum enabling the buyer to request that the seller pay the buyer agent’s commission. Thus, although buyers will negotiate their agent’s commission on the front end, they have the ability to do so knowing that the expense will ultimately be shifted to the seller, as it was before. For the reasons stated above, this will likely become the new norm, as buyers will be looking to maximize their offer price by decreasing closing costs, and sellers are in a more liquid position to pay those costs.
Although well-intentioned, it is likely that the realtor settlement agreement means little more than more paperwork added to an already over-documented transaction. The new 13-page standard buyer representation agreement does not accomplish the goal of providing transparency to buyers concerning agent compensation, particularly when the associated cost will simply be passed along to the seller (as it was before).
Another unintended consequence of the realtor settlement, which we predicted in our article posted earlier this year (linked here), is an alarming increase in dual agency. Dual agency appears to be on the rise in Los Angeles, particularly in the luxury market, as reported by WAV Group. Some sophisticated, and even unsophisticated, buyers are unwilling to enter into a 13-page contract with an agent just for the opportunity to view a home. The alternative is to simply contact the listing agent and have them show the home. But in order to do so, the listing agents are similarly required to obtain written agreements from prospective purchasers before showing the home. This practice, unfortunately, will encourage the practice of the listing agent representing both buyer and seller – a practice that is illegal in many states and many other professions.
Feel free to call us at 213-973-9439 or email us at info@esquirereb.com to discuss the new Realtor settlement rules or how Esquire Real Estate Brokerage can help you in the Southern California real estate market.
