The recent settlement in the N.A.R. (National Association of Realtors) Sitzer/Burnett case has caused ripples throughout the real estate industry. Many headlines have focused on the large settlement amount as well as the notion that real estate commissions and practices are going to substantially change, but what does this actually mean for home buyers and sellers? In this article, I’ll cut through the noise and focus on the key takeaways and potential impacts of this landmark decision.

The Heart of the Matter

The core issue in the Sitzer/Burnett case (and well over a dozen copycat cases) involved how agent compensation is structured for many real estate transactions. Historically, the seller of a home agrees to pay a commission, which is then split between the listing agent (representing the seller) and the buyer’s agent. The lawsuit alleged that this system artificially inflated home prices since buyers were indirectly paying for their own representation. While the N.A.R. did not admit to any wrongdoing, the settlement opens the door to potentially significant changes in how real estate agents are compensated.

Much of the media coverage surrounding this case is speculative with academics and economists driving much of the discussion at a theoretical level. They have proposed extremes of what could possibly change, not what’s likely to actually change. Unsurprisingly, hyperbolic and sensational headlines are more likely to attract attention. This has contributed to a lot of confusion and concern on the part of home sellers and buyers.

The Key Changes

The reality of the settlement is that scope change that will impact most people is quite small. Aside from the money transferred between N.A.R., other real estate brokerages, lawyers, and plaintiffs, let’s focus in on the substantive changes that may impact home buyers and sellers:

Buyer Representation Agreements

The most immediate and concrete change resulting from the settlement is the mandatory implementation of buyer representation agreement. These agreements formalize the relationship between a buyer and a real estate agent, clearly outlining the agent’s duties and how they will be compensated.

While buyer rep agreements have been commonplace in many regions, they were not universally required. Beginning in July 2024, all buyers will need to sign this agreement before a real estate agent can begin showing them properties. I’ve been having all of my buyer clients sign these agreements for some time now, so those of you who have worked with me recently will not be surprised by this change.

Decoupling Commissions

Another key elements of the settlement agreement is that N.A.R. will eliminate the ability for home sellers to market cooperating commissions for buyer’s agents through the Multiple Listing Service (MLS). If a seller chooses to offer commission to a buyer’s agent, this will need to be communicated off the MLS. I don’t view this as a substantial barrier for buyers or sellers, just a small modification in the way negotiations between buyers and sellers are communicated.

Will This Change Impact Home Prices?

A central question is whether this change will lead to a decrease in home prices. The impact on real estate prices is complex and uncertain. Some argue that making buyer compensation more transparent could lead to increased negotiation and potentially lower prices. Others counter that buyer representation agreements could make it easier for agents to justify their fees, potentially maintaining the status quo. It’s important to note that real estate markets are influenced by many factors, including mortgage interest rates, local economic conditions, and inventory levels.

Should Sellers Still Offer Commission to Buyer Agents?

I want to start by acknowledging that I’m biased in my response to this question. That said, I think there are a number of very compelling points to make in favor of continuing to offer commission to buyer agents (off the MLS of course).

1. Maximizing Exposure: By offering cooperating commissions, sellers tap into the vast network of buyer agents. Agents are more motivated to show properties that will earn them compensation for their work, resulting in your home receiving increased attention and a wider pool of potential buyers. More prospective buyers means more viable offers and in a competitive market this generally leads to a higher selling price.
2. Faster and Smoother Sales: Buyer agents bring extensive knowledge and expertise to the transaction. They help buyers navigate the buying process, understand offers and contracts, and handle potential obstacles. This can streamline the process, reduce the likelihood of delays, and increase the chances of a successful closing.
3. Higher Sale Prices: Experienced buyer agents help their clients assess fair market value and submit competitive offers. They advocate for their buyers’ interests while still working towards a mutually agreeable price. This expertise generally increases the chances of achieving a higher sale price compared to unrepresented buyers.
4. Less Seller Involvement: Listing agents who offer cooperating commissions can offload most of the direct interactions and negotiations with buyers. This frees up sellers’ time and reduces the stress associated with constant back-and-forth communication.
5. Maintain Standard Practices: Despite the potential for change, offering cooperating commissions remains the industry norm. Deviating from this practice could make it more difficult to attract buyers and potentially cast doubt on the perceived value of your property.

Important Considerations

• Commission Rates are Negotiable: The amount of commission offered to buyer agents is always a point of negotiation in the listing agreement. Sellers retain control over the amount they are willing to offer.
• Alternative Models May Emerge: The changes brought about by the settlement might encourage experimentation with different compensation models. However, for the foreseeable future, offering cooperating commissions remains the most effective way to attract a large pool of qualified buyers.

Ultimately, the final sales price is a function of supply and demand. All things being equal (size, condition, location, etc.), the more demand there is for a given property, the higher the price paid.

Risks of Unrepresented Buying

Buying a home without the assistance of a real estate agent carries significant risks. The real estate transaction process is complex, filled with legal documents, negotiations, and potential pitfalls. An experienced agent can guide buyers through:

• Understanding Disclosures: Disclosure packages can include dozens of documents that are hundreds of pages long. Deciphering these important reports and statutory obligations requires a unique skill set. The goal of an agent is to make sure you are protected when writing an offer, and that means clearly understanding any condition issues or future expenses you may be taking on before crafting an offer.
• Evaluating Market Value: Agents analyze recent sales data to help buyers determine what they can afford. A great agent will also help you target properties that are likely to sell within your budget so you don’t spend time writing non-viable offers that lead to feeling dejected.
• Navigating Contracts: Standard real estate contracts are lengthy and contain nuanced language. Agents ensure buyers understand their rights and obligations and protect them from possible time consuming and expensive litigation.
• Negotiation Expertise: Experienced agents help buyers craft strong offers and negotiate effectively with sellers.
• Handling Inspections and Appraisals: Agents schedule inspections, interpret reports, and can help buyers negotiate repairs or price adjustments.

Something that is often not understood by home buyers is the importance of the reputation of their real estate representative. In general, people prefer to work with people they like. If your buyer agent has a strong history of past performance including writing thorough, easy to understand offers and being known for collaborative problem solving, the chance of your offer being accepted goes up substantially, even against a higher priced offer.

You might wonder why a seller would leave “money on the table” and choose a lower price offer. The answer is that the listing agent will often make a case to the seller to select the cleanest offer from the most reliable agent and lender rather than the highest priced offer. This is all about mitigating risk for their client.

Conclusion

The N.A.R. settlement marks a turning point for the real estate industry. While the most visible change will be mandatory buyer representation agreements, the long-term impacts are still uncertain. It’s essential for both buyers and sellers to stay informed, understand their options, and carefully select the representation model that best suits their needs. If you ever have questions about this case or anything else related to the real estate process, please don’t hesitate to contact me.