Nine Four Insights

The NAR Lawsuit: What does it mean and what is at stake?

Per Reuters, the National Association of REALTORS (NAR) recently settled a federal lawsuit by agreeing to give potential home buyers and sellers more accurate information about commissions and fees.

Per the article:

“The changes include requiring NAR to stop misrepresenting that buyer broker services are free, eliminate rules that prohibit filtering multiple listing services based on the level of buyer broker commissions and change rules limiting access to lockboxes to only NAR-affiliated real estate brokers.”

Lawsuits against the NAR have been ongoing for a while, with the DOJ largely taking the stand that residential real estate brokerage is increasingly anti-competitive. In fact they have a web page dedicated to outlining this. It’s tough to avoid scrutiny when US broker fees are among the highest in the world, highlighted by a 2019 Brookings Institute whitepaper about anti-competitiveness across the industry. In short, US real estate buyers and sellers are subject to a system that is heavily weighted against them to inflate costs – and perhaps most importantly, to maintain high walls that preserve those costs.

That said, and as in any profession, there are great agents that are worth every penny, and bad agents that might do more damage than good. My intent here is to focus less on that, and more on the impact that the NAR settlement will have on real estate commissions and the impacts for consumers. Specifically, what each of the three changes mentioned above are, why they matter, and what we expect the impacts on consumers to be.

Change #1: Misrepresenting that buyer broker services are free

I love this one. “The seller pays the agent commissions” is one of the most common – and most material – misrepresentations in residential brokerage. If the seller pays the commission, why wouldn’t a home buyer use an agent? The reality could not be further from the truth.

Let’s break down the process as it stands now:

The home purchase or sale process usually starts with a multiple listing service (MLS), which, at its core, is an online marketplace for homes that is restricted to licensed real estate agents. It’s where all of the eyeballs go, which is important because it means that’s where the most inventory goes. This then creates a classic marketplace network effect flywheel where the more homes that go on the MLS, the better it is for users as they have more options and freedom to choose, which brings more homes…etc. A key mechanism for the MLS is that users are obligated to enforce a rigid commission structure. Per the National Association of Realtor website: “participants (on the MLS) make blanket unilateral offers of compensation to the other MLS participants and shall therefore specify on each listing filed with the service the compensation being offered by the listing broker to the other MLS participants”. The MLS achieves this with a field called “CC”, or “Cooperating Commission”. This is the commission that a buying agent is due if they bring a seller to bear.

Now here’s where things can get a bit confusing. Despite a buyer agent serving a home buyer, it is not, in fact, the home buyer that determines their agent’s compensation. Per the National Association of Realtor website, “The listing broker retains the right to determine the amount of compensation offered to buyer agents”. In the US, commissions are typically 2.5-3% of the purchase price per “side” of the sale (one side for the buyer, one side for the seller) for a total of 5-6% commission. This is among the highest commission rates for real estate transactions in the world.

Now herein lies a bit of a rub: a home seller wants to sell their home, and they typically want to incentivize other agents to find and bring buyers to their home. Makes sense. BUT… because a home buyer doesn’t pay their agent directly – the buyer agent commission is paid at closing, at a rate that was not determined by them – does not mean their service is free. It reminds me of the famous line in the movie the Usual Suspects: “The greatest trick the devil ever pulled was convincing the world he didn’t exist”. Buyer commission is absolutely not free.

A helpful way I find to think about a home purchase is to simply not call the price you pay for the home anything other than the “transaction price”. To simplify, transaction price = home price + commissions. It is in both the home buyer and home seller’s best interests to make the transaction as efficient as possible – ie, for every $1 of transaction value, as much of that $1 should go towards the home price.

Walking through some quick math here:

  • Home sale price: $500,000
  • Selling agent commission: 3% = $15,000
  • Buyer agent commission: 3% = $15,000
  • Total commission: 6% = $30,000
  • Net to home seller: $470,000

On a $500,000 transaction price, a home buyer is really paying $470K for the home to the seller and $30K for commissions. The buyer agent is not “free”. If buyer agents were free, then in the above example, the home buyer could’ve paid $485K for the home with the same effective cash impact to the seller.

The lawsuit ruling matters because it will hopefully educate and empower more home buyers to put pressure on their buy-side agent commission. I frequently meet people who express their frustration in needing to pay their buyer agent a commission commensurate with a seller agent for doing little of the relative work. In those cases, I hope this settlement allows them to have transparent conversations about who is getting paid what and for what. Some will argue that no matter what happens, the real estate game is still rigged with systemic barriers that make the real estate transaction world anti-competitive – for example, in some states it’s actually illegal to rebate a buyer a portion of the commission at the closing table. If a buyer tries to negotiate with their agent to rebate a cut of their commission, it’s illegal. MLS access is restricted to licensed agents, agents are incentivized to get a transaction done and at the highest price for the compensation, some agents won’t show a home that isn’t on the MLS for fear of negotiating lower commission structures, etc. All that said, I hope this ruling helps.

Taking a step back, the role of technology is replacing many of the “jobs” that agents were previously hired for. For example, accessing and viewing inventory, understanding home values and market trends, learning about specific neighborhoods and markets, school ratings and reviews. However, despite the fewer number of “jobs” that agents are hired for, their commissions haven’t responded in a commensurate way. I hope this ruling is a step in reducing the cost and friction of a home sale while improving the experience for all parties. Eventually this might lead to a separation of commission structures, where buyers can freely negotiate with their own agents, but I expect the power of the NAR and number of agent members will restrict that from happening anytime soon.

Change #2: Eliminate rules that prohibit filtering multiple listing services based on the level of buyer broker commissions

From the same NAR website: “In filing property with the multiple listing service, participants make blanket unilateral offers of compensation to the other MLS participants and shall therefore specify on each listing filed with the service the compensation being offered by the listing broker to the other MLS participants. This is necessary because cooperating participants have the right to know what their compensation will be prior to commencing their efforts to sell.(bold added for emphasis)

This one is straightforward: buyer agents should show homes that are the best fit for their clients, not the ones that get them paid the most. I have no idea how this can be enforced, but I appreciate the spirit of this to put the customer’s wants and needs first. At the end of the day, unless MLS access is opened up, many home buyers will likely not see (or ask to see) the MLS listing or commission structure.

A related topic is that many markets have “private listings” or “pocket listing” networks that only agents have access to. These can be listed as “pre-sale” properties that wouldn’t hit the MLS and therefore be accessed by more agents. The impact is that more people are funneled to use an agent for access to supply. These off-MLS listings may have different compensation structures that could be advantageous to both buyers and sellers, but at the end of the day it’s still restricting in the same way an MLS is. If someone doesn’t want to use an agent to sell their home, they’re challenged when they can’t use a marketplace with many buyers and sellers because they aren’t a licensed agent.

Change #3: Rules limiting access to lockboxes to only NAR-affiliated real estate brokers

I’ve lived this one and it feels like an annoyance for everyone. When my wife and I purchased a home we didn’t use a buyer agent, which meant that any time we wanted to see the house we needed to be on the seller agent’s schedule. Not a huge deal, but it’s inconvenient when we we’re trying to get into the home to take measurements, color samples, or the like.

Although our experience wasn’t wildly inconvenient, this ruling could impact other buyers who opt not to use an agent. Relating to the above, by limiting lockbox access you are limiting the groups of people that can view a home, which is inherently anti-competitive. It’s another barrier for Realtors to lock up commissions, or at least stack the deck in their favor. People buy homes without an agent all the time, but it’s smaller frictions such as lockbox access that add up over time to make the experience a challenging, time-consuming one.

Technology Driving Regulatory Changes

I see these rulings as a step in the right direction, but they’re largely reactive to what technology is unlocking for real estate consumers. My hope is that technology will continue to unlock more value for consumers, but I also hope that regulations can be more proactive in allowing technology to change compensation structures. If consumers are left with high friction, expensive transactions, it’s a detriment to the ecosystem and only positive for REALTORs. I envision a middle ground where great agents continue to be highly compensated and motivated and consumers ultimately pay for the service that they receive. Tech companies are chipping away, but it’s going to take time to get there.

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