Recent Changes to Buying and Selling Homes

The recent $418 million settlement in the lawsuit against the National Association of Realtors (NAR) is set to reshape the U.S. real estate industry, particularly in how homes are bought and sold. This lawsuit, Burnett v. National Association of Realtors, which arose from accusations of antitrust violations, focused on NAR's practices that allegedly inflated buyer agent commissions. Along with several similar lawsuits, this case led to significant changes that took effect on August 17, 2024.

Let’s Look at the Key Changes

Buyer/Broker Agreements

As of August 17, 2024, buyers and their agents must have a signed representation and compensation agreement before touring any homes. This agreement details the terms of the representation and the compensation that the buyer’s agent will receive. Prior to this date, written agreements between buyers and agents were optional and rarely used.

Elimination of “Broker-to-Broker Cooperation”

Previously, it was standard practice for the seller to pay the listing agent a commission, which was then shared with the buyer’s agent through a process known as “broker-to-broker cooperation.” This practice has been eliminated. Now, the buyer’s agent’s compensation is independent of the listing agent’s compensation and must be negotiated separately by the buyer’s agent.

Buyer’s Agent Compensation

Compensation for the buyer’s agent is now paid directly or indirectly (in the form of concessions) by the seller, the buyer, or a combination of both. The three possible compensation scenarios are:

1. The seller pays the buyer’s agent’s full compensation.
2. The seller pays a portion of the buyer’s agent’s compensation, with the buyer covering the remainder.
3. The seller does not contribute to the buyer’s agent’s compensation, requiring the buyer to pay the full buyer’s agent’s fee.

Buyer’s Agent Compensation No Longer Shown in MLS

Concessions or compensation offered to the buyer or buyer’s agent will no longer be advertised in the MLS. Buyer agents will need to contact listing agents on a per-property basis to inquire about any potential seller-paid concessions or compensation for the buyer’s agent.

What are the Market Implications?

It’s too early to assess the impact of these new rules, but I fear they may have unintended consequences. Although these changes are supposed to protect consumers, the opposite effect might occur. Recent studies indicate that over 80% of homebuyers cannot afford to pay a buyer agent’s commission, as most are already financially stretched due to high down payments and interest rates. These new rules may limit the number of homes many buyers can afford, with lower-income buyers being the most affected.

On the other hand, some sellers might view this as an opportunity to save money by not offering compensation to the buyer’s agent. However, they may overlook the fact that many buyers either cannot afford to pay the commission themselves or will avoid touring homes where they know they must cover this cost. This could result in fewer buyers viewing their homes, longer times on the market, and lower sale prices compared to homes where compensation is offered.

Our expectation is that within a few months, real estate transactions will resemble those before August 17, with most sellers continuing to pay the buyer agent’s compensation. The biggest challenge will likely be navigating the new rules and managing the additional forms, which add more complexity to an already complicated process.

It will be interesting to see how these changes unfold in the coming months.