I heard about the NAR lawsuit over broker commissions and potential shake-up of the real estate market. What’s happening with real estate commissions here in Knoxville?
In March 2024, the National Association of REALTORS® (NAR) settled a class-action lawsuit filed by home Sellers over broker commissions. The settlement resolved claims that NAR's rules on broker commissions resulted in excessive fees. The NAR agreed to pay $418 million to people who have sold homes in recent years, and made two rule changes:
- Multiple Listing Services (MLS)
Agents will no longer be allowed to include the Buyer Agent's compensation when listing homes on MLS databases. Instead, Buyers will be able to negotiate their own Agents' pay and formalize it in a signed contract. The contract must include a specific disclosure of the compensation amount or rate, and it must be objective and not open-ended.
- Representation contracts
Buyer's Agents will be required to enter into representation contracts with their clients. MLS participants working with a Buyer must also enter into a written agreement with the Buyer before touring a property.
Overall, the new rules are intended to make commissions more transparent and competitive in the real estate industry. Changes will go into effect as of August 17, 2024.
Will these changes disrupt the real estate market as we know it?
When the settlement was announced in March, news outlets and industry observers predicted a major shake-up in real estate. However, actual impacts are likely to be relatively modest, at least for the foreseeable future. This is because:
- Commissions were always negotiable – Sellers have always had the ability to negotiate commissions and fees with listing Agents, and Sellers should have been entering into listing agreements detailing Agent compensation and any cooperating compensation to a Buyer’s Agent. While the lawsuit has brought increased visibility to commissions, Sellers will continue to work with Agents to agree to commissions aligned to services provided and financial goals.
- Buyers will still want to work with Agents, and business models will eventually adapt to account for Buyer’s Agent compensation – Buyers will need to be mindful of how they will pay for Agent representation (more details on this below), but there will likely be options to bake those costs into a purchase transaction via Seller concessions or other methods that will keep them from having to pay out of pocket.
- Home prices are unlikely to drop significantly – While decreased transaction costs may help bring prices down slightly, overall pricing will continue to be primarily driven by supply, demand, and interest rates.
Ultimately, the fundamentals of successful real estate deals will remain the same: motivated Buyers and Sellers coming together in a market where supply and demand align; where both parties have clear objectives and realistic expectations about the transaction; and information is shared transparently and efficiently, allowing all involved to make informed decisions. Competent real estate agents play a crucial role by adding professionalism and expertise, facilitating communication, and ensuring that both the Buyer’s and Seller’s interests are addressed. They guide the process from negotiation through to settlement, helping to maximize the outcomes for both parties.
What should Knoxville Sellers and Buyer’s be looking for?
As a Seller, you still have the power to negotiate the commission rate with your listing Agent. Traditionally, listing Agents charge a percentage of the home’s sale price to be split between the listing Agent and the Buyer's Agent. However, this is not set in stone. Discuss and negotiate the commission rate with your Agent to ensure it aligns with the level of service provided and your financial goals. You have the option of offering compensation to Buyer’s Agents and should consider the pros and cons of doing so.
Link: “Home Sellers: Here’s What the NAR Settlement Means for You”
As a Buyer, carefully review the benefits, risks, and tradeoffs of using a Buyer’s Agent and how they will be compensated vs. representing yourself:
- If you opt to work with a Buyer’s Agent and sign a Buyer's Agency Agreement, you’ll have someone representing your best interests while offering market insights, negotiation skills, and expertise throughout your home search and purchase. This fee is negotiated as part of the purchase contract. However, you’ll need to agree to terms and clearly understand how and how much the Buyer Agent will be compensated for their services, and you should be aware of scenarios where you’ll need to pay them directly or negotiate a Seller concession to cover their fee. We are finding that the seller is still offering to compensate the Buyer's Agent in all scenarios we have seen since the settlement.
- If you opt to represent yourself, you’ll avoid having to pay Buyer’s Agent compensation at closing, ultimately reducing your cost to purchase. However, without professional representation, you may miss out on valuable insights, negotiation strategies, and critical support that a Buyer’s Agent can provide. You’ll have to communicate with numerous listing Agents directly, potentially leading to a disjointed and inefficient experience as your search expands.
Link: “HomeBuyers: Here’s What the NAR Settlement Means for You”
As a Seller, does this mean I no longer have to compensate the Buyer’s Agent?
As previously stated, commissions were always negotiable and will continue to be. Our recommendation when listing a home is to offer a Buyer’s Agent commission (or Buyer’s Concession) to cover the cost of their Agent fees. By offering Buyer’s Agent compensation, you can increase the marketability of your home, broaden the buyer pool, attract serious buyers, and reduce buyer concerns over Agent compensation.
When you choose not to offer Buyer Agent compensation, buyers represented by agents will need to cover their Agent's fees themselves. This added expense may lead them to prioritize other properties where the Seller offers compensation, making your home less attractive to these Buyers. These Buyers may also negotiate strongly for Seller Concessions, leading to a scenario where you effectively end up paying the Buyer’s Agent commission anyway.
Additionally, if you work with unrepresented Buyers who may lack experience and professionalism, your Listing Agent will need to take on the role of a Facilitator throughout the transaction. This increased responsibility could lead the Listing Agent to request an adjustment in their commission to account for the additional time and effort required.
As a Buyer, do I need to have a Buyer’s Agent to help purchase a home or can I contact the Listing Agent directly?
Your first choice as a Buyer is to determine whether to work with an Agent and enter into a Buyer Agent Agreement or proceed as an Unrepresented Buyer. A Buyer might choose to work with a Buyer's Agent because these professionals offer valuable expertise and guidance throughout the home-buying process. When seeking a Buyer’s Agent, you may want to consider a Realtor who holds the Accredited Buyer’s Representative (ABR) designation. Accredited Buyer’s Agents can provide market insights, help identify suitable properties, assist with negotiations, and navigate complex paperwork, ultimately ensuring a smoother and more informed transaction. Having a Buyer’s Agent also means having someone to advocate for your interests, which can be particularly beneficial in competitive markets where quick decisions are needed. You can feel confident that you have someone representing your best interests throughout the transaction who knows the market, how to negotiate, and how to avoid mistakes and pitfalls that can derail a contract and settlement. With that said, Buyers may need to prepare to cover the cost of their Buyer’s Agent commission if a Seller is not willing to cover it. Buyer’s Agents will work with Listing Agents and Sellers to negotiate their commission or to receive a Seller Concession at closing to cover the cost of the Buyer’s Agent’s fee.
Conversely, some Buyers may opt to be unrepresented to avoid paying agent fees, as working without an Agent could reduce overall costs. Unrepresented Buyers have the flexibility to negotiate directly with Listing Agents, but they must be prepared to handle all aspects of the transaction on their own, which can be daunting without professional support. This approach might appeal to experienced Buyers confident in their ability to manage the process independently. This will require them to sign agreements to view single properties. This process is time-consuming and adds complexity to their search. The Buyer will have to coordinate showings and gather information while managing other responsibilities including financing contingencies, home inspections, home repairs, and any issues that arise such as appraisal gaps or title concerns. While the goal of saving money is understandable, the complexities and demands of buying a home can lead to inefficiencies and setbacks without expert guidance, especially when it comes to legal contracts and required disclosures. When working with Listing Agent directly, Buyers need to remember that their fiduciary duty is to the Seller.
What is the difference between Compensation and Seller Concessions?
As of Aug 7th, 2024, the East TN Realtors released information stating that a new field will be added to our MLS.
While the “Cooperating Compensation” field in the MLS will be going away, a new optional field titled “Concessions” will be added that will allow for more transparency for both Sellers, Buyers, and Realtors. This is not a workaround for cooperative compensation (as Concessions are between a Buyer and a Seller), but it will give an indication if a Seller will be offering any Concession to a Buyer to include Buyer's broker fees, closing costs, or other Seller paid concessions. The value of communicating offered concessions on a listing will be very helpful to Buyers when drafting an offer. However, as a general matter, Seller concessions usually aren’t binding until they are established in an executed contract such as a listing agreement or a purchase and sales agreement.
The "Concessions at Close" field will required after the home has closed and will provide the following options:
- Amount paid by Seller for Buyer’s broker fees
- Amount paid by Seller towards closing costs
- Other amount of Seller paid concessions
- Total amount in concessions paid by Seller (this field will autofill with the sum of the previous three fields)
Concessions are new to our MLS, but they are not new to real estate. It will be valuable to Real Estate Agents to more accurately price properties based on a Seller's true net and help appraisers when finding the true value of the property.
Conclusion
Overall, these changes are expected to minimally impact how realtors will be compensated, and only provides more transparency and competitive practices. The introduction of more transparent practices aims to protect all parties involved by allowing for clearer communication and expectations regarding real estate transactions. While it may introduce challenges, especially for Buyers with limited budgets, it also offers opportunities for more customized and negotiated real estate services.
