Home buying and real estate commissions are about to change dramatically
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A recent jury verdict against the National Association of Realtors and major residential violations could cost the residential real estate industry.
The real estate compensation model is at the heart of the matter. Plaintiffs allege that commission rates are too high, that buyer’s brokers are overpaid, and that NAR rules, along with the corporate defendants’ practices, lead to fixed prices . In contrast, NAR maintains that the regulations promote competition and efficient, transparent and fair local broker markets.
NAR, whose CEO left shortly after the famous court defeat, is appealing the $1.8 billion jury decision, so it could be several years before the case – which covering the Missouri markets of Kansas City, St. Louis, Springfield and Columbia – solved. But with similar lawsuits underway, the potential for policy changes that could affect realtors’ pocketbooks is apparent.
The impact on the market continues to spread. Sections of Re/Max Holdingsfor example, down more than 8% on Tuesday amid fears of a lawsuit, even though it had settled with plaintiffs before the recent NAR case decision.
Here’s what real estate agents, home buyers and sellers need to know about potential changes in the economics of residential real estate.
Bad time for bad news in real estate
The jury’s decision comes at a time when many real estate agents are already feeling the pinch.
The rapid rise in interest rates caused by the Federal Reserve’s recent fight against inflation sent the average 30-year fixed mortgage rate topping 8%, exacerbating an existing affordability crisis already in the US housing market. Sellers are unable to move if they have to consider a mortgage rate as large as if not more than double their current rate, while millions of homebuyers cannot afford the monthly payments. made and are currently locked out of the market.
Existing home sales fell to their lowest level since 2010. According to an October report from University of Colorado Boulder resident scholar Mike DelPrete, existing home sales are on pace for 4.15 million actions this year, based on NAR data, which would be down from more than 6 million in 2021 and 5 million in 2022.
At a time when home sales are already under pressure, “this lawsuit is just another punch in the gut for real estate franchises,” said Bill Gross, a self-employed real estate broker in California with eXp Realty.
So far, there has been little impact for brokers and individual agents as a result of the legal proceedings, but that may not be the case forever, depending on how the legal battles play out. on many sides, shaping up. . An analysis by Keefe, Bruyette & Woods analyst Ryan Tomasello published last month, before the jury’s verdict was reached, estimated a 30% reduction in the $100 billion paid out in real estate commissions each year and up to 1.6 million agents losing their source of income. .
The pressure on trade taxes will increase
Taxes have generally been under pressure in recent years, with technology leading to greater transparency and the recent court battles putting pressure on that industry.
Also, as home prices have increased, the fees are more prominent compared to the size of the deal, said Gilbert J. Schipani, founder of Tempus Fugit Law, which represents buyers, sellers, realtors, -lending and businesses through commercial and residential transactions. .
Lawsuits targeting taxes reinforce the general trend of trying to lower taxes in the real estate market, Schipani said.
“This is another step in the direction we have been going for the last 10 years,” he said.
As court cases progress, there is likely to be more disclosure of fees in the future, for transparency purposes, he said.
As Glenn Kelman, CEO of tech-led real estate brokerage Redfin, recently wrote, “In the weeks leading up to the ruling, the National Association of Realtors had already updated its guidelines to allow agents to list homes for the seller does not offer its commission to the buyer’s customer. … Of course traditional brokers now train their agents to welcome fee negotiations. … This is as it should be.”
Red Finnand another technology-focused realty brokerage firm, Capacityamong targets added to new legal challenges.
Buyer’s agents may be the biggest losers
Plaintiffs argue that buyers, not sellers, should foot the bill for the buyer’s agent, but that could negatively affect the ease with which buyer’s agents are the practice.
“If plaintiffs had their way, representing homebuyers would be a thing of the past and the most important and complex purchase they’ll make in their lives,” said NAR spokesperson Mantill Williams, in an email.
If courts force the current rules to change, it is likely that more home buyers will try to find properties on their own to save money, and negotiate with listing agents, thinking they will get a discounted fee. since the latter has already been compensated by the seller, Gross. said.
Not all real estate professionals will agree to work both sides of a deal because of their “inherent bias,” but it could happen more often depending on how the market shapes up, Gross said. There’s also the possibility that new rules imposed by the courts could prevent real estate professionals from working on both sides of a deal, Schipani said.
Kelman noted in his post-judgment analysis that if buyers still hire a buyer’s agent, they are likely to negotiate a lower fee with the higher focus and because it might not be part of the price of the home further, which allowed it to be financed with a mortgage.
This also suggests that new agents may be less likely to enter the industry, according to Gavin Myers, managing partner at Prudence, a venture capital firm that invests in the real estate sector. Most new agents start out on the buy side and there is risk when trying to break into the business. If there are questions about how they get paid, or if they get paid, people may not want to work on the buy side, or you may not find high-quality people, Myers said.
Local housing market changes will be significant
Local market rules may change depending on what happens in the courts, or wider market trends.
For example, the Real Estate Board of New York (REBNY), which is not affiliated with NAR, announced upcoming changes to its rules, in a stated effort to promote transparency and consumer confidence in the residential market. The changes, which had been in the works for months, were voted on in October.
Starting January 1, compensation offers to buy-side brokers must come from the seller/owner, according to the change. Listing brokers will no longer be allowed to compensate the buy-side broker, even on behalf of the seller. Also, listing brokers will no longer pay buy-side compensation. Instead, the buyer’s broker will be compensated directly by the seller or owner of the particular property, which should occur at the closing as usual in the New York City area, the group said.
“The decoupling of buy-side compensation represents the future of residential real estate, and other listing services are expected to follow suit,” REBNY said in an FAQ on the their website discussing the changes.
Commissions are already settled
Currently, real estate professionals do not have to change the way they do business, while legal challenges are ongoing. However NAR strongly recommends using buyer representation agreements for reasons of clarity and understanding. NAR also urges members to continue to inform consumers that commissions are negotiated and fixed between brokers and their clients.
A separate lawsuit against NAR and its violations, involving multiple markets, could go to trial next year, and another national lawsuit has recently been filed to join the face
“No matter what happens with a Missouri judge, or in any other courtroom, one thing is certain: nothing is going back to the way things were,” wrote Kelman, who left his company NAR before the decision, in his recent post.
Real estate professionals should keep an eye on it.
“This is a time to read the fine print, stay as informed as possible both for the sake of your business as an agent and for the good of your client,” says Vickey Barron, a licensed real estate broker with Compass in New York City ..