NAR Settlement Agreement and Meaning

David and Julie discuss the recently publicized agreement between the National Association of Realtors and Plaintiffs in class action suits.  How will the landscape of real estate by changed?  What will be the new rules of operation between buyers, sellers and agents?   Who wins, who loses, and who gets paid.  

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Transcript

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And bang, here we go. I'm Julie Jones and I'm David Vann with the Real Property St. Pete podcast. A very poignant conversation today talking about the most recent news. It's in all the headlines we're going to debunk some myths, talk about the facts and how we think it's going to impact our market. The NAR settlement. Agreement. And post settlement environment. We have a lot to say but we're gonna try to keep it to a good summary we want to cover the facts and help everyone to understand we're going to talk about what's happened what's changed and And how things were before and how things might be going forward. And that's just going to be really a guess because there's a lot to come. Yes, we've talked about this actually today for about an hour and there's a lot of different things we feel like could happen, but we're really not necessarily sure what will happen. So Julie, tell us what's happened. Well on March 15th, the National Association of Realtors Often called NAR, announced a proposed nationwide settlement agreement that would release the organization, association owned MLSs, and the majority of its membership from liability in the seller initiated commission lawsuits, The proposed settlement includes a payment by NAR of 418 million, as well as several changes in business practices. Yeah, that's the basis I think that's a pretty good summary, but who is NAR and what is a REALTOR? NAR is the professional organization that REALTORS are members of. Right. And what's the difference in a real estate agent and a realtor? A real estate agent has a license through their state and their license to be a real estate agent. They can practice in many different ways, but a realtor is a member of a professional organization. Realtors are real estate agents that are held to a higher professional standard and guided by a multi point. Ethics. Code. The Code of Ethics is divided into three major sections, and those sections include duties to clients and customers, duties to the public, and duties to other realtors. We studied that when we have continuing education ethics courses, which is, put on by the National Association of Realtors. You know, being held to this level of ethics and being held to, a level of respect within the community. with respect to the laws, with respect to fairness, yeah. The National Association of Realtors, support that level of respect and fairness and honesty in our business. So what's changing? Well, I think I want you to talk about that. The key changes in the NAR settlement and what's being proposed. So for clarity, this is a proposed settlement. It has not been a final court decision, right? the REBAC settlement received preliminary approval in November of 2023 and is set for a final approval hearing on May the 9th of 2024. So keep that date in mind if that is confirmed in May, in mid July there will be significant changes to the way we operate. Two proposed business changes that are most relevant and they're expected to go into effect in mid July of 2024. The first one is that offers of compensation are still permitted, but they can't take place in the MLS. So that That means sellers can still offer compensation to the agent that represents the buyer in the transaction, but they can't do it in the MLS and the MLS has been a cooperative database where realtors offer compensation as a listing agent. To a buyer's agent. And it's with the knowledge of the sellers that the buyer's agent will be paid a certain amount of commission based on a percentage based on the sale price. And they list that in the MLS. The second thing that will change is that NAR, the national association of realtors would create a rule requiring a written agreement between buyers and their agent. The new rule would apply to any agents using the MLS. Where the buyer would pay their agent for the services that they provide. These points I think are very important consumers today don't have a solid awareness about how real estate commissions work. You've heard a lot of differing commentary and the news has sensationalized this situation. But I think a big piece of that is most people don't really know how real estate commissions work. And so It's true. I think that just putting this lawsuit out into the world, into the real estate environment is not going to solve that. This is going to be a huge education piece among sellers, buyers, the community. The market, all of it. It will be a situation where you first have to explain how things work before, and then how they're changing. And I think that's probably what we're trying to do here today too, is to talk about how things have been and what it looks like could happen In July, if everything's confirmed, I think that's the perfect opportunity for us to share with people and including our thoughts about how things are gonna work, right? I mean, do we actually think it's something that's better for the consumer? Do we think it's better for the realtor? Is it better for the seller? Is it better for the buyer who benefits from this agreement? I think your question is poignant, valid. You know, there's 418 million involved in this suit and that breaks down to probably around 5, 000 to each person each house that was sold, each seller, there was 50, 000 sellers that came together to bring the lawsuit. you talked about when you meet with your sellers, explaining to them how commission works. Maybe you should go over that. So, it's funny because I would say, in almost every scenario, when I meet with my sellers to go over the listing agreement and talk with them about how the real estate commission is broken down and how that works, which is always negotiable, I would say it doesn't matter the seller's, you know, selling experience, it feels like a new conversation to those people and a aha moment about how the commission works and how it's going to be, charged against their closing costs, et cetera. So, that's a perfect point because this situation is all about just creating a new awareness of how things are going to work. Right. I Have presented Commissions in listing agreements as a part of the conversation where I show them that, the total listing commission is 6% and that I'll be offering 3% in the MLS as compensation for the buyer's agent. And they will ask me, so does that mean it's 9%? And I'm like, no, it's not 9%, it's six. Three for one and three for the other. Mm-Hmm, it's split fairly. And you know, we try to cooperate to help people come to an agreement and, you know, that cooperation has been, what really helps make the transactions work, but it's not anything that we're cooperating on. It's that two parties, the buyer and seller, are the ones that are negotiating. We're there to bring the messages, explain the contract, Help people understand what the rules and laws are and the buyer and seller have to decide if they're going to come to an agreement or not. But we're just doing the job that we do each and every time. Huh. One of the biggest changes is you have to have a written agreement with any buyer that you're working with. And that's new for our area, but it's not new for a lot of other territories. That's true. In fact, it's notable that there are 18 other states that already require a written buyer agency agreement. That's Arkansas, Alaska, Georgia, Idaho, Maryland. Minnesota, Missouri, Nebraska, New Hampshire, North Carolina, North Dakota, Pennsylvania, South Carolina, Utah, Vermont, Virginia, Washington, and Wisconsin. All of those states, 18 of them require that a written agreement must take place between the buyer and the buyer's agent. That's the law. how are buyers agents going to be paid in the future? According to NAR buyers, agents can be paid in multiple ways, including, but not limited to buyer clients can pay their agents directly in any manner that the two parties agree to. Now that brings up a point that I think is interesting If you are purchasing a property and cost of acquisition includes the commission for your agent, when you sell that house, the amount of profit that you make on that house, if it's taxable, the amount of money that you paid to your agent is deductible. So I've even had in the past buyers who are pretty savvy and tend to be pretty wealthy offer to pay all of the commission. And the closing costs and they have a purpose. Their purpose is to take on all of the expenses of the transaction and make that a deductible part of when they sell the property. I've seen that happen before. It's something that can happen. You know, usually your buyer's pretty savvy when they do that and they feel good about the price they're offering. They just want that to be an expense for them. Not the seller, it benefits them on the sale side on the back end. Another option they offer is that sellers can offer compensation in the form of a concession. That might be the amount of the commission. They could even say that they'll pay the commission for the buyer. If they want that, it's something that is a possibility. And I think this goes back to what we have talked about a little bit. And that is what are the market conditions? I mean, if it's a seller's market, the seller's not going to pay the commission for the buyer's agent. They're going to say, give me a full price offer and you pay your agent. If it's a buyer's market and it's tough on the seller, and that's what we're seeing right now, as we'll get into in our next market statistics report, is that A 3 percent commission is something they might offer to the buyer as an incentive, as an incentive to be able to sell the house. Well, even with part of the settlement, the listing broker can offer a part of its commission to the buyer's agent. You just can't do it. And publish it in the MLS anymore. That's right. It's not available in the MLS. It doesn't mean that they can't pay it. But again, I think I'm back to what's the market condition. I think that this. New Format can hurt some consumers too, and I'm not sure if that was thought through. I think it will make things more difficult for the first time home buyers and the VA Buyers there's gonna need to be a solution for those consumers to help out with this situation. I 100 percent agree. They're going to have to come up with 3 percent additional cash to purchase the house so that they can pay their agent. And that's going to be tougher. And that's the reason that this was done in the first place was to protect those kind of buyers that don't have representation. The seller has been living in the house. They have equity in the home. They can pay it. But in general, the buyer brings the money anyway. It's, you know, you made that point when we were talking about this before, I would like you to hit it home because I think it's such a valid point. I mean, the point is, is that the only person bringing money to the table is the buyer. That's the one they get alone. They bring the money to the table and they pay the seller whatever they agreed upon prices. The seller just deducts a part of that towards the commission, but the seller's not bringing any money. They're bringing the house. And so. Whatever they agree to is built into the commission. And that's been the way it's been for a hundred years. And consequently the market is based on a 6 percent commission being paid by the seller. Now, the market value of a property. When suddenly, there's no longer a 6 percent commission being paid by the seller, it's now a 3%. And now the buyer has to pay the 3%, if that's the way it's worked out, how do you value the property? Meaning, once you see a sold property listed, you don't know if 3 percent was paid towards the buyer's agent or not. Because they're taking that out of the MLS, right? It's not clear, it's not transparent, so it's going to be tricky. We'll certainly have to figure out how to navigate this new world, right? The buyer might say, look, I'll pay your commission. That's fine, but I'm taking 3 percent off the price. I'm offering to that seller because I'm paying it now. The comparable properties were sold for 6 percent and they paid the commission. So I think that might have an impact on property value in the first few months of this practice. Right. There's, and we talked about that at the beginning. I mean, understanding exactly what's going to happen is, pretty complicated and it will bear itself out. But I was talking to a realtor the other day and his answer was, well, we're all going to be obligated to sign these buyer broker agreements now. There's not a need. There's not any question about it. I'm not leaving the house without having one signed. Who knows if that's what's going to happen, but at any rate, the sellers would still be able to use the MLS to offer concessions as covering buyers closing costs. The concessions, however, cannot be conditioned on the use of. to a buyer brokerage, buyer broker, or buyer representative. So basically what they're saying there, a seller concession cannot be offered under the condition that the funds be used to pay the buyer's broker. So Basically, the seller cannot require that that concession be used as a commission. It would be the buyer's prerogative then. Yes. What the buyer does with the concession is up to the buyer and it's of no business to the seller. Again, creating a gray area. Of knowing who paid it makes it a lot more difficult to sort out property values. It does, because 3% negotiated off the price, if it's priced well is a pretty significant negotiation. Right. And some price points and, and I also see that, when you're in a negotiation for a contract for a purchase and someone says, okay, look, you know how it was during COVID people would get three months of post closing occupancy for free. Because it was a seller's market. People would leave their furniture for free. People say close when you want to, I'll pay cash and I'll pay 10 percent over. I mean, all these things were happening because it was a seller's market. I mean, don't you think the sellers would say, I'll pay your agent? Yes. I mean, it's just another negotiation point that is not going to be clear and transparent. It's just like, well, how did you get that house? Well, we let the seller stay there for six months. And we paid as agent. I mean just not clear So, do you think this is gonna mean buyer agency is gonna go away? No, I think buyer agency is gonna soar you want to be represented and you want to be represented well, and so you're probably going to sign up and make a deal with an agent to represent you who knows what they're doing. And I think that's going to be a big factor. I think it will too. Do you think that buyers will be more compelled to come to the listing agent? To make the deal for them, you know, I think that people like I mentioned will be confused about how things work just because this is a proposed settlement agreement does not Create knowledge for the consumers right away. It's going to be something that's has to get sorted out. I think there'll be levels of solutions, levels of representation. I heard that. Lots of options. Yes. Yeah. Yeah. So I think the important thing to denote is the timing of these changes. The proposed settlement does still require court approval and that process can take months like any legal process, but NARA expects to implement these business changes, meaning no compensation offers in the MLS and a required signed buyer broker representation agreement by mid July of 2024, something to Be paying attention to if you're considering buying or selling a home getting some good advice from an experienced And knowledgeable agent on this subject, right? I agree. I think that's right and that's a great summary. I think one other thing that I talked about in kind of a mastermind situation the other day, we had a lender on the call and there was some conversation about, especially in the lower price points where it's harder for people to come up with the cash, that maybe possible to roll some of those fees into the loan. Where it might be possible that, you know, Hey, I need to pay my agent. It's now the law and it says that I have to pay my agent 3%. And so I, it's a part of my closing costs. And so I'm going to roll those closing costs into the purchase price. Instead of paying 500, 000, I'll pay 515, 000 for this house. And that will come out of my closing costs. I think that seems like a nice solution for some people who might not have the extra money saved. So I'm hopeful that will work out. There's going to be a lot of change coming up. Right, right. You know, things are going to look different. Yeah, they're going to look different. there's a lot of other models out there in the real estate business that are probably going to be affected by not having, I mean, a lot of people didn't have those kinds of agreements with their clients. They just relied on the MLS compensation to be paid and that's going away. I think, you know, for the way the market's shifting, it's probably good timing for there to be more substantive agreements between buyers and their agents, you know, when we were operating in 2020, 2021 of Fast and Furious. It would have been possibly more difficult, but things have slowed a little. There's more time to sort out and invest time into what you're doing. The sellers are much more motivated. That too. Yeah. I mean, you know, we're going to talk about in our next market. Report that we're up to three months worth of inventory and the amount of houses on the market is way up from last year. Stay tuned for that broadcast and we appreciate you listening more to come on this subject. I'm sure. Absolutely. It was really kind of it's kind of exciting. Well, I'm Julie Jones and I'm David Vann. With REMAX Metro and the Real Property St. Pete podcast. Thanks for listening. Subscribe below and follow us