The recent settlement proposals from the National Association of Realtors (NAR) suggest a future where the traditional commission structure in real estate transactions could undergo significant changes. These proposals create an atmosphere where commissions are not explicitly outlined in MLS listings, potentially complicating contract negotiations between buyers and sellers. Despite NAR settlement assurance is that seller concessions will remain permissible, the way commissions are disclosed and negotiated might shift dramatically, with possible ramifications for both buyers and the agents representing them.
If you are unfamilar with the terms of the settle, please read: NAR Commission Settlement Prosposal
One of the advantages our transaction coordinator team enjoys is the opportunity to work with various brokerages and participate in a range of internal discussions. We've gathered insights from these meetings and, while eager to explore some theoretical outcomes further, wish to convey the general consensus we've observed.
Many brokerages anticipated changes in the compensation structure due to the Department of Justice's (DOJ) longstanding push for reform. Most have advised their agents to adapt their discussions with buyers and sellers accordingly. This includes urging buyer's agents to more effectively communicate their value, supported by brokerages through training. Changes of this nature are not unprecedented in the real estate industry; the practice of using buyer's agents, for instance, has evolved over time and varies internationally. The consensus is clear: agents who cannot articulate their value may see a decline in transactions. It is also becoming crucial for agents to explain to sellers that the commission for buyer's agents is integrated into competitive market prices, essentially serving as a form of advertising. New forms, legal requirements, and guidelines from both brokerages and local associations are expected to emerge.
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Although the settlement is pending finalization, we've outlined below several potential market changes or outcomes if the current proposals proceed as planned:
Potential Impact
Reduced Transactions: The added complexities and financial burdens on buyers could lead to fewer real estate transactions, affecting the industry's turnover rate.
Shift in Agent Roles: There could be a shift towards prioritizing listings over buyer representation, as listings may offer more straightforward compensation structures.
Diminished Buyer Representation: The value proposition of buyer's agents—highlighted by their dedication to client service—may be overshadowed by structural changes, potentially leading to a reduction in agents focusing on buyer representation.
Flat-Fee Models: More agents and brokerages may offer services for a fixed fee instead of a commission percentage, appealing to cost-conscious buyers.
Growth in Seller Concessions: Agents might see more sellers offering concessions to cover buyers' costs, including agent commissions, as a negotiation tool.
Example:
Sale Price: $300,000
Seller Concession: $10,000, which might be broken down as follows:
$2,000 allocated towards the buyer's closing costs.
$8,000 allocated as the buyer's agent commission.
Greater Use of Attorneys in Transactions: In markets where it wasn't the norm, there might be an increase in hiring attorneys to draft real estate contracts, especially in complex negotiations.
Market Exit: The new settlement could raise barriers to financial success in the real estate profession. It might also lead to an exit of agents who find the new structures less favorable or too challenging to navigate.
Shifts in Consumer Preferences: Consumers' preferences regarding how they engage with real estate services might shift, with some preferring DIY approaches or limited service models to save on commissions, while others may value full-service representation more highly.
Rethinking Professional Affiliations: According to an Inman survey a significant portion, 27% of agents, are contemplating joining the newly proposed American Real Estate Association, signaling a potential shift in professional allegiances away from traditional groups like NAR.
What You Can Do Now
Real estate agents must proactively adapt to these potential changes. Strategies might include:
Value Proposition: Be able to clearly articulate their value to both buyers and sellers, justifying their fees with tangible benefits.
Enhancing Negotiation Skills: In a market where commission structures are fluid, agents with superior negotiation skills will stand out.
Prioritize Listings: Shifting focus towards securing listings could offer a more stable income source amid changing commission dynamics.
Extensive Disclosure: Agents should prioritize extensive disclosures to both buyers and sellers about current market conditions and the implications of these on contract negotiations, prior to signing. Mastering Disclosure Structure and Sequencing: Mitigating Liability Risks in Real Estate.
The Importance of Education and Adaptation
Understanding the reasons behind the proposed settlement and its implications is crucial. Agents should incorporate discussions of these changes into client consultations, emphasizing the value and expertise they bring to the transaction process. Educating clients on potential market shifts and adjusting service offerings to match new realities will be key strategies for agents aiming to thrive in a transformed real estate landscape.
As the industry stands at this juncture, highlighted in "New Horizons: Why Brokerages are Leaving NAR and What It Means for the Industry," the collective response from agents, brokerages, and associations will undoubtedly shape the future of real estate transactions. While uncertainty prevails, the resilience and adaptability of real estate professionals will undoubtedly play a pivotal role in navigating these changes, ensuring that both buyers and sellers continue to receive the support and expertise they need to make informed decisions in a shifting market environment.
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