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- 🚨 SPECIAL EDITION - $418M SETTLEMENT 🚨
🚨 SPECIAL EDITION - $418M SETTLEMENT 🚨
How this landmark case will affect you
All right y’all - today is going to look different. There was a landmark $418M settlement by the National Association of Realtors (NAR) and it marks the most significant change to the housing market in over 100 years.
If you’re new here, hi! Welcome. Here’s a link to what you can normally expect:
Okay buckle up everyone, this will impact you so let’s get you all the information you need.
Quick disclaimer - there has been an incredible amount of very heated discourse in the week since this settlement. I am approaching this factually, not from a Realtor lens.
âś… Housekeeping, done. Moving on.
Let’s start at the top - what is NAR?
NAR is the National Association of Realtors.
Here are some facts:
1.5M members
They own the word Realtor™
Own the largest PAC in Washington
Psst: A PAC is a political action committee. They donate funds to campaigns for or against candidates, initiatives or legislation. They have serious pull.
Got it. What else do they do?
Houses for sale are listed on the MLS (multiple listing service) - this is a subsidiary of NAR. Think of the MLS as Zillow on steroids. Agents search the MLS for deals, additional information about the property, disclosures, tax records etc. It houses a lot of information that is not available to the public. If you want to see a home outside of an open house, NAR owns the lockboxes. Sometimes the word monopoly gets thrown around carelessly but nearly 9/10 real estate transactions are handled by agents affiliated with NAR.
💰️ Let’s talk: money.
Buying and selling a home are infrequent transactions filled with emotion. We know everyone is getting paid but how much and who is paying?
When selling a property, industry “standard” (more on this soon) is 6% of the sale price of the home. That 6% is typically split evenly between the seller’s agent and the buyer’s agent. When you are a buyer’s agent you are “free” to the buyer - you are paid out of the 6% set aside by the seller. The MLS is also where agents see how much commission is being offered on a given house. It usually says 3% but can be higher or lower.
Now, let’s talk: misaligned incentives.
Meet the characters: Molly is buying a house. Her budget is $500,000. Ryan is her realtor.
Here is the scenario: Molly likes house A and house B. Both houses are identical except house A will pay Ryan 4% and house B will pay Ryan 2%. That is a $10,000 commission difference for Ryan between house A and B. Molly is conflicted and she needs some advice.
All things equal - which house do you think Ryan will recommend to Molly? Probably A. Capitalism baby.
Ryan talks up house A resulting in Molly buying it. She is not aware of his undisclosed interest. This behavior on Ryan’s part is called - steering. Steering is the illegal practice of directing a prospective homeowner toward or away from a particular area. This is typically used to describe race/socioeconomic class but applies here as well.
Phew, that was a lot of information.
What does the settlement do about steering?
Seller agents can no longer display the buyer agents commission on the MLS.
Theoretically - this is a good thing. Your buyer’s agent should show you the best property for you, regardless of their commission. However, the NAR president all but said you can just call the seller agent and ask what your commission split will be.
6% seems like a lot.
It is. One of the highest in the world.
NAR will say, the 6% seller side commission is not set in stone. This is true. This has come as a surprise to many, it has never been set in stone. This percentage has always been negotiable between the seller and their agent. If this is the case, why don’t more seller’s take advantage? It is because NAR owns the entire ecosystem of home buying/selling. Seller’s agents know anything below 3% commission for the buyer’s agent will potentially cause steering. They want to sell the property as quickly as possible without compromising their own commission. Realtors operate in a system where it is difficult to break the 6% mold without affecting either yourself or your buyer (less/worse offers due to lower buyer commission). If you do discount yourself, the industry frames it as undercutting and devaluing the entire profession.
What’s changing: The seller can choose to pay the buyer agent commission, or not. If the seller chooses to not pay the buyer agent commission, the buyer will have to. This is where the stickiness comes in, what has historically been a “free” service to buyers now comes with a fee that they will be clearly aware of. How that’s handled, how the buyer agent will get paid and how much is the $418M question.
Here is what I think and why.
The relationship between the buyer and their agent will change fundamentally. As competition enters the real estate market buyers will favor self-serve tech solutions or flat fees for agents to complete contracts.
Disclaimer round 2: There are many incredible agents on both the buy and sell side who are worth every penny they are paid and more. When things go wrong buying a home, they can go really wrong and spending 3% can save you hundreds of thousands. There will always be a place for agents who are experienced, knowledgeable and highly trusted by their clients. The industry has unfortunately become bloated and this settlement gets ready to cut the fat.
For me, the real estate industry is analogous to the travel industry. It used to be impossible/unheard of to book your own airline tickets and accommodations. It’s too difficult, it’s too complicated and too many things can go wrong. A majority of those concerns were addressed through access to education and competition. We got educated on how to search for and get our flights. There was competition from a variety of sources that allowed us to search for the best deals. This is where I see real estate headed.
A federal court is expected to give final approval to the NAR settlement and make it official in the coming weeks. We will be back to our regularly scheduled programming next week but I will keep you updated, always.
Thank you for being here - Kirtana
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