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NAR Settlement Update and BIG Market Shifts

If you follow Real Estate market news at all, you have probably heard about the National Association of Realtors (NAR) Settlement and possibly even news stories about how this is a good thing for Buyer affordability and will save Sellers commission money.

Well, I have some bad news for you…

This settlement could mean BIG value changes that negatively impact both Buyers & Sellers and the overall value of our Real Estate market. Here is how 👇🏻

The Economic Effect of the NAR Settlement:

The National Association of Realtors is America’s largest trade organization with a peak 1.6 Million members back in 2022 and over 1 Million members today. Their mission is Empowering REALTORS® to preserve, protect, and advance the right to real estate for all.

Here are the key changes of the NAR settlement that you need to know. All of these rulings are set to become effective July 2024:

  1. Offers of Buyer Broker Compensation can no longer be listed on MLS – Currently I can see a wide range of Buyer Broker compensation models on our MLS, including flat fee, commission based, and discounted rates for discounted services. Under the new ruling offers of compensation cannot be listed on the MLS and would have to be negotiated with real estate professionals offline.
  2. Written agreements for Buyers now Required before showing property: While Southern Athena has always required written agreements with our Buyers (we practice Exclusive Representation), in this settlement, it would be required that all MLS participants working with buyers enter into written representation agreements before showing them properties.
  3. Large Settlement Payout – NAR would pay $418 million in settlement fees over approximately four years. This is a substantial sum, and will take away from housing rights advocacy and lobbying activities pertinent to protecting consumers’ rights to own their piece of the “American Dream”.

With changes in Buyer Broker transparency, industry turn over, and lack of leadership at the National level, the Real Estate market is in for an economic shift, and it’s not what you think.

No Clear Offers of Compensation listed on MLS for Buyer Brokers means Trouble for Buyers

Without clear offers of Buyer Broker compensation listed on the MLS, Buyer’s don’t know how much they will actually have to bring to the table to pay their agent in order to Purchase a home.

This lack of transparency causes additional confusion in an already stressful and complicated process, meaning many Buyers will elect to leave or never enter the market entirely.

Even before the settlement, we have seen buyer demand decrease due to inflation, higher costs of living, lack of supply, and market uncertainties. With interest rate increases, many buyers are already priced out of the market and living paycheck to paycheck as their wages don’t keep up with cost of living factors. Millennials, the largest adult generation in the US, are already not entering the market while accounting for age.​

Pricing Transparency is Important for Consumers

There has been a ton of research on pricing transparency being a good thing for consumers from topics such as wages to health care costs.

It enables consumers to compare prices and quality across different providers and products comparing apples to apples so they can make informed decisions. It also promotes competition in the market. With greater price transparency, Buyers can avoid unexpected costs and better manage their real estate expenses.

With the new settlement taking effect in July, what was once a transparent offer of cooperative compensation goes away, and so does its benefit.

New DOJ suggested Buyer Broker Compensation Models Don’t Actually Benefit Buyers.

The lawsuit argued that the old Buyer Broker Compensation model of charging a commission is outdated and puts Sellers that don’t want to pay it at a disadvantage to get offers on their property.

The DOJ has encouraged Realtors to adopt new compensation models such as online offer platforms and hourly models similar to how attorneys bill. 👈🏻 This one could get really dicey for Buyers as Realtors charging hourly are going to get paid WAYYY more and without the same client benefits.

In our local market, these options are already available to consumers, but not as main stream because of their inherent shortcomings for both Buyers and Sellers.

Buyer Affordability is going to get even worse, especially for first time home buyers, as potential out of pocket expenses rise and Buyers decide they can’t afford the risk.

Here is a breakout of some of those Buyer Broker models and how they would work under the new recommendations.

Buyer Broker Hourly Fee Model:

For instance, a Buyer signs an agreement where they pay their Realtor under an hourly or pay per service fee model – say $200 per showing or $100 per hour. When they start their search, they think that they are pretty reasonable and will only visit 3-5 homes to keep costs down and they will do all of their searching online by themselves. 😉 They already do anyway.

They don’t realize the Average Buyer views 10 homes before making an offer, and what would you know, that first offer doesn’t work out and the homes they love online, don’t look the same in person. Their planned $600 – $1,000 search just jumped to an unexpected +$2,000 dollars.

And even when they do finally find “the one”, the Buyers still don’t have a clear understanding how much additional money, hours or other service based transaction fees they will be paying because of their limited Buyer Broker service. That $2,000 surprise may end up costing a lot more or even prevent them from Buying all together as they waste tons of time and money in the process.

Traditional Buyer Broker Commission Model:

A Buyer wants representation and commits to an Exclusive Representation Agreement with their Broker for a set commission to be negotiated with the Seller. They commit to a certain % and start their search under the traditional industry model.

When setting up tours their Buyer Broker has to negotiate a Seller paid commission prior to showing them a home. Or if they miss this step, they have to negotiate a commission later on in the process. This can get risky and prevent out of town Buyers from even seeing properties because of the additional upfront legwork to get a door opened. ie. pre-showing negotiations, calls, paperwork, touring coordination, confirmation, etc.

Say a Buyer falls in love with a property online, but when their Broker calls, the Seller is not offering a commission. They turn down looking at the home because they can’t afford their Buyer Broker’s fee on top of all their other costs.

The Buyer misses out, the Seller misses out, and everyone moves on.

Or worse, their agent isn’t successful negotiating a Seller paid commission on the front end because the listing agent is unresponsive and their Buyers are on a tight timeline visiting from out of town. They make an offer, later to find out they have to cover part of their Buyer’s Commission as an additional unexpected cost after the purchase contract has been signed. Surprise surprise! Now they are buying a home and having to bring thousands more $$$ to the closing table or risk expensive lawsuits with their Buyer Representative for their breach of contract.

A “No Representation” Model – The Buyer Foregoes Representation to Avoid Additional Costs

Many Buyers may decide to forego representation to avoid unknown costs. Without representation they are more likely to fall prey to bad purchases, contract issues, and simply losing money on things they didn’t know about because “they don’t know what they don’t know”.

Many Buyers will learn the hard way of navigating a purchase without a Buyer’s agent and either get burned out or Burned 🔥 in the process. Not good for keeping Demand strong.

Unrepresented parties are never a good thing for Buyers or Sellers and mistakes cost both parties a lot of money and time. It’s a lose / lose and in turn decreases property values overall.

Unless you have purchased multiple properties or are a seasoned investor, going it alone could cost you hundreds of thousands of dollars. I have seen it, and say it is similar to going to court without an Attorney. No one is advocating for your interests and you have blinders on in the process because you are too close to see otherwise.

The Buyers that do stay in the market will have to toughen up and become more educated than the average licensed realtor. That means in Tennessee over 120+ hours of pre-license education, and hundreds of thousands of hours in transaction experience just to compete with the Seller’s agent. Yikes.

The knowledge I have accrued over hundreds of transactions and years in the business makes a big difference for my clients and with financial results that far outweigh my fees.

Who do you think plays a better game? A professional athlete or a little leaguer?

Industry expertise, feet on ground experience, and transaction volume play a critical role here. I learn something new in every transaction closed, not to mention staying on top of market shifts, continuing education, relationships, local developments, and establishing critical vendor partnerships.

All of these topics take time and legwork to understand and analyze the various nuances that impact your real estate holdings. Any one of them can have big impacts on Real Estate outcomes.

Decreased Buyer Demand = Lower Prices for Sellers

With decreases in Demand, and no way for Sellers to advertise that they are willing to offer compensation to a Buyer’s Broker, many Sellers will have to stay put, or be forced to sell at lower than average market rates which in turn drives down prices for all surrounding property owners.

This simple economic shift will begin to decrease access to private property ownership, the highest paying property class, and in turn decrease overall property values, NOT commission savings as spun by the media.

Seller’s are not saving on Commissions, they are losing Equity. With decreased buyers in the market, Sellers are losing out on an opportunity to market to the highest paying share of property owners, owner-users. (There are many types of property owners including corporations, investors, private equity, REITs, owner-users, etc. Owner-Users always pay the most!) Sellers will have to become aggressive bringing more money to the table while demand decreases and Supply chases the market down. 📉

“You will own nothing and be happy.”

2016 World Economic Forum​

Meanwhile more property will be gobbled up by investors and turned into rentals.

Failed Leadership at the National Level means a Tougher Market for Both Buyers & Sellers

The National Association of Realtors organization is supposed to advocate for property rights and ownership for all. Instead they chose to Sell-Out consumers in a backdoor deal to protect some of their highest Brokerage paying Realtor members – Keller Williams, Home Services of America, and any brokerage with over $200 Million in sales volume.

The attorney fees for the class action lawsuit attorney, Michael Ketchmark, alone was over $9 Million. Ouch. And the plaintiff’s attorney is making a grab for another $82 Million of the settlement proceeds to go towards his fees. That’s a 20% commission, sir!

NAR continues to defend its commission-sharing policies, defining them as a hallmark for consumer protection to ensure representation for buyers.

To me, the whole thing stinks of a sell-out to big corporations and at the consumer’s and Realtor member’s expense. 60% of America is already owned by big corporate investors. That number is going to continue to go up. If you own or plan on owning Real Estate, it is more important than ever to become educated on these big shifts and what it means for you.

What Can Buyers & Sellers Do To Prepare?

Buyers and Sellers need to stay abreast of these market changes and plan accordingly. The average real estate cycle lasts 18 years but can shift quickly when industry wide legal action takes place.

Hiring an experienced Real Estate Professional to navigate one of the biggest financial decisions of your life is a no brainer. Real Estate compromises over 50% of the wealth of half of the Nation and this new settlement will have a huge impact, especially on those at the bottom

Tips for Buyers and Sellers After July 2024

  • Buyers should begin saving more money before Buying – Not only for downpayment, closing costs, higher interest rates, and moving costs, but they should also be ready for more negotiations of previously paid Seller expenses. Having more financial capacity always helps leverage when negotiating the best deal.
  • Sellers should keep their homes in tip top shape to appeal to the active Buyers in the market. Staging, Design, and Marketing will become a big factor in getting top paying Buyers. Sellers that decide to stay put would benefit from the long term investment of regular property maintenance and remodeling to make their home fit their lifestyle. A dollar spent today will always be more valuable than one spent tomorrow

Both Buyers and Sellers will benefit from the wisdom of the Real Estate agents. Here is a list of 284 ways Real Estate Agents bring value to your transaction.

What changes does this have for Southern Athena? Not much.

We already enter into Exclusive Representation Agreements with our Buyers and Sellers. We will continue to advocate for individual property rights, values, and use design and creative solutions to add value to our clients.

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