By Gene Galin
Pittsboro, NC – On August 17th, 2024, a landmark settlement from a federal lawsuit reshaped the real estate industry, fundamentally altering how commissions are handled in property transactions. The National Association of Realtors (NAR) has agreed to major changes that will impact buyers, sellers, and agents alike, creating a new landscape where transparency, negotiation, and buyer representation take center stage.
To dig deeper into the subject matter, I sat down with long-time friend Eric Andrews, a local Chatham County real estate agent, to have a conversation about the changes. This is part 1 of our 2 part conversation.
A Shift in Commission Payments: What’s Changing?
For decades, the standard practice in real estate transactions has been for the seller to pay the commission for both their own agent and the buyer’s agent. This arrangement, however, has come under scrutiny, leading to a federal lawsuit that challenged the fairness of obligating sellers to pay for the buyer’s representation.
To kick off our conversation, Eric explained that the traditional model of commission payments is about to undergo a significant shift. “The lawsuit argued that it was unfair for sellers to be responsible for paying the buyer’s agent,” Andrews said. “The analogy I like to use is if you were suing your neighbor, it wouldn’t be fair if you were required to pay for their attorney as well. That’s essentially what was happening in real estate.”
Understanding the New Rules
Under the new rules, which came into effect on August 17, the requirement for sellers to automatically pay the buyer’s agent commission is removed. This means that the responsibility for paying the buyer’s agent could shift entirely to the buyer, fundamentally altering how transactions are negotiated and closed.
“Sellers are no longer beholden to a second-party agreement to pay the buyer’s agent,” Andrews explained. “This change introduces a free market approach where it’s not predetermined who pays the buyer’s agent—it’s now a matter of negotiation.”
In practice, this means that when a buyer seeks representation in a transaction, they may need to pay their agent directly out of pocket unless the seller agrees to cover this cost. This new dynamic raises important questions about affordability and access to representation, particularly for first-time homebuyers and those purchasing lower-priced properties.
The Impact on Buyers and Sellers
One of the most significant changes is that buyers must now enter into a written agreement with their agent before being shown any property. This agreement will detail the compensation the agent expects to receive, which was previously handled behind the scenes as part of the commission paid by the seller.
“This is a big change,” Andrews noted. “In the past, you could go out and look at properties with an agent without any formal agreement. Now, before you even start looking, you have to have a written buyer agency agreement in place that outlines what your agent will be paid.”
This shift in responsibility could have wide-ranging effects on the market. Buyers, particularly those with limited financial resources, may find it more challenging to afford representation, potentially leaving them vulnerable in transactions. Sellers, on the other hand, will need to carefully consider whether to offer to pay the buyer’s agent as an incentive to make their property more attractive.
“Sellers might still choose to pay the buyer’s agent to make their property more appealing,” Andrews said. “But this is now a negotiable point, rather than an automatic part of the transaction.”
The Role of MLS and Transparency
Another major change involves how information about commissions is shared. Previously, the Multiple Listing Service (MLS) would display the commission being offered to buyer’s agents, but under the new rules, this information is no longer publicly available.
“In the past, the commission being paid to the buyer’s agent was displayed on the MLS, so everyone knew what was being offered,” Andrews explained. “Now, that information is not available unless the buyer’s agent contacts the seller’s agent to find out.”
This change adds a layer of complexity to transactions, as agents must now be more proactive in determining what compensation, if any, is being offered by the seller. It also places greater emphasis on the relationship between agents, as they will need to communicate more directly to negotiate commissions.
The Challenges for New Agents
The new rules are expected to have a profound impact on the real estate industry, particularly for new agents or those who only handle a small number of transactions each year. With commissions no longer guaranteed and the market becoming more competitive, many agents may struggle to adapt.
“This is one of the most fundamental shifts in real estate in the last 50 years,” Andrews stated. “I expect we’ll see a significant shakeout in the industry, with many agents unable to survive this new landscape.”
According to Andrews, agents will need to be more business-savvy and transparent with clients, clearly explaining their fees and the value they bring to the transaction. “You’re going to have to be a lot more accountable,” he said. “This isn’t a bad thing, but it does mean that agents will need to be more professional and strategic.”
For new agents or those looking to enter the industry, this could mean a more challenging environment. However, it also presents an opportunity for those willing to adapt and develop strong client relationships.
The Future of Real Estate: A More Transparent Market?
As the real estate industry adjusts to these changes, there will undoubtedly be a period of uncertainty. The full impact of the new rules may not be clear for several months, as buyers, sellers, and agents navigate the new landscape. However, one thing is certain: transparency and negotiation will play a much larger role in future transactions.
“We’re moving toward a more transparent market,” Andrews predicted. “Buyers and sellers will need to be more informed and engaged in the process, and agents will need to provide more value to justify their fees.”
This shift could ultimately lead to a more efficient and fair market, where buyers have greater control over their representation and costs are more transparent. However, it could also create challenges for those who are less financially prepared or knowledgeable about the complexities of real estate transactions.
Navigating the New Real Estate Rules
As the real estate industry braces for these sweeping changes, both buyers and sellers will need to adapt to a new way of doing business. For buyers, this may mean budgeting for additional costs and being more selective in choosing an agent. For sellers, it could involve offering more incentives to attract buyers who may be hesitant to take on additional expenses.
For real estate agents, the new rules represent a call to action. Agents will need to be more diligent in their business practices, focusing on building strong client relationships and clearly communicating the value they bring to each transaction.
“The market is changing,” Andrews said. “But with change comes opportunity. The agents who can adapt and provide real value to their clients will thrive in this new environment.”
As these new rules take effect, the real estate industry is set to undergo one of the most significant transformations in its history. Whether this change will lead to a more equitable and transparent market remains to be seen, but it is clear that all parties involved in real estate transactions will need to navigate this new landscape with care and consideration.
If you have additional questions, you can reach out to Eric Andrews at Eric Andrews Realtor or call 919-548-1014
Watch on YouTube – Part 1 Eric Andrews on new real estate sales rules – 8.16.24
New Real Estate Sales Rules: NAR Settlement and Its Implications – Overview with Eric Andrews
00:16 New real estate sales rules bring significant changes.
Federal lawsuit, Burnette vs. Missouri, deemed it unfair for sellers to pay buyer-side commissions.
The traditional method of listing firms compensating buyer agents is being questioned.
03:10 Discussion on who pays for representation in real estate transactions.
Debate on whether the seller or buyer should cover the costs.
Challenges for buyers with additional costs like buyer agent fees on top of other expenses.
05:43 Real estate sales rules are now negotiable and require a written buyer agency agreement.
Buyer agency agreements are now required before showing any property, with negotiable compensation arrangements.
Sellers are no longer required to disclose their commission rates on the MLS, creating a new process for agents and buyers.
08:19 Fundamental shift in real estate sales rules
New questions may arise and the situation may change
More emphasis on building relationships with experienced agents
10:37 It’s important to have a written buyers agency agreement before showing real estate
Buyers agency agreement prevents others from taking over the deal after you’ve done the work
Offering to compensate the buyer’s agent can make your property more appealing to buyers with limited resources
13:27 Real estate industry facing a fundamental paradigm shift
Expectation of losing 10-20% of agents
New agents may have advantages in breaking bad habits and adapting to changes
15:59 Importance of having commission agreement in place before making an offer
Discussing the necessity of a commission agreement before submitting an offer to purchase
Explaining the significance of clarity on commission responsibilities between buyer and seller
18:34 Representation is important for first-time home buyers in the real estate market.
New real estate sales rules may impact the affordability of representation for buyers in different price ranges.
Fees for representation are negotiable, with downward pressure possible, but having representation is still valuable in real estate transactions.
20:51 Clients can move on if they don’t find value
Eric encourages clients to seek other options if they don’t see the value
He reassures that he is okay with clients choosing someone else