Let's be very clear: The NAR Settlement is a cluster 🦆 for investors and brokers alike. For brevity's sake, I understand the merit of seller's not paying professionals to negotiate against them and I am a proponent of brokers having greater flexibility and influence on compensation allocated, as it provides all parties greater chance of compromise. However, the intention of the settlement was clarity and transparency and it achieves the exact opposite. Allow me to enlighten our industries 'leaders and legislators.'
This post is not to explain the NAR 'changes' as to highlight transactional effects and considerations NO ONE has mentioned:
Prior to the new rules (that effectively forbid the disclosure of buyer's broker's fees) one could readily assume that the listed sales price included compensation for both parties. At present, most MLS services have removed the BAC section and now it is presumed (but not required) that seller's offer buyer's broker commission (typically 2-2.5%).
-This creates comparable and sales valuation complexity. Investors, lenders, appraisers and brokers alike will need to do further due diligence on comparable sales to determine if and what commission percentages were included in the sale price. For closings that featured zero RE related commissions, the comparable sales price would need to be adjusted.
- The second challenge this creates is for investors or buyers with limited capital or down payment reserves. Particularly on competitive offers, previously most offers would have had similar mechanics, in that the seller was paying both parties brokers. Already, when presenting an offer investors and their representatives will need to discuss the best strategy from the seller's perspective. If for example, a more well capitalized or cash buyer (with the ability to compensate their buyer representative directly) can theoretically submit a lower gross sales price while still yielding the seller greater net proceeds. Think of it this way:
- Buyer A: $100K Price seller to compensate 5% (2.5% to each) to listing and seller's broker VS Buyer B: $98K Price and buyer compensates their own broker. Obviously this is exponentially more relevant as values and complexities increase.
This is actually LESS transparent for buyer's and investors as they don't know what they are competing against or if the listed price includes offers of compensation to the buyer's broker at all. If the seller is offering zero compensation, that property could be out of budget from inception or drastically reduce the seller's potential buying pool as initially it might appear out of the buyer's budget or feasibility if required to compensate their side directly.
As is typical with government intervention into the public markets, the intentions of this policy achieve the opposite. The lowest and first time homebuyers will be negatively impacted the most as many will not be able to compete with investors or well capitalized buyers that can compensate one party directly. Furthermore, entry level homes typically utilize less experienced real estate professionals and the new rules place emphasis on stronger creativity and negotiating skills.
There is one other transactional party that is also unintentionally adversely effected: Sellers. A greater proportion of comparable sales will on longer include buyer paid compensation of 2-3%. How will appraisers, lenders and tax authorities account for this? Certainly as with seller concessions, brokers can note the relevant details of the transaction, but presumedly an exponentially larger percentage of transactions will no longer include these costs or be publicly recorded.. So the recent 'Zestimate' could be even more inaccurate than had the sellers paid the buyer's broker. Ultimately the true cost of acquisition and investment will need to be disclosed and assessed. More work for guess who? Buyer's Brokers..the primary group being marginalized.. Anyone else have thoughts on this?
In short, it is going to take investors, brokers and appraisers a lot more consideration and effort to accurately evaluate values and offers. It is also going to take greater quantity of offers and efforts to culminate a deal. Meanwhile the average compensation is likely to further reduce from nearer 5-5.5% to 4-4.5%* These are personal hypothesis based only on twenty years and two days of the new rules.
95% of my transactions are buyer broker related, so you could say I'm biased but I an neutral. I welcome more flexibility in negotiating fees to get a deal done. I'm 1000% transparent in all things, so having the conversation early with buyers is better and it also helps me gain advantage on my 'competition.' No broker will out think me when it comes to structuring creatively. The rule has already helped get one pending. The other transaction, the seller was offering a standard BAC. So far so good but let's see if any of these other points are as close as they appear..
NAR rules: good or bad for consumers? Or both?
