How Buyers' agents could show value after NAR's latest decision to stop commission split

What determined NAR to stop the commission split?

In 2023, a lawsuit against the National Association of Realtors (NAR) revolves around accusations of antitrust violations concerning the organization's policies regarding real estate agent commissions. A group of Missouri home sellers argued that the NAR's rules mandated inflated fees for agents, particularly regarding the commission paid to the buyer's agent. These practices, according to the lawsuit, violated federal antitrust laws. As a result, the lawsuit sought damages from the NAR, with potential triple damages of up to $5.4billion.

Listing agents are prohibited from using the Multiple Listing Service (MLS) to offer commissions to buyer’s agents. This means that listing agents can no longer specify commissions for buyer's agents through the MLS. Agents working with buyers are required to enter into written agreements with homebuyers, specifying service charges. This ensures clear communication regarding agent service fees to prospective homebuyers.

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When will the new NAR rules take effect?

The rule changes are set to take effect in mid-July, 2024.

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How the commission split was working before the settlement?

A homeowner in USA currently looking to sell a $1 million home should expect to spend up to 5%-6% or $60,000 on real estate commissions alone. Typically, the split would be 60:40 for the Listing Agent. The Listing agent would take 3% or $30,000 and the Buyer's agent would have 2-3% or $20,000. Even for a home that costs $400,000 — close to the current median for homes across the United States — sellers are still paying around $20,000 in commissions, a cost that is baked into the final sales price of the home.

If we were to look at other countries in Europe, the commission split doesn't happen. The buyer pays an agent for assisting to buy a property and the seller pays an agent to market and sell his or her property.

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How are the verdict and NAR settlement affecting Buyers' agents?

The issue arises from the fact that buyers would now be responsible for covering the commission out of their own funds, as lenders are unlikely to include this expense. This situation presents two possible scenarios: either buyers will embark on their property search to avoid paying the commission, or buyer's agents must emphasize the value they provide beyond simply providing property information. While the importance of having a representative negotiate and handle transaction documents on behalf of the buyer is significant, buyers may not fully appreciate this value until they are in the process of making an offer and are faced with the complexities of negotiating price and purchasing conditions.

The challenge for buyer's agent’s lies in demonstrating their value to buyers before an actual transaction occurs. This requires a more comprehensive marketing strategy with service packages that are unique to make them stand out to attract potential buyers. A competitive edge can be established when buyer's agents offer insightful analyses of the potential property improvements and how to value-add opportunities post-purchase. Agents may leverage online resources to access property information and order Development Analysis, thus showing their commitment to providing valuable insights and guidance throughout the buying process.

How buyer's agents could show undeniable value so that the buyers would sign a contract with them?

Before this verdict, Realtors would put more time once a Buyer decided to write an offer for a property. Now the Realtors have to put a lot more time prior signing any representation contract in order to get paid by the Buyer. This means that Buyer's agents have to make more explicit their services and how they'll add more value than any other agent, so that buyers to signing a representation contract with them.

This is new to residential agents. It requires a dedicated marketing budget to reach out to prospective buyers.  The good news is that, due to the technology, there are a lot of new and free resources about property data with important information for Buyers that Realtors have access to. One of them is being able to understand and evaluate the opportunity a property for sale. It gets difficult to make sure that you're not overpaying, and you don't miss an opportunity to add more building area and units so that you'd have a profitable investment. This type of information requires a lot of experience in the field that most of the first-time home buyers don't have and they reply on agents, architects and contractors. It's a lot to cover when you tour a lot of properties. The research is time consuming and getting clear answers become too expensive.

Away around this, when you're looking to purchase a property is to rely on companies that are focused on feasibility studies. They offer free tier products that get you started and put you on the right track. You search their database to the specific address you're interested in and they give you instantly the possible opportunities. If it looks like the property has an opportunity to add value to it, then it makes sense to find out how much it'd be to see if the asking price is too high, low and so on.