Major modifications to home purchasing and selling procedures become applicable today – here's what you ought to be aware of.
The National Association of Realtors, a powerful organization with 1.5 million members, approved new rules as part of a $418 million settlement to address antitrust claims. These changes aim to revolutionize how realtors are paid and who pays them, marking the largest adjustment in the organization's rules in several decades.
In a statement, Kevin Sears, the organization's president, emphasized that these changes will help consumers make informed decisions when buying and selling homes.
Two significant alterations
Traditionally, home buyers did not have the obligation to pay their real estate broker directly. Instead, the commission fees, typically amounting to 5% or 6% of a home's selling price, were covered by the home seller. For example, a seller of a $450K home would pay $27,000 in fees. Many experts argue that these commissions have been incorporated into a home's listing price, inflating property values.
Effective immediately, seller's agents will no longer be allowed to disclose commission fees to buyers' agents on multiple listing services (MLS) used by realtors for listing and finding homes for sale. As a result, buyers' agents can no longer search for houses based on commission rates, a practice known as "steering," which led some agents to overlook houses that met their clients' criteria due to lower-than-average commission rates, critics claim.
Tonya Monestier, a law professor at the University at Buffalo School of Law, stated, "Without commission on the MLS anymore, it makes it harder to steer, because you can’t just do a search for 3% commissions." She added that while buyers can still negotiate commission rates, this change makes the process more challenging.
The second change affects the relationship between potential home buyers and their real estate agents. Starting now, buyers must sign a legally binding representation agreement with their agent before beginning house tours. These agreements will inform buyers about their agent's payment structure and make them responsible for covering the agent's commission if the seller fails to do so.
Norm Miller, a real estate professor at the University of San Diego, explained, "If buyers are aware that they can negotiate commissions and that, in fact, they do pay them, not the seller, it might create a more competitive market and possibly a menu of services in the future that would be more comparable to other developed countries."
A crucial aspect of these agreements is that a buyer's agent cannot receive more compensation than what was initially agreed upon, even if a seller offers a higher compensation rate.
On its website, NAR claims that these two changes eliminate any potential steering, ensuring that brokers will not receive higher compensation by steering buyers towards particular listings with higher compensation offers.
The final approval hearing is scheduled for November 26, although a judge granted preliminary approval of NAR's settlement in April.
Caution for buyers
Some brokerages have created shorter-term contracts to address buyers' concerns about signing legally binding agreements before touring homes. However, Monestier advises buyers to thoroughly read any contract before signing to avoid any unintended consequences.
Leo Pareja, CEO of eXp Realty, a major American brokerage, emphasized simplicity in his company's contracts to prevent potential confusion. Pareja made these contracts accessible to other firms, aiming to minimize friction in the home-buying process.
Impact on home affordability
Some real estate professionals have raised concerns that the new rules may negatively affect the home-buying market, as more buyers may now be responsible for funding their agents' commissions.
However, Monestier believes that, in the long run, the changes will benefit consumers. She suggested that commission rates might decrease over time, ultimately making the housing market more affordable for buyers and sellers.
However, it remains unclear whether the immediate cost of buying and selling homes in the US will decrease for most people. Miller, a real estate professor at the University of San Diego, noted, "Somebody out there will eventually say, 'let's compete on price.' If it's a big firm, that could cause a revolution. But when would that happen? I don't know."
In the immediate future, Miller thinks that mortgage rates will have a more substantial influence on housing affordability than any specific rule adjustment.
The rate for a typical 30-year fixed mortgage just touched 6.49% recently, despite being higher compared to past times, it's close to the lowest points seen over the past year.
"That has a significant impact on affordability compared to anything we're discussing now," stated Miller. "If mortgage rates decrease even more, any rule amendments will merely be background noise in the equation, in comparison to that."
Seller's agents will no longer be able to disclose commission fees to buyers' agents due to the new rules, which aimed to eliminate potential steering and ensure fairness in the home-buying process. With the new legally binding representation agreements, buyers are now responsible for covering their agents' commissions if the seller fails to do so, potentially leading to a more competitive market and potentially lower commission rates over time.
