How an antitrust settlement with a real estate agent could hurt homebuyers

Recent antitrust settlement will have a profound impact on the way residential real estate is bought and sold – and not for the good, says Rick Kahler, president Kahler Financial Group in Rapid City, SD Here’s why:

Larry Light: The new restrictions apply to people selling real estate. How will this impact homebuyers?

Rick Kahler: A few weeks ago, an antitrust lawsuit against the National Association of Realtors (NAR) was settled for $419 million. News reports announced that this would reduce commissions by 25% to 50%.

Light: How did this happen?

Kahler: First, a quick look at how selling and buying through a NAR real estate agent works. The seller offered a commission – typically 6% – from which both his broker and the buyer’s broker were compensated, with a typical offer for the buyer’s agent ranging from 2.5% to 3.0%. This information was displayed at the auction so that buyers’ agents knew what they would receive.

The plaintiffs argued that sellers who offered a buyer’s agent a low amount discouraged him from showing his property, so sellers wanted to offer the “going rate” that buyer’s agents expected in order to be competitive.

Light: So how has the situation changed?

Kahler: In the future, NAR will not allow sellers to advertise the amount they will offer to a buyer’s agent. The idea is that buyers’ agents will not agree to what will essentially become a lottery to see how much they will receive for the sale of a particular property.

Instead, the agent will sign a contract to work for the buyer for a set fee or percentage of the sales price that will come directly out of the buyer’s pocket. The seller will most likely continue to pay their agent 2.5-3.0%. Essentially, the court seeks to shift the burden of paying the buyer’s agent from the seller to the buyer.

Light: Is this good news for sellers?

Kahler: Maybe. The problem is that most buyers do not have the means to pay a broker out of pocket. Current lending practices do not allow the buyer’s brokerage fees to be added to the cost of the home. They must be included in the price of the home in order to be repaid with mortgage proceeds.

The settlement hopes this change will force buyer’s brokers to work for less. As with many well-intentioned regulations, these will also have unintended consequences. Faced with the prospect of doing the same job for a 25% to 75% pay cut, how many buyer’s agents will even stick around to show homes to sellers who are listing with a realtor?

Light: What is the importance of being a real estate agent?

Kahler: This only applies to real estate agents who are NAR members. Non-member agents can advertise what sellers offer to buyer agents. This gives a competitive advantage to properties listed with non-NAR agents.

In the past, brokers who were not NAR members could not list their properties on NAR’s Multiple Listing Service, which is to real estate what the New York Stock Exchange is to stocks. It provides an efficient marketplace in which to buy and sell real estate and is a significant advantage of NAR membership. This is no longer true.

Light: What other restrictions currently apply to real estate agents?

Kahler: NAR can no longer exclude non-members from using the MLS. Does this mean that a non-member can place an ad on the MLS stating how much the seller will pay the buyer’s agent? I don’t know at the moment.

However, I am relatively confident that many real estate agents will opt out of NAR membership. In part, this will likely be a response to higher membership costs that will be needed to repay the $419 million settlement. As one real estate agent put it, “This probably spells the end of NAR as we know it.”

Light: Why is this bad?

Kahler: If NAR is disbanded, so will its robust education, ethical requirements, and MLS platform. The process of buying and selling real estate could be set back by 50 years.