Navigating the complexities of buying or selling a home can be challenging, and the recent National Association of Realtors (NAR) settlement adds another layer to the process. This settlement is designed to bring more transparency to real estate transactions, especially regarding commissions. Understanding these changes is essential for making informed decisions, whether you’re buying or selling a home.
In this blog, we’ll explore the NAR settlement and how it will impact buyers and sellers in the future.
What Is the NAR Settlement?
The NAR settlement stems from legal challenges aimed at increasing transparency around real estate commissions. Traditionally, the seller has paid both the seller’s agent and buyer’s agent commissions, often leaving buyers unaware of the specifics of these payments.
The settlement aims to clarify the commission structure, ensuring that both buyers and sellers have a clearer understanding of what they’re paying and why. This shift allows for more informed decisions, giving both parties and greater control over their financial obligations during the transaction. Although this has already been a requirement in the practice of real estate. The aim is to increase the knowledge of both sellers and buyer in a real estate transaction.
What This Means for Sellers
The NAR settlement introduces more flexibility and transparency in commission handling for home sellers. In the past, the thought was that sellers were expected to pay the buyer’s agent’s commission, which was often a non-negotiable part of the transaction. However, this is incorrect and never been the default expectation.
Sellers have always had negotiating power when it comes to commissions despite some belief to the contrary. Sellers need to review their options and determine the best approach for their situation, whether they choose to offer a competitive commission to attract more buyers or negotiate terms that align with their specific needs. The reason why sellers paying buyer agents was an accepted practice was to benefit both sides of the transactions. By offering compensation to the buyer agent, the seller ensures that they will most likely get the strongest offer on their home. Most buyers are financing and are required to pay a percentage as a down payment for their mortgage. If the buyer is to pay the buyer agent, the cost of compensation will in most circumstance reduce the offer amount considerably. For example: if a buyer would like to make an offer on a home for $500,000 and they are required to put 20% down, with a 2% buyer agent commission agreement, the seller might expect to see the offer amount decrease up to $50,000 if the cost of the buyer agent effects the amount that the buyer can put down. Ultimately if the seller offered the buyer agent 2% and, the buyer was able to use their full available reserves for their deposit, the seller actually looks to net another $40,000.
While this is certainly a large benefit of the seller offering commission it is not the only benefit for the seller. If a buyer is unable to afford proper representation from a real estate professional the transaction has an increased chance to not make it to closing. A buyer, trying to navigate a real estate transaction without a professional to help guide the process is more likely to default on some of the milestones of the deal. This can effect the transaction negatively and as is the case with most seller’s any subsequent transactions that the seller is planning as a result.
With this level of control, sellers can make strategic decisions about their overall costs while maintaining transparency about how the commission is split.
How Buyers Are Affected
For buyers, the NAR settlement provides a clearer understanding of how commissions work. One of the most significant changes is that buyers will now be more aware of the commission paid to their agent, which the seller previously handled without much input from the buyer. Where previously it was stated the large majority of the time the seller would be offering buyer agent compensation and what the buyer agent was paid was determined by the seller. In this new settlement the buyer is now required to sign a document agreeing to the buyer agent compensation level and it is explicitly stated that the buyer may have to compensate their agent as opposed to relying on the seller.
While this has always been a practice of the real estate transaction, the increased transparency benefits buyers by giving them more insight into the costs of purchasing a home. Additionally, buyers have the option to negotiate the commission they pay to their agent. It is important to have professional representation during the one of the largest and most impactful purchase of their life. It is critical to have someone on their side in order to make sure their side of the purchase.
Navigating These Changes
While the NAR settlement changes how real estate commissions are disclosed, it ultimately empowers buyers and sellers to make more informed decisions. For sellers, understanding the flexibility in commission structures can lead to different outcomes. For buyers, increased transparency and the potential to negotiate commission rates can provide more informed approach over the home-buying process.
Whether you’re buying or selling a home, it’s crucial to stay informed about these changes. Familiarizing yourself with the new rules around commissions can help you avoid surprises and ensure that you make decisions that work best for your financial situation.
Final Thoughts on the NAR Settlement
The NAR settlement marks a positive shift toward greater transparency in real estate transactions. Both buyers and sellers now have more insight into the commission structures that were previously less clear.
For sellers, this means the potential for more strategic decisions around costs. For buyers, it means greater clarity on where their money is going.
Being aware of these changes is crucial for making informed choices during a real estate transaction. The NAR settlement is designed to create a more balanced and transparent process, ultimately benefiting both buyers and sellers as they move through the home-buying or selling journey.
