The NAR Settlement: Potential Drawbacks for Homebuyers and Sellers

The State of Ohio passed Bill 466 which states in a nutshell that agents are required by law to execute a buyer agency contract with all buyers prior to showing houses……

Here’s a closer look at how the NAR settlement could make the home-buying and selling process more challenging.

A Shift in Costs to Homebuyers

One of the most immediate and concerning effects of the NAR settlement is the potential shift in financial burden from sellers to buyers. Traditionally, sellers have been responsible for covering the commission of both their agent and the buyer’s agent. However, the settlement encourages a system where buyers might have to pay their agent’s commission directly.

Impact on Buyers:

• Increased Upfront Costs: For buyers, this could mean higher out-of-pocket expenses at a time when they’re already struggling with rising home prices and interest rates. Coming up with a substantial down payment is challenging enough for many first-time buyers. Adding the need to pay a buyer’s agent commission, which can be thousands of dollars, may push homeownership further out of reach for some.
• Barrier to Entry: The requirement to pay their agent directly could disproportionately affect first-time homebuyers and those with limited savings. This shift could create a barrier to entry, making it harder for people to transition from renting to owning a home.
• Reduced Agent Services: Faced with the need to cover these costs, some buyers might opt for lower-cost services or try to navigate the process without an agent. This could lead to less professional guidance, potentially resulting in poor decision-making, overpaying for a home, or missing out on critical protections during the buying process.

The Requirement of Buyer Agency Agreements

Another significant change resulting from the NAR settlement is the increasing necessity for buyers to sign a Buyer Agency Agreement before engaging with a real estate agent. This formal contract, which outlines the terms of the relationship between the buyer and their agent, has both advantages and potential drawbacks.

Impact on Buyers:

• Obligated Commitment: By signing a Buyer Agency Agreement, buyers are committing to work with a specific agent for a set period. While this can ensure dedicated service, it also limits the buyer’s flexibility to switch agents if they are dissatisfied with the service. Terminating these agreements can sometimes be complex and may involve penalties or additional fees.
• Complexity and Confusion: For many buyers, especially first-time homebuyers, these agreements can be confusing and intimidating. Understanding the legal and financial obligations outlined in the agreement is crucial, yet many buyers may not fully grasp the implications before signing. This could lead to unexpected financial commitments or restrictions on the buyer’s options.
• Increased Pressure to Pay: The Buyer Agency Agreement often includes terms regarding the agent’s compensation, which may now be more directly tied to the buyer. This increases the pressure on buyers to secure additional funds, which could exacerbate the financial strain already associated with purchasing a home.

Impact on Sellers:

• Price Reductions: If buyers are forced to cover their agent’s commission, they may negotiate harder on the purchase price to compensate. Sellers might find themselves in a position where they need to lower their asking prices to keep deals moving forward, particularly in a competitive market or during periods of economic uncertainty.
• Increased Complexity: The potential for more complex negotiations around commissions and purchase prices could lead to longer transaction times and increased stress for sellers. Sellers may need to offer other incentives to attract buyers who are stretched thin financially, adding further complications to the sale process.
• Lower Net Proceeds: Ultimately, sellers could see lower net proceeds from the sale of their homes if they are forced to make concessions on price to help buyers manage the added cost of agent commissions.

Market Disruption and Unintended Consequences

The changes prompted by the NAR settlement could also lead to broader disruptions in the real estate market.

• Potential for Reduced Agent Quality: As commission structures change and become more negotiable, there is a risk that the quality of service provided by real estate agents could decline. Agents might cut corners or reduce the level of personalized service they offer in response to pressure to lower their fees. This could negatively impact both buyers and sellers, who rely on experienced professionals to navigate complex transactions.
• Uncertainty in the Market: The settlement introduces a level of uncertainty into the market that could have ripple effects. Buyers and sellers might hesitate to enter the market until the full implications of the changes are understood, potentially leading to reduced market activity and slower sales cycles.

The Bottom Line

As the real estate market adjusts to these changes, buyers and sellers will need to be more vigilant and prepared for new challenges that could make an already stressful process even more daunting. It’s crucial for all parties involved to understand the potential risks and to work closely with knowledgeable professionals to navigate this evolving landscape.