FAU Housing Economist: NAR Settlement Could Lead to Increased Deal Complexity, Buyer Confusion

The upcoming settlement from the National Association of Realtors (NAR) related to broker commissions is likely to do more harm than good for buyers and sellers alike, according to a real estate expert at Florida Atlantic University.

Rather than lead to better deals and less costs for buyers, the deal could place more of a burden on potential homebuyers and make real estate transactions more complicated.

“I don’t see how the listing agent not disclosing what the seller is willing to pay to the agent working with the buyer creates a more competitive market,” said Ken H. Johnson, Ph.D., real estate economist with FAU’s College of Business. “This settlement creates confusion, increases deal complexity, and possibly violates current state laws involving the interaction of real estate agents, buyers and sellers in the marketplace.”

NAR reached a $418 million settlement to be paid out over the course of four years last week, as well as the addition of two new rules: listing agents are no longer allowed to advertise agent compensation on the multiple listing service, and realtors are required to enter into a written agreement stipulating services and cost for said services with their buyers.

The settlement is still subject to court approval.

“No longer advertising buyer agent commissions will only create a more confused and drawn-out transaction process as buyers, sellers and agents will have to negotiate the fee, who will pay for it, and how much will be paid by each party,” said Johnson, a former broker for more than a decade. “Due to this added level of complexity, buyers will almost certainly have to negotiate with more sellers before they find the deal they are satisfied with. Thus, the house hunting period will extend for the average buyer.”

The deal’s new guidelines could also lead to buyers having to pay more out of pocket than before, creating an affordability issue for many households. If buyers are not able to negotiate the price down, they may decide to try and purchase a home without an agent, an idea Johnson warns against.

 “It’s a Venus Flytrap situation. It may seem like a pretty good idea to buyers to go straight to the listing agent, but buyers are entering into situations where they may not be equipped to get the best deal possible,” Johnson said. “Going directly to a listing agent who represents a seller in a legal sense puts the buyer at an extreme disadvantage in terms of bargaining power and market knowledge.”

Real estate agents must now also enter into an agreement with buyers that outlines what services they will offer during the period in which they work with the buyers, as well as the exact cost of those services; though it’s unclear how this might benefit or work for buyers, Johnson said.

“Will buyers be committed to buying exclusively from one selling agent? Are they free to roam across multiple agents? If they work with one agent exclusively, what happens when the selling agent is committed to other buyers as well? What happens when two of the selling agents’ buyers want the same property?” Johnson said.

Other issues involve current state laws overseeing the interaction between real estate agents and their clients and customers. While these laws are similar, they are not universally the same across all states and will likely require legislative actions, according to Johnson.

 Overall, the settlement does not offer much in terms of driving down the cost of selling property or making the homebuying process more transparent. Without driving down the cost of operation, it is unclear how brokerage fees will decline.

“This is just going to lead to a less efficient housing market without a lowering of cost. Nothing will change until the underlying operational cost structure changes for both listing and selling agents,” Johnson said. “I know it is late in the game, but I hope the presiding judge throws the settlement out. There are ways to lower operating costs. The current proposed settlement is not one of them.”

 Johnson is an award-winning researcher specializing in residential real estate transactions, buy versus rent research and housing indices. Prior to his academic career, Johnson practiced in residential real estate for 12 years.

-FAU-