We’re thrilled to be back with another Real Estate post today. We began a new series: “Buyer Beware.” We’ve covered septic systems, flooding + flipper white. Some of our sweet readers have found these super helpful, so if you’re in the market or may be soon, be sure to check them out. You can catch up on that, as well as all our Real Estate posts, here!
If you’re in the market now or will be in the future, we want to provide you with valuable information for navigating the real estate market so we can help you make that next purchase. We hope these posts help you ask the right questions about that next Real Estate transaction.
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Today, we’re taking a break from the usual topic for something pending.
You’ve probably heard there’s a settlement in a class action lawsuit against NAR and other Real Estate firms/entities. Most likely, you’ve seen it flying around from the news pundits or on social media.
When we started our real estate series, we said our goal was to help you navigate the buying and selling process, and this settlement could drastically affect that process. Today, we want to start by breaking down what we know and don’t know, as well as who to trust and who to ignore.
But first, let’s keep all the legal humans happy: This series aims to explore the housing market and what I believe we can expect from it or what you should know about it. Please understand we’re not offering personal financial or investment advice. We highly encourage you to talk to your local Realtor and licensed financial adviser. {Side note: If you need help finding a good local Realtor, let us know no matter where you live. We’ve helped several people with this not-so-little task!}
Let’s start with what we do know: Things will change.
We’re still working through how, and anyone who tells you differently is not a reliable or truthful source. I have some ideas on how this will affect the market, {more on that further down and in future posts, I’m sure} but they’re just ideas, not things we know for sure, and most certainly not truths.
So, sticking with what we know, things will change, but we don’t know how simply because this is just a proposed settlement and not an approved one. And that makes a world of difference. All we have before us, as of right now, is that the two sides have come to terms on a way forward, but this has not been approved, and there is no guarantee that the court will approve it.
A similar settlement has been before the court for over five months now with no movement, which questions the approval of this case anytime soon. Also, in another similar case, the DOJ has filed an amicus brief that effectively kills the proposed settlement agreement.
So let me restate: We really don’t know anything other than that things will most likely change.
If anyone is telling you differently, please find a new source for your information. Either they are misinformed or not telling you the truth.
What changes are proposed?
• The biggest proposed change concerns buyer agent compensation. Currently, the seller has made a buyer’s agent compensation offer on the Multiple Listing Service (MLS). If this settlement were to go through, then this offer would no longer be allowed on the MLS. The thought is that this offer is inflating and raising the cost of homes. I have thoughts on that below.
• The other major change in participating in the MLS is a requirement that buyers and agents enter into a written agreement before working together. That seems like common sense, and most agents already adhere to it.
Now, let’s enter the speculative part of the discussion, and please understand this is nothing but an opinion.
• On the surface, this settlement is being championed as a victory for the selling and buying process. However, at the end of the day, there is only one winner, the seller, and one loser, the buyer. If this settlement is accepted, it could become even more difficult for first-time home buyers or non-cash buyers to buy a home.
How listings work
Before we proceed, I want to ensure we’re all on the same page about how listings work.
At present, when a listing agent meets with a client, a lot of things happen, but for the sake of our discussion, the only thing we care about is the part where the agent is trying to win the seller’s business and the two enter a contract with each other to list the house. As a part of the listing agents’ presentation, they will discuss their fees, and those are negotiable. They can typically range from 1.5%-3% of the sales price; the larger the sale, the lower the percentage, generally speaking.
Then, the agent will explain that you want to attract good offers, and part of that is attracting offers from represented buyers because represented buyers are generally more serious, present fewer problems, and have been vetted. Otherwise, you can end up with every mom-and-pop that’s bored on a Sunday afternoon, with their dirty shoes from the church bathroom, wanting to traipse through your home and judge all your closet contents.
So, to attract buyers with agents, you would list on the local MLS, which requires you to offer compensation. It could be as little as $1, but you had to offer something. Generally, you would offer what others in the market offered: 1.5%- 3% buyer agent compensation. Because honestly, did you want to work with an agent who was only making $1?
One of the major aspects of the settlement is that the MLS can no longer list or offer compensation to the buyer’s agent. This effectively means sellers do not have to compensate the buyer’s agent.
Great. That seems like a win. Now, I, the seller, get to keep more of my money. AND, as a buyer, I should “expect” home prices to come down, because the seller is getting to keep more money, which means they can lower the purchase price.
That’s a win, end of story.
Remember, we want well-qualified, vetted buyers, and those generally come with agents. But if the buyer’s agent isn’t receiving compensation for their work from the home’s selling price, where will it come from? The buyer.
Seems simple enough. But it’s not.
Let’s start with what should be obvious: Home sales are not based on seller profit but on comps of recently sold homes. So if homes A, B, and C sold for “X”, the seller will sell theirs for “x-3%” because they don’t have to pay the buyer’s agent now. Some people think this is what will happen and why home prices will come down.
That is not how capitalism works.
No one in their right mind or telling you the truth, can honestly believe that a seller will willingly give up 3% just because it’s there. They will see it as more money added to their bottom line.
That is how capitalism works.
Sellers are going to say thank you very much for the extra 3%.
This brings us back to how buyers will be represented. Well, in a perfect world, they would pay their own agent, and that may be where we’ll end up, but it’s not that simple.
Stick with me here…Most home buyers are required to put at least 5% down on the purchase of the home; some can get away with 3.5%, but most at least 5%. So, assuming the house costs $400,000, the buyer would need to come up with $20,000 (5% down payment) +$6,000 (assumed 1.5% closing cost), and now they’re being asked to come up with another $12,000 (3% buyer agent fee).
Keep in mind most first-time buyers are cash-strapped, so we have just made it that much harder for them to get into a home.
But what about a credit back on their loan?
First, that would assume the home appraises for more than 400,000. And keep in mind that in the best case, you could get 7% cash back, more realistically, for our discussion, 1-3%.
Also, if you’re now using your cash back to pay the buyer agent, say goodbye to those new window treatments or updating that kitchen. And if your furbaby needed a fence, you might need to find another way to pay for it.
So, to break it down: Home values have now risen by close to 6%. The seller keeps the 3% that did go to the buyer’s agent, and now the buyer needs to come up with 3% to pay his agent, which is a net of 6%. So, while politicians and class action lawyers brag about what they accomplished, realize they aren’t telling you the truth. Home buying just got more expensive.
The politicians who were supposed to be looking out for the common person failed again, at least based on our current situation.
This is also far from over, and no one, and I mean no one, knows how this will eventually all play out.
The proposed changes won’t go into effect until mid-July or later, so if you’re in the market to buy, this might push you over the edge.
Remember I have been warning for some time now that buying a home would become more expensive the farther we moved into 2024, this is simply one aspect of it. If you missed those warnings or any of our other Real Estate posts you can catch up, here!
Thanks so much for tuning in today. Please let us know if we can answer any questions!
Real Estate is an interesting beast, and having an agent who can pull the curtains back and help navigate what will most likely be the biggest purchase of your life is essential. As they say, you don’t know what you don’t know, and that’s where a good realtor comes in. {If you need help in hiring a Realtor, check out our post here.}
If you’re in the Middle Tennessee area, I’d love to meet you and help you find the perfect home; you can sign up here so we can start the process. And even if you aren’t in Middle Tennessee, contact us here, and we will take care of you no matter where you live. There is no reason to go it alone.
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