Background
In 2023, the National Association of Realtors (NAR) reached a settlement on agent commissions for buying and selling homes. This is likely to transform the U.S. real estate industry, including the corporate relocation sector. Plus Relocation has reviewed this landmark decision, which is expected to overhaul traditional commission structures and promote transparency, competition, and consumer protection.
The settlement led to a number of changes, all of which are set to take effect on August 17, 2024. Unless this date is extended, all Realtors (NAR members) and NAR-related organizations will be required to comply with the NAR settlement provisions by September 16, 2024. These provisions include:
1. Prohibition of Compensation Offers on MLS: NAR will enact a new Multiple Listing Service (MLS) rule, barring offers of compensation. This separates seller and buyer commissions for real estate transactions, and forces NAR to eliminate the commission field in the MLS. However, offers of compensation can still be coordinated through other channels, including direct negotiation and consultation with real estate professionals.
2. Mandatory Written Agreements: NAR will require agents working with home buyers to establish written buyer representation agreements (exclusive or non-exclusive) before proceeding with showing homes. They must specify an amount of payment, which cannot be openended. Also, the agent’s final compensation may not exceed the agreed-upon amount in the buyer representation agreement.
Note that the settlement is still subject to final court approval, which is scheduled to take place on November 26, 2024. While there are strong grounds for the court to approve this settlement, articles suggest the Justice Department may want to take further action before the presidential election in November. After that, NAR is scheduled to pay $418 million over approximately four years. For greater detail on the practice changes and MLS information, see these NAR Settlement Facts.
Impact on Buyers and Sellers
Commissions for both listing and buying agents are likely to be impacted, and this may result in lower costs for consumers. Up to this point, the home seller has typically been the source of commissions for both seller’s and buyer’s agents. After the settlement, compensation will be more transparently negotiated between agents and home buyers and sellers. It is expected that some sellers will eliminate or reduce commissions to buyer’s agents, forcing buyers to cover some or all of the commission. Buyer agent commissions are likely to come from multiple sources as the industry works toward more standardized processes. Some possible commission sources for buyer’s agents include:
- A percentage of the sale price or a fixed fee commission paid by the buyer
- A concession amount paid by the seller as either a percentage of sale price or as a fixed fee amount
- Some combination of the above, or
- A portion of the listing agent’s commission
A concern for buyers is the ability to come up with the cash needed for their agent’s compensation on top of a down payment. Paying a buyer’s agent commission will likely affect lower-income and first-time home buyers the most. Relocating employees without new home closing cost benefits could see their purchasing power diminished, since they need to set aside funds to cover these new commission costs. Some buyers may need to revise their housing budgets, which could impact the type of housing and communities they consider.
Dual agency, where the buyer uses the same agent as the seller, may become more prevalent as buyers try to avoid or minimize the cost of agent commissions. However, dual agency can create conflicts of interest. It is also illegal in eight states, and many brokerages do not allow it. However, unrepresented buyers who can’t pay a buyer’s agent commission may feel their only option is to use the listing agent, which isn’t usually a great situation for a buyer.
Even in cases where sellers continue to cover commissions on the buyer’s side, the burden of negotiating that “concession” into the contract now falls squarely on buyers and their agents. Again, this may prompt some buyers to forgo representation to avoid the cost, putting them at a disadvantage. At the same time, sellers that are unwilling to negotiate the buyer’s agent commission may find their homes take longer to sell. Many situations may require a case-by-case approach.
Impact on Renters
The NAR settlement may also impact renters. Landlords often partner with real estate agents to rent their properties, especially single-family homes. With agent commission structures changing, renting may involve new steps. Relocating employees who are renting may need to sign a tenant representation agreement to guarantee broker compensation, either from the landlord or the tenant. They may also need to compensate a rental agent if they choose to use one. In markets like New York, New Jersey, Massachusetts, Rhode Island, and parts of Connecticut, where tenants traditionally pay the full broker fee, no significant change is expected. The NAR settlement, however, could bring these broker fees to new markets.
Impact on Corporate Relocation Programs
The impact to corporate relocation programs could play out in many ways. Experts believe it could take a year or more for each market to adjust after the settlement takes effect. Most mobility programs know that home buyers need to be represented by high quality real estate agents. Relocating employees need support to understand the real estate market in their destination location, someone who can quickly and effectively manage their transition process.
Home sellers in some markets may realize that offering to cover buyer agent commissions is worth it. It might net them a higher sale price or a faster sale. For cases like this, the percentage of the sale paid to both agents will likely decrease in most markets. If this is the case, not much would ultimately need to change across real estate processes. Overall costs for mobility programs might actually come down as a result. However, there is no doubt that before this process is accepted, there will be other variations on commission, with sellers only paying a smaller percentage. Ultimately, we expect that buyers will need to pay at least some of their agent’s commission for the near future.
Structured relocation home sale programs, such as BVOs and AVOs, will see some savings to companies if sellers decide to eliminate or reduce their commission offers. For home sale programs where the company buys out the employee’s home at a certain point, there is no recommendation to set any new limits on the commission offers. This is because sellers need to have as many buyers see their home as soon as possible. When they sell quickly, it benefits the company in numerous ways, so the best practice would be to continue allowing sellers to negotiate offers for buyer agent commissions for customary amounts.
Additionally, if the company elects to cover buyer agent commissions as part of their home purchase benefits, it will be a new taxable expense incurred by the mobility program that may also get tax assisted (grossed up) for the employee. Companies that do not cover new buyer agent compensation would likely see some impact, not just on employee satisfaction but also on recruiting and retention. The additional costs may result in fewer home purchases by relocating employees and more reluctance or refusal to relocate.
Finally, process adjustments may need to be considered for renters as market conditions change. Companies may need to be ready to take new broker fees into account.
Financial Implications
Relocation Management Companies (RMCs) normally receive referral fees paid by referred listing and purchase agents. There is the potential for RMCs to lose revenue from the changes to commission structures and reduced amounts given to agents for each side of the transaction. If this happens on a significant scale, RMCs may need to re-evaluate the financial structure of their client contracts. We may see a reversion back to clients paying fees for services, rather than RMCs relying on real estate referral fees to cover their operating costs.
If companies choose not to cover agent commissions as part of relocation packages, the relocating employee will be responsible for the costs. Programs with real estate rebates will also likely see rebate amounts reduced or eliminated over time, since rebates assume a certain percentage of referral collection from both buying and selling a home.
Next Steps for Companies with Relocation Programs
At the moment, awareness and education are critical. With the NAR settlement’s changes taking effect on August 17, everyone is getting familiar with the adjustments and considering scenarios for their own companies. Plus is training our account managers and service team members on the potential impact, and on what to watch for in buyer agency agreements. Our counselors are advising relocating employees on the pending changes and helping them to effectively navigate their specific real estate needs.
Mobility programs also need to consider whether they want to make immediate policy changes to address new situations or to wait until new trends and practices start showing up. If no policy changes are made, expect an increase in exception requests. Exceptions aren’t usually addressed on weekends (when purchase offers are being created), so there could be delays for employees who don’t know if their company’s relocation package will cover something. For employees who miss out on a purchase opportunity because of an exception request being delayed, this could be extremely frustrating.
Now is the perfect time for mobility programs to consider how their employees may be impacted by the NAR changes, explore the options for supporting them, and identify how your costs and processes might change.
Plus will monitor and track exceptions to determine new best practices for policies and programs going forward. We will evaluate each exception request and provide clients with additional information, recommendations, and impacts.
The NAR settlement will absolutely reshape the U.S. real estate and relocation landscape. In the meantime, we recommend that policy adjustments be made further down the road. With so many potential variations for agent commission payments, it will be advantageous to wait and see what becomes the new normal for buyers and sellers in different markets. Over the next few months, Plus will monitor activity and create best practices for mobility programs.
