Along with continued economic uncertainty and a series of Fed rate hikes, busy real estate professionals are facing a new challenge. The NAR settlement resulting from the Sitzer/Burnett lawsuit will create big changes in how agents make commissions. The settlement resolves litigation facing individual REALTORs and provides a path forward for real estate professionals. While the settlement relieves the uncertainty that could have continued for years with an appeal, this new path creates substantial work for real estate brokerages. Outsourcing can help stabilize the impact of the NAR settlement by allowing brokerages to focus on core business activities while ensuring compliance with the new regulations.
Understanding the NAR Settlement
In a class-action lawsuit (the Sitzer/Burnett case) filed in Missouri federal court by a group of home sellers, plaintiffs claimed that real estate commissions are too high, buyer's agents are overpaid, and the National Association of REALTORS (NAR) practices lead to inflated commission rates. Although NAR showed evidence defining how the real estate market works, including the fact that there is no set standard rate for commissions, the jury found in favor of the plaintiffs. While NAR denies any wrongdoing in connection with MLS compensation, they agreed to a settlement in which NAR would pay $418 million over four years and a few key changes in rules about real estate agent commissions.
New Commissions Rules
The NAR settlement includes two key rule changes.
-
Compensation offers will be moved off MLS: Under the current MLS system, the buyer's agent commission is included in the listing. The new rule prohibits agents from sharing a buyer's agent commission in MLS. However, offers of compensation can be posted on other platforms or communications, and sellers can offer buyer concessions on an MLS.
-
Written agreements for MLS participants acting for buyers: MLS participants working with buyers will be required to enter into a written agreement before showing a home. While this action solidifies the commitment between agent and buyer, it gives agents less time to make an impression.
Although the final court decision is scheduled for November 2024, these rules will go into effect on August 17, 2024.
How the NAR Settlement Affects Real Estate Agencies and Property Management Companies
Technically, the verdict doesn't require any professional to change how they run their company. However, any firm using MLS and traditional commission rate splits in which the listing agent negotiates the commission and splits it with the buyer's agent will be affected by the new rules. In short, if you're a licensed REALTOR or use MLS, you'll be impacted. Other housing market professionals could be impacted as well.
While NAR continues to believe cooperative compensation is good for consumers, the settlement is likely to transform how commissions are negotiated. Buyers facing one of the most significant purchases they'll make in a lifetime deserve representation and professional advice. Yet, stretching a budget to meet rising home prices can make it impossible to invest in assistance from a real estate professional. Sellers may also be interested in participating in cooperative compensation to attract a wider buyer pool.
Agencies attempting to meet the needs of their clients will have to find ways to communicate their offerings to potential clients outside of MLS. As changes begin to take place, agents may be less dependent on industry relationships for compensation.
Competing Rates Could Complicate Financial Operations for Larger Brokerages
Large real estate agencies work as a brokers for both buyers and sellers agents. In most states, a real estate agent is required to work under a brokerage for a set number of years before becoming an independent agent. While working under a brokerage, commissions are split between the agent and the brokerage.
Many industry professionals expect there to be pricing competition in the wake of the settlement, which could be bad news for brokerages splitting commissions. Free agents are likely to have more wiggle room to reduce rates, whether using commission or flat rates. To compete, brokerages will have to heavily leverage the experience they bring to the table as an experienced company (in turn, providing better representation).
Property Management Companies Could See More Business and More Competition
Real estate professionals and property managers often have similar licensing requirements.
The professions have overlapping requirements and interests in the housing industry, but property management is typically less volatile. In the past, would-be property sellers turn to property managers when the market is in a slump. While waiting to sell, they can rent out properties and have them overseen by a property management agency. Since the full impact of the NAR settlement is difficult to predict, it's possible many sellers will wait for the dust to settle. This could mean more business for property managers.
However, the similarities in licensing are a double-edged sword. New real estate agents who entered the industry during a housing boom may seek a way out with the expectation of diminishing pay. A real estate license will give these job seekers the credentials they need to enter property management. This could mean increased competition and more marketing requirements.
As the new rules promote transparency surrounding real estate fees and compensation, all professionals in the housing market will need to have ways to communicate the value of their services.
Navigating Financial Changes in Your Agency
Changes in legislature that affect payment and how firms operate have the potential to impact the way agencies offer services and bill clients. Buyers and sellers are both critical to successful home sales. Financial departments in these agencies will have to navigate how to restructure financial systems so agents still offer the highest level of services to clients and get paid for their valuable services.
-
Structuring pricing based on services: Real estate agencies will need to consider the services they provide and whether to charge a flat fee or offer tiered services. It's likely some agencies will continue to work on commissions, so billing might be required to be fractured in multiple directions.
-
Navigating due diligence requirements: Buyers get an appraisal, get inspections completed, purchase hazard insurance, and do multiple walk-throughs to go through closing. Professional assistance during this process can ensure it goes smoothly, so the buyer is confident enough for purchase the home. Agents may need to provide transparent pricing to complete any or all of these services.
-
Leaving room for negotiation: While commissions have never had a set standard rate, the settlement brought a lot of attention to negotiating agent commissions. President Biden even mistakenly claimed that the settlement agreement allows Americans to negotiate commissions for the first time. This attention has the potential to drive both buyers and sellers to seek lower pricing from REALTORS.
-
Sharing the value of services: When agent commissions were derived from a fraction of the selling price, home sellers and buyers were less likely to investigate the labor going into the provided services. The elimination of cooperative compensation on MLS will require agents to extend their reach to communicate the value of their services.
-
Increased Marketing Expenses: It's likely real estate agencies will need to provide transparent communications across all channels about the value they bring to the table. Experienced property managers will need to find ways to stand out from new competitors. These changing expenses overload financial teams with extra tasks.
How Accounting Outsourcing Can Help You Navigate the Changing Landscape of Real Estate
The current structure of a 5% to 6% commission divided evenly between the buyer's and seller's agents has been in place for as long as many agents have been in the business. Making changes to this model will require substantial effort from financial professionals. With billing no longer "baked in" to the sales cost, agents will be tasked with communicating the value of their services and providing transparent information about agent commissions. This could lead to increased marketing costs to provide adequate advertising and communications.
Outsourcing your accounting offers critical advantages to help you navigate the upcoming changes related to the NAR settlement.
-
Gain access to industry accounting professionals. Working with accounting professionals familiar with the real estate industry allows seamless connections with industry-specific billing and accounting systems.
-
Develop solutions for problems you haven't encountered in the past. Connecting with a team that offers financial planning and analysis services provides you with relevant professional advice about new billing situations and client expectations.
-
Bridge the skills gap. Finding industry professionals during a time of industry turbulence can be difficult. You can avoid the hassle and cost of onboarding new financial professionals to your team during this uncertain time.
-
Get the convenience of scalability. Your needs may fluctuate during the coming months as you make changes to operations and settle into a new normal. Since the new rules don't technically require agencies to change their operations, it will be difficult to forecast how the actions of other industry professionals can affect your needs. Outsourcing gives you the flexibility to increase or decrease services based on your firm's needs.
-
Focus on high-level tasks: Outsourcing manual billing requirements takes hours of manual labor like data entry and bookkeeping off your desk so you can focus on other high-value tasks.
NAR Settlement Made Easy: Outsourcing for Efficiency
While the full impact of the NAR settlement remains to be seen, agencies must prepare for the inevitable upheaval of traditional practices, particularly the impact on core operations. Outsourcing NAR settlement tasks can be a strategic solution to minimize disruption and ensure efficiency. The right approach has the potential to place your firm in a competitive position for the future. Home buyers and sellers are likely to be excited about the potential for changes in the way sales operate and seek industry forerunners eager to adopt new ideas. As the industry navigates the changes, adaptability will be crucial. Increased competition in the market is predicted, providing growing firms with an opportunity to develop a competitive edge.
Outsourcing your accounting tasks gives you access to financial professionals in the industry and frees up more time for you to address high-value requirements. Finding the right partner can be a vital component of success. Personiv offers a wide range of scalable and cost-effective accounting solutions for real estate professionals. By outsourcing specific tasks related to the NAR settlement, you can streamline operations, ensure compliance, and free up their teams to focus on core business activities. Get in touch to learn more about our full line of services.
