PHOENIX — Veterans of Arizona’s real estate industry say new rules for realtors expected to kick in this summer will change the dynamics of the home purchasing process, but to what extent is unclear.
“There will definitely be some changes with the game of real estate, the profession in general,” said realtor Dennis Carr of HomeSmart.
No more compensation for buyer’s agent on MLS listing
The National Association of Realtors entered a settlement on Friday in a class action lawsuit where a judge ruled the association was violating anti-trust laws. The settlement establishes a new set of rules for agents buying and selling houses, pending a judge’s approval.
“Number one, the settlement would mean that in the listing agreement, the seller will no longer be able to specify an amount that they will pay the buyer’s agent as an incentive to get activity on their properties,” Carr said.
Agents have always been able to negotiate compensation amounts during the purchase process, but critics say the practice of listing a compensation amount on the MLS motivated some agents to steer their client to a house based on the potential profit the agent can make, not based on the best deal for the buyer.
Typically, a 6% commission fee wrapped into the final sale would be divided 50/50 between agents of the buyer and seller.
Now the seller is not assumed to pay the buyer’s agent a commission. However, that does not prevent the seller from negotiating a compensation amount with the buyer’s agent during negotiations, Carr said.
New rules will have mixed results for buyers
One likely consequence of the new rules is a group of buyers will simply not use a realtor.
“I think that savvy buyers that don’t think they need representation and are buying houses on a regular basis and are comfortable with the process, perhaps there may be a benefit to them because extra compensation won’t be built into the purchase,” Carr said.
Conversely, other buyers will need to negotiate with an agent on compensation before beginning the house hunting process.
“The buyers who could value the expertise of an agent to guide them through this emotional process of a lifetime, they will still want the representation.”
“The seller will benefit”
Real estate advisor Alonsso Lomeli said the seller will benefit by not being responsible to pay the full commission that many sellers’ agents are accustomed to paying.
“But keep in mind, the seller wants a buyer, so it works both ways now. It’s going to benefit the seller, but who is going to pay that (compensation)? It’s going to come down to negotiations in terms of the buyer’s agent,” Lomeli said.
Will settlement “erode” fixed margins that agents currently enjoy?
Carr said he expects more competition among agents and some may leave the industry.
“I think this is going to be a time when a lot of part-time agents aren’t going to be part-time anymore,” Carr said.
The NAR says commissions have always been negotiable, issuing the following statement: “It has always been our goal to preserve consumer choice and protect our members to the greatest extent possible. This settlement achieves both of those goals.”
The settlement is going to erode the fixed margin many agents are accustomed to, said ASU Economist Dennis Hoffman. “The savvy ones are going to fight through this and demonstrate their track record and their value.”
News of the settlement comes at a bad time for the real estate industry which is dealing with a slow market. Although Hoffman says the real estate sector is not a driver of Arizona’s economy, it is an important component. Arizona has one of the highest ratios of real estate agents per capita. “I feel a little bit of concern for the agent community right now. Their livelihood is based upon the volume of homes transacted. And it is about half of what it was.”
“Lower end” buyers may be at a disadvantage
Mark Stapp, professor of Real Estate at ASU’s W.P. Carey School of Business, says if compensation fees are not wrapped into the mortgage, some buyers may be squeezed out of purchasing a home. “Maybe one of the things that transpires is that you will find buyers, especially at the lower end of the marketplace, less able to afford to buy a house because they don’t have the cash available to pay the agent.”
The alternative for lower-end buyers is they go into the process without an agent.
“And that’s not a good thing,” Stapp said.
He worries the new rules will reduce the pool of real estate agents and lead to more buyers going into the process without representation.
“The seller’s agent is not going to represent the buyer if they are representing the seller. There are many small details that can get you into trouble as a buyer. That’s the biggest concern I have.”
Buyers who want an agent will be expected to negotiate a flat free, no fee or a percentage commission. But Stapp also worries without the current compensation structure, the buyer will be more likely to be left alone in closing out a deal.
Pendulum swinging the other way
The current system was originally set up by consumer advocates in the 1990s because the buyer didn’t have proper representation, Carr said.
Now the pendulum may be swinging the other way.
“Right now, buyers don’t have to worry about having cash on hand because the compensation for realtors is already built into the process,” Carr said. “Entry level buyers who don’t have funds to enter a buyer-broker agreement may be at a disadvantage.”
Experts don’t expect large impact to home prices
Experts who spoke with 12News say they don’t expect a major impact to home prices.
“Will the price of homes go down? I doubt it,” said Stapp.
Hoffman closely follows Arizona housing trends.
“To the overall economy, I don’t see this as a huge deal because the elephant in the room is high mortgage rates and locked in sellers. Until we break through that there’s going to be a lot of friction in the real estate market.”
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