FACT CHECK: Joe Biden’s Statement on NAR Settlement and Real Estate Commissions

My newsfeed has been chock full of misleading and incorrect information since the National Association of REALTORS® (NAR) announced a settlement agreement last month regarding a class action lawsuit focused on broker commissions. Believe it or not, even President Biden got it wrong during a campaign speech in Las Vegas Nevada March 19 when he said,

“Last week the National Association of Realtors agreed for the first time that Americans can negotiate lower commissions when they buy or sell their home. On a typical home purchase, that alone could save folks an average of $10,000 on the sale or purchase. I’m calling on realtors to follow through on lowering their commissions to protect homebuyers.”
https://www.whitehouse.gov/briefing-room/speeches-remarks/2024/03/20/remarks-by-president-biden-on-lowering-housing-costs-for-american-families-las-vegas-nv-march-19-2024/

I’m here to set the record straight and give you the REAL story.

CORRECTION: Commissions have always been negotiable.

Firstly, commissions have always been negotiable. Always. And going forward they still will be if the terms of the proposed settlement are approved by the courts. (If you are unfamiliar with the class action lawsuit that has been working its way through the court system for the last several years, check out this article, “Real Estate Commissions, the Class Action Lawsuit, and What it Means for You”.) As the NAR stated on March 22, 2024,

“NAR does not set commissions, and commissions were negotiable long before this settlement. They are and will remain entirely negotiable between brokers and their clients. And housing prices are dictated by market forces beyond members’ control.”
https://www.nar.realtor/magazine/real-estate-news/law-and-ethics/the-truth-about-the-nar-settlement-agreement#:~:text=NAR%20does%20not%20set%20commissions,market%20forces%20beyond%20members’%20control.

When a seller hires an agent to list their home, the professional fee (or commission) is negotiated as part of the listing agreement. This amount is negotiable – it always has been. And for the last 30 years or so, listing agreements have also included information stating that listing brokers can share a portion of that negotiated commission with the broker who brings and represents the buyer. This allows buyers’ agents to be paid at settlement instead of requiring buyers to come up with additional funds outside of the money they already must have in order to purchase a home.

MISLEADING: Claiming that the settlement will save homeowners “an average of $10,000” is irresponsible.

Where President Biden came up with the $10,000 number is unknown because he didn’t give any basis for this claim. Unfortunately, as promising as this might sound for potential homeowners, the reality is that there are too many factors in play to claim a buyer will save an average amount of anything or that home prices will be impacted at all. Any potential savings depend on the following:

The amount of negotiated commission and the price range you are shopping in. While many people assume commissions are a “standard 6%” they actually are not. In fact, the average real estate commission hasn’t been at 6% for more than 30 years.¹ Furthermore, the portion of the commission offered to the buyer agent varies by location across the country, in local markets, and according to market conditions, as does the average price for homes.
Cutting out buyer agent commissions means cutting out the buyer agents, which leaves buyers representing themselves. While there may be a perception that real estate commissions are exorbitantly high, did you know that the average real estate agent makes $45 – $58k per year?² Most agents don’t even come close to collecting $10,000 per sale, but they don’t work for free either. Saving money by cutting out agent representation carries many risks worth careful consideration.

Negotiating Power

Trying to save money by cutting out the buyer’s agent means you need to have a good understanding of the market value of the home you are purchasing and be able to successfully negotiate the best price possible for it without an agent’s expertise or negotiating skills. What about when competition is fierce? There is a shortage of affordable homes on the market right now. Competing in a multiple offer situation can be difficult when you are represented by a great agent. Going at it alone is even more difficult. Sellers prefer working with buyers who have representation because they are more confident the deal will close smoothly. If you do go under contract, what happens if questions arise from the home inspection, or there are issues with the appraisal? Think of it like this: you can save money by not using a lawyer to represent yourself in court, but if you are going up against someone else who is represented by a lawyer, chances are you won’t fare as well as the other party with representation. You want someone who is an expert in the field on your side.

Dual Agency

“We’ll just use the same agent” – while this idea might seem convenient, using the same agent to work both sides of the transaction is risky. Imagine your favorite sports team is competing for the championship title. Do you think it would be a good idea for the team to show up without a coach? How about if they got their opponent’s coach to coach them? Dual agency – using the same agent to represent both sides – is rife with potential issues related to conflict of interest, and in fact is not even legal in some states.

The suggestion that this settlement will save buyers any money at all is laughable. By pushing for buyer agent commissions to be paid outside of the transaction as an out-of-pocket buyer expense, the reality is that more buyers will end up unrepresented. Buyers already have many costs to cover upfront when purchasing a home, including down payment amounts, loan fees, title fees, escrows (which is money paid upfront for homeowner’s insurance, property taxes, interest, and sometimes mortgage insurance), and inspections. Many, especially first-time buyers who don’t already have equity in an existing home, just won’t be able to afford additional out-of-pocket expenses. And what about our veterans? People who have served our country in the military can qualify for federally backed VA loans, which have different rules and parameters than other loan types such as FHA and Conventional. As of the time of this publication, veterans are specifically prohibited from paying broker and agent fees when using a VA loan to purchase.³ (UPDATE: The Department of Veterans Affairs (VA) announced a temporary policy update allowing veterans to pay their own real estate agent commissions when purchasing a home using a VA loan, effective August 10, 2024. The policy is temporary, with the VA planning to develop permanent guidance in the future.) ⁴

Determining Price

Remember, it is the market that determines the price, not agent commissions. If buyer agent commissions are removed from the transaction, do you really think that difference will be passed along to buyers in the form of a lower price? No! As Victoria Ray Henderson, Owner & Broker at Homebuyer Brokerage plainly explains,

“Think about it, if you determine a sales price for your home based on a comparative market analysis and determine a list price, would you then say, ‘I will lower my sales price because I’m not offering anything to a buyer’s agent.’ Of course not! Every seller wants the highest price when they sell their home.”
https://www.homebuyerbrokerage.com/news/separating-fact-from-fiction-after-the-nar-settlement

DISTRACTION: “I’m calling on realtors to follow through on lowering their commissions to protect homebuyers” is a distraction from the real issue.

Yes, we are in an affordable housing crisis right now, but the commissions of hard-working agents are not the cause. The REAL reason the cost of housing is so high right now is a multi-faceted issue of supply & demand. Not only are we experiencing a lack of inventory as population growth over recent years has outpaced our new construction build rates, but factors including interest rates, inflation, and investor influence also play a role. (A more detailed explanation of how these affect each other can be found here).

I might suggest politicians first look at protecting our borders and start regulating the amount of undocumented people flowing over them along with tamping down excessive government spending, putting a stop to political insider trading, and implementing term limits to protect the American people, but I digress….

The problem isn’t agents and their commissions – in fact lowering or eliminating commissions is quite likely going to hurt homebuyers in the end rather than protect them.

My Position

I believe buyers should be represented, and they should be able to pay for their representation within the real estate transaction, just like sellers can. The notion that buyers, who are procuring the funds to pay for the entire transaction, must now come up with additional money out-of-pocket is ridiculous and in many cases it’s just not feasible. Sellers pay listing agents at closing with proceeds from the sale. I believe buyers should be able to do the same.

Key Takeaways:

There are a lot of false and misleading headlines surrounding the NAR settlement and real estate commissions. President Biden recently claimed that homebuyers can save “an average of $10,000” due to the terms of the proposed settlement.
This statement is inaccurate and misleading as there are several variables that affect real estate transactions, including the amount of negotiated commissions and the fact that home prices vary across the country and in local markets.
Ultimately the “savings” being touted as protecting buyers will likely end up hurting buyers by forcing them to forgo agent representation.
Hiring a skilled buyer’s agent often outweighs any potential transactional savings. Rather than focusing on possibly saving money by not hiring a buyer agent, focus instead on hiring the best one you can.

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