Possible Changes to the US Model of Real Estate Fees

Possible Changes to the US Model of Real Estate Fees

On March 15 of this year, following years of anti-trust litigation, the National Association of Realtors (NAR) in the United States agreed to a settlement of $418 million to plaintiffs while at the same time denying any wrongdoing. You may have seen articles or news coverage of this event and wonder what it means and also what it will mean to Canadians.

In today’s blog article, we are going to explain what this settlement means for practical purposes and how it may or may not impact the real estate business in Canada.

Here is what you need to know.

First, this settlement is subject to court approval in July. In other words, this is not over yet, and if anything changes south of the border, it would not be before the fall.

Historically, in the US, the seller paid the buyer’s broker fee. So, the seller would pay his or her broker’s fee (the seller) plus the buyer’s fees, and this money came out of closing costs. The fee total was typically about 5-6 percent and was split equally between the buyer’s and seller’s realtors.

The plaintiffs in the lawsuit claimed that it was a violation of anti-trust law to require sellers to pay the buyer’s fee and that this practice artificially inflated selling prices because these fees were baked into the sale.

The NAR claimed that this was not true and that fees have always been negotiable. So, the NAR agreed to change the rules and is offering to pay a big settlement to end the lawsuit. The big takeaway here is the uncoupling of buyer’s and seller’s real estate fees.

These proposed changes will spell both some advantages and disadvantages for the real estate buyer. The way things were structured before, the fees to the buyer’s agent felt invisible to the buyer, and as such these fees were covered by the total purchase price and rolled into the mortgage, assuming one was buying with a mortgage.

The disadvantage to the buyer is that the buyer’s realtor fee can no longer be part of the total purchase price, and the buyer will have to pay that fee separately. The advantage to the buyer is that the purchase price should be lower because that fee is no longer covered in the sale price. Some argue that this will make home buying more difficult for some because buyers have to come up with extra money up front, the payment for which can no longer be spread out over time in a mortgage.

Overall, assuming that this settlement is approved in court later this summer, this court case will probably mean lower fees in general for realtor agents, although how much lower remains to be seen. Obviously, if anyone would have previously paid a 6 percent fee to the seller’s agent, and that seller’s agent is not paying the buyer’s agent then you are not going to agree to pay the same 6 percent. The case should also spell considerably more transparency in real estate fees. It is possible that buyers will try to buy property without any agent at all so as to pay no buyer agent fee, but that has some obvious disadvantages for the buyer.

Most realtors south of the border are unhappy with this turn of events even though realty fees in the US are among the highest in the world. No one knows exactly how this will pan out other than their fees will be reduced one way or another. This is going to most hurt realtors that were struggling to begin with and realtors that were mainly (or solely) buyer’s agents.

How this will affect things in Canada is also up in the air. Realty fees in Canada are already much lower than they are in the states, so while we may eventually see uncoupling of buyer and seller fees, the actual fees will not likely drop to the degree that they will stateside.

Metropointe Mortgage Investment Corporation was founded in 2011 and offers the ability to invest in a diversified pool of mortgages secured by real estate in British Columbia. In addition, Metropointe also acts as a private mortgage lender. 

If you have questions about our blog or would like to contact us regarding investing or borrowing, please call us in Surrey at (604) 449-1700.

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