Changing Real Estate Landscape Update and Relocation Policy Considerations
It has been a little over a year since the verdict in the Sitzer-Burnet case, one of several class action real estate lawsuits, stunned the real estate industry with a ruling in favor of the plaintiffs. While there were initial expectations that the defendants would appeal, all defendants ultimately proposed settlements covering multiple lawsuits.
Status of Settlements
Here’s a breakdown on the status of final court approval of the settlements:
- Anywhere, RE/MAX, and Keller Williams received final court approval on May 9, 2024.
- Compass, Real Brokerage, Realty ONE, @properties, Douglas Elliman, Redfin, Engel & Völkers, HomeSmart, and United Real Estate received final court approval on November 4, 2024.
- The National Association of Realtors (NAR) and HomeServices received preliminary court approval in April and August, respectively. A hearing for final court approval for both is scheduled for November 26, 2024.
If court approval is obtained, the settlement amounts and rules implemented on August 17th will stand. The rules include the requirement for buyers to sign an agreement with their agent that states the amount of compensation the agent will receive for supporting them through the home purchase process.
If the court does not approve the remaining settlements, there may be adjustments to either the financial terms of the settlement or changes to the implemented real estate practices. For example, if the court determines that the new rules do not go far enough, there could be a move toward complete de-coupling of commissions where the seller is no longer able to compensate the buyer’s agent.
In either case, it is possible that there could still be continued appeals that need to be worked through and there are still other lawsuits that could continue to impact the industry.
While the final outcome of the hearing is unknown, in the NAR Settlement FAQs, NAR feels there is a strong basis for approval as it is in the best interests of all parties. Preparing for Changes Ahead
For the global mobility industry, it has been challenging to make relocation policy adjustments when the impact is a little hazy. While we will know shortly whether the remaining settlements have been approved, let’s examine a few possible outcomes and how a mobility program may need to respond.
As a reminder, the new rules laid out by the NAR settlement require that sellers and buyers have separate written agreements with their respective agents. Each must negotiate the amount of compensation they are willing to pay their respective agent. The buyer can request, and the seller can still offer to pay the buyer’s agent compensation as part of the sale negotiation, but it may not be advertised on any MLS.
Since these rules have gone into effect in mid-August, Cornerstone has seen little change in sellers paying at least some portion of the buyer’s agent compensation as part of the home sale negotiation. Many buyers do not have the funds to cover their agent’s compensation, particularly combined with current interest rates and home values. Over a longer period, this will likely change.
From a policy perspective, companies that currently offer either a Guaranteed Buyout or Buyer Value Option home sale program and/or home purchase benefits should consider the following:Sale of Employee’s Home (Guaranteed Buyout / Buyer Value Option)
- Employee (seller) negotiated compensation should continue to be covered. Companies can cap the amount of seller compensation to manage their budgets.
- When it comes to paying any buyer’s agent compensation as part of a home sale program, companies have the following options:
- Choose to cover the negotiated buyer’s agent compensation either partially or in full. This can be capped to manage budgets. This option reflects how traditional Guaranteed Buyout or Buyer Value Option programs have operated when both sides of the transaction were covered.
- Choose not to cover. Given that most buyers are continuing to ask for payment of their agent’s compensation, this may leave the employee less willing to negotiate and, for those with a guaranteed offer, increase the risk of taking a home into inventory. Companies may still decide to cover as part of the negotiation with a future buyer should the home come into inventory.
- Choose to cover up to a certain amount of buyer’s compensation as part of the employee’s sale and/or as part of the employee’s purchase, leaving the decision up to the employee. Employees may not be purchasing a home and selling a home at the same time, so they may have difficulty in deciding how to use the allowable amount between their sale and purchase. If a home comes into inventory, the company may end up still covering the buyer’s agent compensation as part of the negotiation with a future buyer, regardless of the employee’s decision.
- Choose to cover on a case-by-case basis. Administratively, handling on a case-by-case basis increases the time and effort by companies and poses equity concerns. If choosing to cover on a case-by-case basis, companies should be clear about the circumstances under which they will cover the buyer’s agent’s compensation.
Employee Purchase of Home
Relocation policies have not typically covered compensation for the buyer’s agent as part of a home purchase benefit. Under the new rules, it is possible that an employee would need to pay compensation out of pocket if they are unable to negotiate it with the seller. Options that companies may consider include:- Choose to cover partially or in full. This can be capped to manage budgets. Companies can add a requirement that the employee should attempt to negotiate into the purchase offer before any portion is covered. If there has been a decision to cover, companies could choose to incentivize employees to encourage them to negotiate the buyer’s agent compensation to be paid by the seller.
- Choose not to cover. This option effectively eliminates the possibility of additional cost to the program, but companies should be aware of the potential impacts of this decision, which could include employee reluctance or refusal to relocate, employee dissatisfaction, and increased exception requests. Employees may have to pay out of pocket, which could impact their housing and relocation decisions.
- Choose to cover up to a certain amount of buyer’s compensation as part of the employee’s purchase and/or home sale. Again, it may be difficult for the employee to decide where to use the allowed amount dependent upon the timing of the purchase vs. sale. Market differences can also complicate the decision.
- Choose to cover on a case-by-case basis. Anything that is administered case by case results in an added effort by the company. From an equity perspective, there could be some concerns about covering for some and not others unless there are clear parameters on when it would be covered and the amount of coverage.
Companies that choose to cover the buyer’s agent compensation should also decide whether to gross-up the expense. Other Considerations
Some of the policy approaches above would keep the cost to the company neutral, while others would add cost. Companies considering adding cost could offset this by evaluating other benefit adjustments. For example, if the company pays the buyer’s agent compensation on the home purchase side and the home sale side, the company could consider reducing or eliminating the miscellaneous allowance or other benefits. Another consideration to manage cost increases might be for the company to exclude buyer’s agent compensation from gross-up, making the employee responsible for the tax if the company pays the benefit. These are just a few examples. Companies should review their whole program when considering changes.
One potential outcome of real estate litigation is a further move to complete decoupling of commissions, making the seller and buyer fully responsible for their sides of the transaction. Should this occur and it is not possible for the seller to pay the buyer’s agent’s compensation, policy decisions may become a bit simpler to make. The Path Forward
With limited experience under the new real estate landscape and concerns about adding cost to relocation programs, companies have been cautious about implementing policy changes. The majority of companies are taking a wait-and-see approach and handling issues as they come up. As a result, the impacts of these new rules on relocation programs to date have been minimal, though real estate commissions nationally have fallen slightly as a result of these changes.
Cornerstone recommends that companies complete a review of their program and carefully weigh the pros and cons of any policy changes. Whatever decisions are made by the court, real estate will continue to be heavily influenced by mortgage interest rates, supply and demand, and local market forces. As these influences ebb and shift, we may see increased modification of accepted real estate practices. Companies need to be able to weather different markets and scenarios as well as reflect the company’s culture, budget, goals, and talent strategy as best fits their organization.