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NAR Settlement Opens New Business Opportunities
by Kern G. Slucter, IAREC
The world of real estate is undergoing tremendous change. In the realm of real estate appraisers and agents, the settlement of the Sitzer-Burnett et al. v. National Association of Realtors et al. class-action lawsuit left the commission structure and agent compensation in limbo until the final court sign-off occurred in November.
Under the National Association of Realtors’ (NAR) cooperating compensation rule, sellers were required to pay the buyer agent’s commission. Based on the median-priced home selling for $420,000 (as reported for Q1 2024, St. Louis Federal Reserve Bank), a six percent commission develops a transaction cost of $25,200 shared between the buying and selling brokers (and their respective agents). That equates to $12,600 per side of the transaction. Of course, the brokers share that commission with their agents based on their agreed commission split.
As an example of the commission model’s failings, an agent reportedly posted on Facebook that she had shown a buyer 32 homes, and they went and bought from a For Sale by Owner (FSBO). Another agent was asked by a seller, “Why do I have to pay such a high commission at six percent?” The agent answered, “Because I have to make a living and work with so many people who pay nothing.” Clearly, the commission model subsidizes “tire kickers” at the expense of sellers.
Rethinking Fees
One potential benefit of the NAR settlement is the opportunity to rethink various compensation programs, including fee-for-service, hourly fees, or a combination of both, thus providing an excellent revenue stream to the practice.
Using the previous example, the typical consulting fee for the same service will likely range from $5,000 to $7,600, saving consumers approximately $6,000 per side of the transaction. How can this fee structure be profitable for both real estate agents and real estate consultants? The answer lies in the efficiency of the economic model. The consultant is paid only when he works for the consumer. Under the commission model, the real estate agent may work for many buyers or sellers who do not buy or sell a home, and that time is unproductive.
Brokers and agents will earn more as consultants because, with reasonable time management skills, they will be paid for the majority of their hours worked. Of course, each consultant will be able to set their own hourly rate or fee-for-service schedule.
Appraiser as Consultant
In the residential sector, the unique qualifications of a residential appraiser could position them as a valuable consultant for residential real estate buyers or sellers. This is due to the rigorous licensing requirements. Most would agree that appraisers have more hours of tested education, with some form of mentorship, and a nationally approved exam to earn their license, unlike a typical agent who is licensed after an introductory course and state exam.
It’s important to understand the significant difference in education requirements between a typical real estate agent and an appraiser. A real estate agent must comply with state law and take between 30 and 90 hours of real estate education (depending on their state statute). In contrast, the minimum education requirement for a licensed appraiser is 150 hours. Further, a certified residential appraiser license requires 200 hours, while a certified general appraiser has 300 education hours. In addition, appraisers must be mentored for 1,000 to 2,000 hours, depending on the license type.
Despite the proposed new mortgage report format and government sponsored enterprises (GSEs) pushing for fewer appraisal reports, the appraiser community is on the brink of significant opportunities. Although the number of licensed appraisers and necessary reports may have shrunk, this presents a chance for those remaining to thrive and substantially impact the consumer and real estate markets.
Appraisers seeking to add consulting to their business portfolios must research their state agent/broker licensing requirements. Be sure to inquire whether appraisal experience applies to upgrading to a broker level—some states allow that experience to be counted for all or part. Adding an agent or broker’s license is inexpensive and enables a significant expansion of the business practice and services offered.
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Other Considerations
In light of Sitzer-Burnett, appraisers and agents must have a solid grasp of agency law. Understanding the duties of “agency” is not just important, it is critical to knowing when the customer relationship begins and ends, and when a client relationship is entered. Agents have duties to clients. A complete understanding of these duties is not just beneficial, it is essential for every real estate professional. This knowledge will empower them to navigate the evolving landscape of the real estate transaction with confidence and expertise.
Consultants with a broker or agent license and an appraiser license will avoid using words like value, range of value, or market value when discussing property price. Terms like list price, price range, and probable sale price will be critical parts of their consulting vocabulary. The consultant must be aware of state licensing laws and the Uniform Standards of Professional Appraisal Practice to maintain an ethical and legal practice. Consultants are advised to use a Comparative Market Analysis form rather than a restricted appraisal report or appraisal report format.
Under the fee-for-service model, the real estate appraiser, as the consultant, will typically meet with a buyer or seller for an intake assessment. During this meeting, the prospective client’s goals are discussed and recorded. The method of compensation is discussed in detail. The six steps or stages of the buying or selling process are reviewed, and the tasks are divided between the client and consultant. Ideally, an engagement letter is developed, and in many cases, a retainer is collected. (It’s important to note that it would be considered a conflict of interest for an appraiser to provide a mortgage appraisal for a transaction on which they were consulting.) Depending on company policies, billings are provided monthly, much as an attorney would bill. Often, there is no brokerage or consulting expense on a closing statement.
Watershed Moment
We are at a watershed moment in the history of the real estate business. It is time to upgrade the real estate business to a profession and serve the consumers first. As unbiased consultants, forward-thinking agents and appraisers have a unique and crucial role in real estate transactions. Their role is not about selling but about providing valuable advice and services.
This unbiased approach is what sets appraisers apart and makes them an integral and valued part of advancing the real estate profession. This transformative period could see a significant expansion of their business portfolio, potentially propelling them into the role of a highly valued real estate consultant, offering unique insights and expertise.
About the Author
Kern G. Slucter, MS, MAI, SRA, is the author of Real Estate à la Carte (second edition) and CEO of the International Association of Real Estate Consultants. He has more than 30 years of real estate consulting, counseling, residential and commercial brokerage, teaching, and appraisal experience. His career includes teaching real estate and valuation courses nationally and internationally. For more information on fee-for-service or hourly consulting as envisioned in his book, visit www.iarec.org.
OREP Insurance Services, LLC. Calif. License #0K99465