Over the last several years we’ve seen one class-action lawsuit after another filed against the Chicago-based National Association of Realtors® (NAR) and its member brokerages. This also includes a legal battle with the US Department of Justice for anti-trust allegations. It now appears a settlement was reached several weeks ago on March 15, 2024. The surprise $418 million dollar settlement calls for NAR to eliminate decades-old commission rules and establish new rules for the MLS (Multiple Listing Service) participation. Changes are expected to be finalized sometime in July 2024 but consumers are already wanting answers. As such you must be prepared to answer questions from both sellers and buyers. Following is how the surprise settlement could impact you and your fellow agents:
BE PREPARED TO NEGOTIATE YOUR COMMISSION
NAR’s legal troubles are pretty well-known by now, making national headlines in all areas of the media over the last year in particular. And with national headlines comes national awareness. As such, you must be prepared to answer questions from both sellers and buyers when it comes to your commission. The standard 5-6% commission that was the norm–and the sole burden of the seller–has been fully called into question. If you are a listing agent, expect your sellers might push back on the traditional 5% to 6% commission that comes at their expense, even though there hasn’t been a finalized ruling yet.
The most impactful change happening as a result of the NAR Settlement will affect how commissions are shown—or rather not shown—on MLS. NAR will no longer be able to suggest that sellers shoulder the burden of paying the buyers’ agent. More importantly, NAR can no longer require that participating MLS systems be forced to advertise what those commissions are come July 2024 (or whenever the settlement gains approval by a Federal judge). This reduces the possibility of buyer agents excluding showings of properties that they might feel don’t offer enough–or any–commission.
PREPARING FOR THE NEW LANDSCAPE OF BUYER COMMISSIONS
If the seller is no longer required to pay the commission of the buyer broker, then how does the buyer’s agent get paid? A tricky question indeed. The new rules include that NAR will require buyer’s agents to enter into written agreements with all clients, outlining their fees and services before moving forward with any work. This could conceivably go a number of ways: (1) For one, in states where dual representation is allowed, a selling broker could work both sides and negotiate a lower payment with the seller when doing so. This could ultimately result in less expense to the seller. (2) Or, buyers could go without a buyer agent altogether. (3) Buyers could instead use attorneys to wrap up their deal with the seller, in particular if they are using the listing agent to show the home rather than contracting with a buyer agent. (4) Buyers and buyer agents could negotiate a written agreement for commission prior to being shown homes by a buyer agent; and/or pay for services on an a la carte basis. (5) As part of the offer process, buyers could negotiate with sellers to have a certain amount of money come off the offer price. That could then be used to pay their buyer-agent. (6) Or, the buyer’s agent’s commission could possibly be rolled into the mortgage as a closing cost.
Reading the tea leaves with no crystal ball in sight, it appears that buyer agents–and buyers– will carry much of the burden going forward. As such, buyers will have to pay commission (or attorney fees) in addition to all the other costs associated with purchasing a home. This could make a first-time home purchase, in particular, a much more expensive endeavor than it currently is. It is already widely expected that mortgage companies will jump into the mix and offer buyers the option to roll the buyer agent commission into their mortgage. (Based on a national median sales price of $417,700 as of Q4/2023, this would end up looking something like an additional $10,442.50 at the current 2.5% commission model added into the mortgage. Of course in high-priced areas like California and New York, this amount would be roughly doubled. And don’t forget that this amount will have interest added onto it for roughly 30 years.)
THE NEW REALITY
You would be wise to prepare for the possibility that commissions for both buyer and seller agents will trend lower. What these lawsuits have effectively done is put commissions strongly into a place of negotiation. NAR’s agreement to settle cements this new reality. Even moreso because now there is no leverage by the MLS system to require listing agents and sellers to advertise a commission to the buyer side. Proponents of this ruling expect a leveling-off effect for the cost of selling a home. Sellers are expected to win out with this new reality. But what about buyers? How will this new reality affect the buy side in the long run? How will buyer agents navigate this new, uncertain landscape? How will buyers themselves be able to afford this new additional expense of buying a home? All this remains to be seen. But one thing’s clear: Buyers and buyers’ agents will bear much of the burden of the new reality.
REMEMBER HOW WE GOT HERE: A TIMELINE
(1) 1990s – NAR instigates the MLS cooperative compensation rule as a way to appease calls from consumer protection advocates for buyer representation.
(2) The MLS Cooperative Compensation Rule is born (“Participation Rule”) – In order to list a for-sale property on MLS sellers must offer a commission to the agent who ultimately brings in the winning buyer. This commission amount was then “advertised” on MLS and created an incentive for buyer agents to show the home. Historically, this has resulted in a 5% to 6% total commission, with half going to the seller’s agent and half to the buyer’s agent. It is primarily this particular “mandate “rule” that ends up being the culprit of everything to follow. This is because it places sole responsibility of how the buyer agent gets paid on the seller.
(3) Anti-trust Issues and the US Department of Justice – Because the commission is fully paid by the seller and added to their closing costs this allegedly amounts to a form of antitrust by reducing competition and pushing up commissions higher than services warrant. Proponents claim this is one of the causes of inflated home prices across the nation.
(3) The Sitzer-Burnett class-action lawsuit: This class-action lawsuit is filed in 2019 in the state of Missouri naming NAR and member brokerages as defendants.
(4) Copy-cat class-action suits come forth at record-breaking pace with landslide victories for the plaintiffs.
(5) The NAR Settlement, March 2024: Five years after the Sitzer-Burnett lawsuit, NAR agrees to settle in as a way to end further lawsuits and protect their organization and their broker members from further pay-outs. A final decision by a Federal judge is expected this July.
(6) NAR Reputation suffers: In addition to the wave of lawsuits, NAR is beset by a series of scandals, throwing into question its role as the enforcer of integrity and practice of ethical behavior for the real estate industry. Membership begins to decline, with several large brokerages, such as Redfin, leaving the membership altogether.
(7) Introduction of an alternative industry group in January 2023: Stemming from the problems surrounding NAR, an alternative industry membership group called AREA is formed.
GREAT AGENTS WILL CONTINUE TO THRIVE
The new changes being brought forth by NAR’s somewhat surprising decision to settle aren’t expected to happen until mid-July. A Federal judge still must reexamine everything and make a final decision. But one thing’s certain: this will seismically and foundationally change real estate as we now know it. As an agent, be prepared for increased commission negotiation, especially on the buyer side. Some are predicting lower housing costs as a result but in reality this seems unlikely.
As the Greek philosopher Heraclitus so aptly put it 2500 years ago, “The only constant in life is change.” At the end of the day your success still hinges on being a great agent and giving top-level customer service to your clients. If you remain committed to that mantra, you will weather these changes well. And make no mistake: sellers and buyers need good agents to represent them. Buying or selling a house is a confusing maze of market inconsistencies, disclosures, legalities, paperwork and financial repercussions. Good agents are there to guide sellers and buyers through this process and protect the interest of their clients. It’s safe to say that agents who continue to expand their knowledge base and give top-level service will always be busy regardless of industry changes.