The Real Estate industry has been in the news lately as the National Association of REALTORS® (NAR), a powerful trade group with over 1.5 million members nationwide, and several large, national brokerages, have faced a barrage of lawsuits across many states, as well as renewed scrutiny from the Justice Department. Last month I shared some historical context as well as an explanation of recent news. The landscape continues to evolve rapidly. This month I am sharing an update of news from the last month, as well as my prognostication as to what it all may mean for our local market. As a reminder, I am, myself, a reluctant member of NAR.
News Update
There have been several developments since last month’s column. As a quick refresher, in October 2023, a jury in Missouri Federal court found NAR and several member companies, including Berkshire Hathaway HomeServices and Keller Williams, liable for $1.78 billion in damages for its anti-competitive practices. This was in addition to RE/MAX and Anywhere Real Estate (parent of Coldwell Banker, Century 21 and ERA) agreeing to settle prior to trial for a combined total of $138.5 million.
The plaintiffs asserted that commission rates are too high and NAR and the other corporate defendants conspired to maintain commission rates at 6 percent. They also argued that sellers shouldn’t pay for a buyer’s agent and that a buyer should negotiate compensation directly with their own agent.
After the jury verdict, NAR made a settlement proposal for $418 million. On April 19, the plaintiffs submitted a preliminary approval of NAR’s proposal, and the court preliminarily approved the motion on April 23. The plaintiff’s acceptance of the approval, which removes the variable of an appeal, in part, is a recognition that the $1.78 billion jury verdict was beyond NAR’s ability to pay, and simply would have bankrupted the organization.
The settlement will require final court approval, which could be granted at a hearing that is scheduled for Nov. 26. The terms of who is eligible to receive a payout from the settlement, and for what period of time vary a bit depending on where you transacted your home sale and which company represented you. If you sold a home that was listed on a Multiple Listing System (MLS) from Feb. 1, 2020 through Feb. 1, 2024, you may be eligible to receive compensation. More information can be found at
www.realestatecommissionlitigation.com.
What will it mean in our market?
Importantly, the settlement requires changes to the way that NAR and its members conduct business. These changes are mandated to be adopted before Aug. 17.
First, when you engage a buyer’s agent, you will now be required to enter into a written agreement that clearly stipulates how and how much the agent is entitled to be paid. This agreement will be executed before seeing any homes. Disclosing how compensation works in a transaction is an improvement to how things have sometimes worked in our market.
Second, compensation set aside for a buyer’s agent can no longer be published on the MLS. The idea behind this change is that a buyer should negotiate what they want to pay their agent directly and that the seller of a home shouldn’t dictate the arrangement between a buyer and their representative.
This change is more likely to have unintended consequences.
It is undeniable that the dialogue about compensation should be an explicit conversation between a buyer and their agent. However, this settlement doesn’t prohibit a seller from offering a commission to a buyer’s agent. It only prohibits listing it on the MLS. This means, for example, that a brokerage can list an offered buyer’s commission on their own website, or on a marketing flier. Or, more nefariously, they could publish nothing publicly, and offer different buyers different terms, violating fair housing laws in ways that would be difficult to prove.
These changes are also likely to disproportionately negatively impact lower-income consumers and first-time buyers.
The genesis of buyer’s agency was the desire to make the playing field fairer for consumers. Before the buyer’s agency, all offers were brought to a seller’s agent. The seller’s agent has a fiduciary duty to the seller. Having a consumer negotiating with a trained and experienced agent can be a very large disadvantage for a typical consumer.
Over time, as the idea of a buyer’s agent emerged, the commission set aside for a buyer’s agent became a standard practice. Buyer’s compensation has historically been rolled into a mortgage at closing, allowing buyers to more easily afford professional representation of their interests.
If it turns out that compensation needs to be paid out of pocket going forward, lower-income clients, who use subsidized mortgage products like FHA or VA loans, will likely be less capable of paying for an expert to guard their interests. Lower-income consumers operating on an uneven playing field is a step in the wrong direction.
That said, I believe that slowly, over time, the FHA and VA will change to accommodate the new requirements of this settlement and mitigate the negative consequences.
And for real estate practitioners, there is the anxiety that comes with the unknown. It is a hard market with higher interest rates, and with these additional changes, many agents will find it is becoming harder to grind out a living. I expect that the number of licensed agents will decline as a result over the next few years.
A final note on this topic for the time being. The Department of Justice is still investigating NAR and its practices, so additional legal developments may loom on the horizon.
