Realtor Lawsuit on Commissions Will Bring New Transparency and Choices To Buyers and Sellers
As a former Realtor?, I have been following this lawsuit from home sellers, the Department of Justice against the National Association of Realtors (NAR) since 2019. To give some figures and context, last year real estate commissions accounted for about $100Billion in revenue paid out to Realtors. The transparency and decoupling of the baked in standard co-op commissions is mainly in question here. This settlement is truly about giving more transparency and choices to both the homebuyer and seller. But at what cost?
It's 2024 and a settlement has come from the NAR waiting on final signature as I write this. There is still ongoing litigation mind you. From my understanding, after the changes get implemented in mid July 2024, there could be further changes demanded from the DOJ post July should the proper effects occur.
Because this settlement has come out of a class action antitrust lawsuit, that means the court has to approve the lawsuit. In a typical lawsuit plaintiff and defendant can reach an agreement and it's done. But in a class action lawsuit, part of the courts role is to protect the unknown plaintiff and NAR potential on the hook for triple the damages. The class members who have not yet been identified. Many recent homebuyers are most likely receiving postcards from attorneys on this.
2024 NAR Settlement Includes Three Main Policy Changes
Here is how this settlement will bring on new policy changes to real estate practitioners moving forward.
How Realtors Work Now
Realtors? today benefit mainly from membership to the NAR, (National Association of Realtors ) which provides their bread and butter sharing portal called the MLS. The MLS stands for the multiple listing system in which properties are listed for sale. Each MLS is usually a local area consisting of several cities and counties where you input real estate for sale. There is no national MLS that I am aware of only local state MLS's.
To be a member of these MLS's, real estate agents must subscribe to them and be a NAR member. Realtor's are real estate agents but they belong to the NAR which follows a code of conduct along with local regulations. The MLS's are strict in their data input and is only available to Realtors. Contracts, arbitration protection and agent co-operation is the main benefit in belonging to the local NAR owned MLS's. You have protections set in place.
Data input in the local MLS, including the co-op commission, has to be accurate and up to date. Appraisers , loan officers and consumers are just a few of the parties that rely on this data. Many litigation cases have taken place with agents switching commissions, inputting of false data or missing appliances, have taken place.
There are many agents working either in commercial or consulting who are licensed but are not NAR members. These non NAR licensed agents operate off of commercial portals like CoStar or Loopnet and still get compensated but the agreement is negotiated in the purchase contract and with their buyer.
When you list with a Realtor, you sign an agreement with that real estate broker at usually a set fee of 5-6%. In the listing agreement there is a part where it explains that the commission will be split to a buyer's agent broker and usually it is half of the total going to the buyer's broker. After the listing agreement is signed that house gets listed in the local MLS. Data gets input like number or rooms, square footage and the co-operating commission. That is usually on average 2.5%-3%.
Selling A House Prior to Buyer Agency Representation
Before the 1990's internet age of property portals there really was no designated buyer's agents. During this time, the legal relationships between brokers and their clients were straightforward: listing brokers represented sellers, and agents working with buyers acted as "subagents" of the listing broker. All agents involved in a transaction owed their allegiance to the seller, and buyers were unrepresented. Brokers could earn a share of the commissions paid by sellers without actually representing buyers directly.
The term client or buyer broker agreement was not in sight. Everyone was either a consumer or customer. You found a home had an agent representing you put an offer in writing and as a buyer you really did not know how much your agent made until the closing.
The selling agent would typically list at 6% because at that time properties were priced at $10,000-$50000 so the maximum commission payout was $3000 compared to the cost of an average a house today in 2024 is $417,700. With that same 6%, this amounts to $25,000 in commission. Two things changed prior to the creation of the designated buyers agency in 1996. Prior to 1996 home prices were way way lower and there was no internet. The first digitized MLS went online in 1994.
Pre 1990's home sellers would hire an agent to list their home and that agent would try to get the best price for them. As a home buyer you would contact the listing agent and that agent would handle the whole transaction. Representation was tough for that listing agent. If you put yourself in the listing agents shoes they had to not only get the highest and best price for the seller, now having that buyer customer somehow they had to negotiate on their terms as well to get paid at closing.
This setup left buyers vulnerable to exploitation and at a real disadvantage in the transaction. There was no formalized representation for home buyers. Simply put buyers were customers at this stage. All commissions were paid out by the seller. Conflict of interest along with consumer advocates pushed for buyers agency representation. First in 1993 the Federal Reserve Bank legalized buyer's agent commission rebates. Soon thereafter in 1996 the NAR revised its code to formally recognize buyer's agency as a sanctioned practice.
What the NAR Settlement Means for Homebuyers
If I am a first time homebuyer regardless if you are FHA,VA or conventional, know that there will be some changes coming from both the HUD, Fannie Mae, Freddie Mac to help. In my opinion new friction is created and as a result you have unintended consequences. I think they will somehow have to make new rules to add this buyer agent commission into the financing because currently it is not allowed for VA and some other cases. Some FHA mortgage brokers could have an advantage now by getting their real estate license as a result.
More Seller Concessions going to buyers
Because homebuyers will now have to pay the buyers agent compensation, I can see situations where home sellers offset this by providing concessions to homebuyers. Example: You as a buyer have an agreement to work with a buyers agent to help you for a fixed about let's say $5000. Your buyers agent can now structure your purchase contract and get the seller to pay down points on your mortgage or provide a $5000 credit towards this, should the lender allow this. This is totally negotiable and can be more or less. It can be a percentage of what you might even need for repairs or a decorating allowance for example. Totally negotiable by both sides. Always has been and will be.
Equal housing is a must for all with this verdict and I myself agree with this settlement. Prior to any showing, conventional, cash buyers and FHA home buyers will now have to sign a buyer agency agreement stipulating the relationship and commission amount and terms. So agents will probably want to lock in a buyer lets say for 90 days into a exclusive buyer contract at their rate which they maybe were accustomed to. Personally if I were a first time buyer with a buyers agent I did not know I would just sign a 1 property showing agreement for 1 day to feel out that buyer agent and get a feel for them to see their value. That buyer agent might agree and put in an tail addendum in that in case I decide to buy down the road.
As a buyer working with a buyer's agent you have to be really careful signing these buyer agency agreements and not to overlap them or signing multiple buyer agency agreements because down the road you would owe all those agents you signed with. So be sure to get some legal counsel with these agreements.
Another thing for home buyers to consider is the local market conditions. Last year when I purchased my home I spent months after months meeting buyer agents all over town losing bids, why you ask? Because it was a seller's market, very few homes and multiple offers. I was an active agent back in the 1990's- early 2000's and I knew how agents worked. So after about 3 months of losing bids with buyers agents I said ok, I am going directly to the listing agent. Let me go on Zillow or another portal see what's new on the market today.
I mean like within the hour as soon as something popped up, I quickly would google the address, double check the location from aerial and street view, then proceed to my county flood plain map, verify it's not in any flood plains or next to any kinds of junk yard or whatever and I would meet the agent. I would be straight up with the agent and say I don't have an agent. That agent showed me the property and I liked it made the offer with that listing agent. They of course had to provide a dual agency representation, I was fine with that because I wanted to own this house. I knew the incentive of the agent. Not only did that listing agent get the listing agent commission side but also the buyer agent commission which amounted to the full 5%. In the above example what a buyer could also do to avoid the dual agency representation is ask the listing agent to refer him or her to another agent in the office.
How am I going to pay for my Buyer's Agent Commission?
So with this new settlement I can see some other scenarios coming into play. For example let's say you short on concessions or the seller simply states they are not willing to pay your buyer's agent commission now. What you can do as a buyer is raise the price of your offer within the appraisal amount up to but not exceeding 5% or your local state housing laws. Maybe your real estate agent representing you as the buyer in their buyer broker agreement has set up a 2.5%- or 3% fee and you can only pay 1%. Then I don't see why you can't raise your purchase price to cover the difference. But whose to tell me it has to be a commission, why can't it be a fee? If an agent shows me just 1 house and they negotiate and put the deal together I would rather pay a fee instead of a set percentage.
What the NAR Settlement Means for Home Sellers
The groundbreaking trial the real estate Community has been particularly attentive to a pivotal trial the Sitzer-Burnett case in Kansas City. This case concluded with a significant ruling against the National Association of Realtors and some other brokerage franchises that these parties had colluded to inflate or maintain high commission rates. This precedent setting moment in real estate legal history came with a verdict that could reshape the commission landscape evidenced by a substantial $1.8 billion damages award.
The settlement agreement allows for NAR MLS's to publish an offer by seller to pay a concession on behalf of the buyer. So if a buyer wants assistance for example paying their closing costs or offsetting some of their closing costs. A seller may offer concessions to a buyer through the MLS. That offer of concession if accepted by the buyer cannot be conditioned on the buyer being represented by a buyer broker.
So the seller's offer of concessions could be used to pay buyers traditional closing costs could be used to pay a buyer existing obligation to compensate their own broker.
Because the commissions would be decoupled after July 2024, what I can see is that sellers will be more savvy now to negotiate the true value of that listing agent. Here is what I am going to ask a listing agent. What services will you provide me besides listing in the MLS? Since the NAR owned MLS's can no longer show the co-op commission, what can I do as a home seller? Because what I would do selling a home post July 2024 is list with a real estate broker stipulating a total commission of 3%.
In that agreement I with the listing agent I would have it state that whomever brings the buyer will receive the 2.5% commission. If it's the listing agent I would just let him or her keep the 3%. There is a lot of hate on agents these days but I believe the cream will rise to the top. There is value to agents but not in the previous 6% model. Even though many say it's negotiable it was not. Sure it's in the contract stating that it is negotiable, the NAR agents would not work otherwise. So we get the settlement. Listing agents to me are like marketing people. Input the listing and see what happens is what I have seen with most. Whoever does the most work should be paid the most is my opinion.
Why I am in Favor of the NAR Settlement of 2024
This new change gets me thinking for getting back into real estate. Why you ask? Two main benefits I see happening for agents. Now I will have more certainty that I will get paid at least for my work. As a buyers agent I can have my agreement for some payment upfront or a portion upfront and at closing. Most likely this will either be a fee/commission for my service.
I believe commission compression will happen but also what will happen is success rate now goes up with buyers agents. I can see buyers going directly to listing agents and many of them simply referring to inhouse agents to avoid liability and getting the in house sale.
When I first got my license to start to work with a small independent non-franchise real estate firm I soon found out how other brokerages treated us. Our small discount brokerage offered a lower total commission overall at around 3.75% total compared to other agencies charging 5-6%. We were full service and could do the same marketing if not better than national companies for less because we did not have any franchise fees, but other companies did not like us. As soon as the other brokerages found this out, they simply would not show our listings. In hopes our office would go out of business.
This compensation model change is a win for consumers, good government and capitalism alike. So I think a lot of people misunderstand the difference between capitalism and corporatism. Corporatism in this case the National Association of Realtors, is when you have so much corporate power that you could protect your monopolies and oligopolies, which is basically what was happening here. And that's why it lasted about 100 years. But, but in capitalism, it's important that you check monopolies and oligopolies. Otherwise corporations like the NAR will grow so large they'll kill off their competition and they'll kill off the free market, which is capitalism.
Department of Justice Stance in the NAR Settlement
The Department of Justice never said you can't offer compensation in the MLS They are not a fan of universal compensation like the typical 6% or even the 2.5%-3% coop to buyers agents. This goes against the Sherman Act is what this settlement is about.
The second complaint coming from the DOJ is that homebuyers simply do not have the ability to negotiate their representation commission. So when they are purchasing their property the buyers agent commission is already baked in the price.
The DOJ would allow the MLS's to disclose it as a Yes or No field just not stipulating the standard amount which was 2.5-5% buyer agent co-op.
In a nutshell, what the Department of Justice was saying is there was no transparency to buyers as what and how the buyers agents were being compensated. Claiming agents steered buyers into homes which paid more in co-op commission. Many buyer agents were showing homes which offered the 2.5% and 3% commission but did not show the homes which offered 1% commission.
How NAR Threw Realtors Under The Bus
I personally got out after the NAR sold out our data and syndicated to Zillow. Things thereafter started going downhill. When you have 1.5 million members and 1/2 of them sell 1 house or less tells me the model is to recruit agents so they can pay their yearly dues.
What NAR's stance used to be couple years ago on this was they said, throughout this litigation process when this lawsuit first started was that you as a home seller if you're not willing to pay, you are not allowed to list in the MLS. This was the NAR stance and they stood by this for years firmly. It was non negotiable. During this lawsuit period since 2019, attorneys for big brokerages tried to convince the MLS to state this was optional for home sellers. That the home seller did not have to offer to pay a buyer broker. The original lawsuit was for over $5 Billion.
The main talking point of the lawsuit coming from the Department of Justice was that you cannot tell someone you have to charge someone compensation. NAR arrogantly basically replied back and said you have to or else your home will not be listed. If you are not willing to pay a coop to another broker, you cannot list a home in the MLS. That was their stance.
That's where the DOJ had a problem with as it is a antitrust issue. Finally the NAR member MLS's during the last 2 months before the verdict NAR changed the stance. They caved in and said you can now put 0 as the co-op commission. If I am NAR and I am charged with a $5.5 Billion lawsuit I need to settle some how right? So now instead of the $5 Billion the NAR settled for $1.8Billion with a four year payout at $418 million dollars per year for four years and said we will just exclude it.
Four years ago the NAR could of fixed this problem at the root and made it negotiable but they did not. At least at that time it would of have a field in the MLS like yes there is a co-op compensation or no there is not. But the NAR just held their stance strong and now they will suffer. With this settlement the NAR told the DOJ you know what, we will eliminate the co-op altogether. Four years ago you could of made it negotiable and now you flipped to the extreme. So now you're not allowed to put compensation in the MLS.
New MLS Models as a Result of the NAR Settlement.
Realtors in my opinion are not going away, although many are saying that 30% will get out of the business. Either way, a new model is way overdue in my opinion. I remember working as a buyer's agent when I was active in three different markets. I can count more buyer deals that fell apart where I did not get paid than where I did make a commission. This needs to be fixed. Maybe a rendered service fee or a la carte items where buyers can pick the service they need.
Going back to my old days as an agent in the field I would be dedicated 100% to working with that buyer finding a home. I would get their criteria what they were looking for, make sure they were preapproved, show them a minimum of 5 and up to 20 houses per buyer.
If I had 5 buyers in a give months I was working with maybe one of them actually I got to the closing table. Deals fall apart and buyers were a lot of work. I did not mind previewing and finding the homes for them but it cost me.
What I can see is some hybrid models coming into play from something like a transaction coordinator fee or maybe a real estate consultant come into play and everything in between. Service rendered fee is a term I like. To me as a former Realtor member from the late 90's I did see some benefits of belonging to a local NAR MLS board.
Another thing I can see happening is either the buyer goes directly to listing agent bypassing a buyer broker altogether. Another scenario I see happening is buyer agents simply referring their buyers to the listing agent or vice versa. This is Zillow's model now as when they get a buyer they will refer it out to a local buyer agent for a fee. An important thing to keep in mind is many state regulations differ.
But now post NAR settlement I believe there will be a flip of truly negotiated fees, whether it's flat fee or some kind of concierge menu of services fee. The term commission might still be a thing but with now buyers and sellers having mode transparency, the rise of the fee agent will be the new kid on the block.
Final Thoughts on the NAR Settlement
You are the listing agent have a new listing for sale and you get a call from a buyer's agent who want to show that home saying I would like to show your home. The first thing that agent will ask is are you offering cooperating compensation and the seller's agent says no. Well unfortunately my client does not have any money to come out of pocket so we're going to have to pass. So what happens as a result is that buyer now has to find another home because they cannot come out of pocket to buy that home. This ruling in my opinion makes it harder to first time buyers. Whereas before it came from the seller's net.
Now this commission structure of buyer's agents will happen off of the MLS through contract negotiation. Many agents are saying what will happen in legislation is that the now decoupled buyer's commission be financed into the transaction.
What I have a problem with is NAR and their tie in agreement with the MLS. In order to list your home in the local MLS, I as an agent have to belong to NAR, and NAR tells that MLS they have to charge money on that listing. Now they are saying you're not allowed to charge anything. Who are you to tell me that if I have a willing seller who wants to actively pay a co-op commission of 2-3% out to a buyer agent from the sale of their house that I can't do that now?
So what will happen in my opinion is a Nationalized MLS that is not affiliated with the NAR in any way will come online. This new National MLS will be geared for buyers and even their agents designed to show a MLS listing specifically showing if there will be a co-op commission or not. Buyers will now know whether they will have to pay out of pocket or not if they are using a buyer agent.
Finally brokers are not required to be members of any MLS! The seller is no longer responsible in paying the buyers agent commission. In a nutshell all these lawsuits want to give the buyer more control over the commission is all.
I remember starting in real estate in 1998 in a small local office and learning about this buyer agency thing. I had to in order to pass the state exam. There really was and still is a difference in a customer and a client. And we had to get it in writing. Did we? Well sort of vaguely verbally in my opinion.
This little independent office where I started to work at felt like going back in time. It was in a mid sized suburban town just outside of Chicago. The building was 2 story with the first floor being the real estate office while the 2nd floor had an apartment. I remember meeting the broker owner at that time he was in his 60's. I got on his good side and ended up getting the apartment above the office and got the keys to the office. So there for years opening up the office below to the public I got into managing some aspects of the building and stumbled on a basement find. Old MLS listing books from the 1970's. Hundred of them covered in dust.
I brought one up and asked my broker what were these? He explained those were out old MLS books that were dropped off weekly of new homes for sale. This is how we did business in the 1970's. I sad what how cool was that.
I got really excited and cleaned them up. To me they were like gold. Each book has probably 500-1000 homes in it for each surrounding city sorted by price.
Many books were just land listing and about 3/4 were either new houses or sears catalog homes! Those MLS books, being a little bigger than index card size, I remember were a keepsake for my office and worth a lot in my opinion because it had really valuable data. Very accurate photos, dimensions, lot size, room count and so on. I felt like I was going through some old scrolls from Egypt or something. One thing I don't recall is if there was a co-op commission on those. It just showed price, property description and photos. I would imagine the agents had to do lots of calling back then.
After a couple years working there I had an idea of marketing those books to get listings. Everybody looked at me like what are you talking about. So I approached the broker with my idea. Let's make copies of these old MLS listing and send the original owner the listing. It had the address and photo of the house when it was first built. I mean if you are a homeowner sitting at home and one day you get this 1970's style postcard of your house showing you the old price of for example $14,000 or in that ballpark, with a tree that perhaps that was small and now taken over, how would you react.
Well sure enough over a 1 year period I did just that. Mailed all these out stamped and sealed by hand and landed our office not just some new listings but some very thankful homeowners which invited me over for their framed MLS listing in their living room.
Later on after leaving this office after 15 years after moving out of state to work for a limited service flat fee broker in another state, I experienced the same thing. Agents saw the co-op commission of 2.5% in the MLS said oh I have a buyer for that house but I know that agency, it's one of those limited fee service brokers, and that buyer agent would not show the listing because if their buyer would agree to buy that home that agent would end up doing more work in putting the deal together versus a full service brokerage.