Real Estate Commission Lawsuit: Key Takeaways from the NAR Settlement

The real estate industry is buzzing with news of a groundbreaking settlement in the real estate commission lawsuit against the National Association of Realtors (NAR). This landmark case has shaken up the traditional commission structure, potentially changing how you buy and sell homes. As a homeowner or prospective buyer, you'll want to understand how this settlement might affect your future real estate transactions and the services you receive from real estate agents.

In this article, we'll break down the key takeaways from the NAR settlement and explore its far-reaching consequences. You'll learn about the background of the lawsuit, the details of the agreement, and how it might impact real estate commissions moving forward. We'll also dive into the changes you can expect as a home seller or buyer, what this means for real estate agents, and how it could shake up the housing market. So, let's jump in and unpack this game-changing development in the world of real estate.

Background of the NAR Lawsuit

The real estate industry has been shaken by a series of legal challenges targeting the National Association of Realtors (NAR) and several major real estate brokerages. These lawsuits have brought to light long-standing practices that may have inflated the cost of broker commissions across the United States. Let's dive into the background of this groundbreaking case and its potential impact on how you buy and sell homes.

Allegations of antitrust violations

At the heart of the lawsuit are allegations that the NAR, one of the largest trade associations in the country with over 1.5 million members , has been engaging in anticompetitive practices. The NAR has set rules and guidelines governing realtor-client relationships and home sales for decades, including the management of local multiple listing services (MLS) used by both members and non-members .

The main point of contention is the NAR's Handbook on Multiple Listing Policy, which required all brokers to make a blanket, largely non-negotiable offer of buyer broker compensation when listing a property on an MLS . This rule, known as the "Buyer Broker Commission Rule," has been criticized for potentially inflating commission rates and limiting competition among real estate brokers .

Class-action lawsuits filed

In response to these alleged anticompetitive practices, several class-action lawsuits have been filed against the NAR and major real estate brokerages. One of the most significant cases, Moehrl v. National Association of Realtors, was initiated in March 2019 . This lawsuit, along with others like Gibson v. National Association of Realtors, aimed to address the long-standing practices that allegedly inflated broker commissions .

The plaintiffs in these cases argue that the NAR's rules, particularly the Buyer Broker Commission Rule, have led to inflated commissions and higher costs for home sellers. They claim that in a competitive market, buyers would have incentives to negotiate their own brokers' commissions or potentially forgo a broker altogether .

Jury verdict against NAR

The legal battle reached a critical point in October 2023 when a jury trial took place for a related case, Sitzer v. National Association of Realtors . On October 31, 2023, the jury returned a verdict in favor of the plaintiffs, finding the NAR and other defendants liable for antitrust violations .

This verdict was a significant blow to the NAR and the traditional real estate commission structure. The jury awarded the plaintiffs $1.78 billion in damages, which, under antitrust law, is automatically tripled to $5.40 billion . This outcome has had far-reaching implications for the real estate industry and has led to settlement negotiations.

In the wake of the verdict, several defendants have reached settlement agreements. Two brokerage defendants settled for a total of $138 million before the trial, while another settled in February 2024 for $70 million . The NAR itself has agreed to a proposed settlement of $418 million in damages, along with commitments to change certain practices .

It's important to note that as of April 2024, these settlements are still pending judicial approval . The judge retains the discretion to approve or reject the proposed settlements, which means the final outcome of this legal battle is still uncertain.

As a home buyer or seller, these developments could significantly impact how real estate transactions are conducted in the future. The potential changes to commission structures and practices may lead to more transparency and negotiability in real estate fees, potentially saving you money in your next home purchase or sale.

Details of the NAR Settlement

The National Association of REALTORS® (NAR) has reached a groundbreaking settlement agreement that's set to reshape the real estate industry. This settlement, which received preliminary approval from the court on April 23, 2024, aims to resolve claims brought on behalf of home sellers related to broker commissions . Let's dive into the key aspects of this settlement and what they mean for you as a homebuyer or seller.

Financial Compensation

As part of the settlement, NAR has agreed to a substantial financial package. While the exact amount isn't specified in the provided information, it's important to note that this compensation is intended to address the concerns raised in the lawsuit regarding broker commissions.

Rule Changes

The settlement introduces several significant changes to real estate practices:

1. Prohibition of Compensation Offers on MLS: One of the most notable changes is the elimination of offers of compensation on Multiple Listing Services (MLSs) . This means that listing brokers or sellers can no longer make offers of compensation to buyer brokers or other buyer representatives through the MLS platform .
2. Written Buyer Agreements: Real estate agents working with buyers will now be required to enter into written agreements before touring a home . These agreements must include:
   • A specific disclosure of the agent's compensation amount or rate
   • Objective compensation terms (e.g., flat fee, percentage, or hourly rate)
   • A clause prohibiting the agent from receiving compensation exceeding the agreed-upon amount
   • A statement that broker fees and commissions are fully negotiable
3. Compensation Disclosures: The settlement mandates compensation disclosures to sellers, as well as prospective sellers and buyers . This change aims to increase transparency in real estate transactions.
4. Prohibition of Filtering: MLSs and participants must not enable the ability to filter out or restrict listings based on compensation levels or brokerage names . This change promotes fair competition and equal access to property information.
5. Retention of "Cooperation" Definition: The settlement retains and defines "cooperation" for MLS participation , ensuring that the collaborative nature of real estate transactions is maintained.

Implementation Timeline

The settlement agreement outlines a clear timeline for implementing these changes:

• August 17, 2024: This is the effective date for the practice changes . It's also the earliest date for plaintiffs to issue class notice and the deadline for REALTOR® MLSs to implement policy changes .
• September 16, 2024: Deadline for REALTOR® MLSs and opting-in non-REALTOR® MLSs to implement practice changes to be considered a Released Party under the settlement agreement .
• November 26, 2024: Scheduled hearing for Final Approval of the settlement .

It's worth noting that while REALTOR® MLSs must implement the changes by August 17, 2024, to remain in compliance with NAR policy, NAR encourages all MLSs to implement the practice changes by this date .

As a home buyer or seller, these changes will impact how you interact with real estate professionals. You'll need to sign a written agreement with your agent before touring homes if they're using an MLS . However, this requirement doesn't apply to open houses or general inquiries about an agent's services .

Remember, agent compensation for both buyers and sellers continues to be fully negotiable . When choosing an agent, don't hesitate to ask questions about their services, compensation, and these new written agreements. These changes are designed to give you more transparency and control in your real estate transactions.

Impact on Real Estate Commissions

The real estate industry is experiencing a seismic shift in how commissions are structured and paid. These changes are set to reshape the way you buy and sell homes, potentially leading to significant cost savings and increased transparency in the process.

End of 6% commission norm

The long-standing 6% commission standard in home purchase transactions is coming to an end . This change is a result of a groundbreaking settlement between the National Association of Realtors (NAR) and groups of homesellers. The NAR has agreed to pay $418 million in damages and eliminate rules on commissions . This settlement is expected to dramatically reduce the cost of buying and selling a home.

For years, the combined commission shared by buyers' and sellers' agents has typically been 5% to 6%, which is higher than in most other countries . However, this norm is now being challenged. According to TD Cowen Insights, real estate commissions are expected to fall by 25% to 50% . This significant reduction could lead to substantial savings for both buyers and sellers.

Decoupling of buyer and seller agent fees

One of the most significant changes is the decoupling of buyer and seller agent fees. As of August 17, 2024, home sellers are no longer automatically responsible for paying both their own agent and the buyer's agent . Instead, homebuyers who want representation may have to pay their own agents separately .

Under the new rules, listing agents are prohibited from making offers of compensation to buy-side agents on any NAR-affiliated multiple listing service (MLS) . This change aims to create a more transparent and competitive marketplace. Buyers will now need to enter into written agreements with their agents before touring a home, clearly specifying the agent's fee .

This decoupling addresses a long-standing concern: the potential conflict of interest in having the home seller decide how much the buyer's agent is paid, given their different objectives in negotiating a home sale . Now, you as a buyer will have more control over the compensation of your agent, potentially leading to more competitive pricing for services.

Potential for lower overall commissions

The settlement opens the door to a more competitive housing market, which could result in lower overall commissions. Realtors can now compete on commissions, allowing you to shop around for rates before committing to buying a home . This increased competition is expected to benefit consumers by driving down costs.

Some experts predict a near-nirvana for consumers, with the possibility of a "buy-side price war" as buyer agents begin competing fiercely for clients . However, it's important to note that the impact may vary. While sellers can still offer compensation to buyer's agents, it will no longer be a condition of using an MLS .

The changes could lead to more diverse pricing models in the real estate industry. You might see an increase in flat-fee and discount brokerages, offering alternative ways to buy and sell homes . This could be particularly beneficial if you're looking for more affordable options in your real estate transactions.

It's worth noting that in countries like Israel, Singapore, and the UK, brokers charge between 1% to 2% for similar services . This international comparison suggests that there's room for significant reductions in U.S. real estate commissions while still maintaining a viable industry.

As these changes take effect, you'll likely see a transformation in how real estate services are priced and delivered. While it may take some time for the full impact to be felt, the potential for lower overall commissions could make buying or selling a home more affordable for many Americans.

Changes for Home Sellers

No longer required to offer buyer agent compensation

As a home seller, you're about to experience a significant shift in the real estate landscape. Starting August 17, 2024, you'll no longer be automatically responsible for paying both your own agent and the buyer's agent . This change stems from the National Association of Realtors (NAR) settlement, which prohibits listing agents from specifying how much the buyer's agent will be paid when a home hits the market .

Under the new rules, properties listed for sale in multiple listing services (MLSs) can no longer include an offer of compensation to the buyer's broker . This means you have more flexibility in how you approach agent compensation. However, it's important to note that you can still negotiate with buyers if they request that you pay all or part of their broker's compensation as part of their purchase offer .

Potential for reduced selling costs

This settlement could lead to a significant reduction in your overall selling costs. Industry experts predict that commissions will ultimately fall below 4%, and possibly even to 3% . Stephen Brobeck, senior fellow at the Consumer Federation of America, anticipates this decrease in commission rates .

The NAR has agreed to pay $418 million to compensate home sellers across the U.S. as part of the settlement . This substantial sum, combined with the rule changes, is expected to put downward pressure on the cost of hiring a real estate broker .

You may also have more options when it comes to listing your home. For instance, you could opt for Flat Fee MLS Listing services, which can get your home on the MLS within 24 to 48 hours . This alternative could potentially save you money on traditional listing fees.

New negotiation dynamics

The settlement introduces new negotiation dynamics that you should be aware of. While you're no longer required to offer buyer agent compensation through the MLS, you still have options to attract potential buyers:

1. Concessions: If allowed by your listing broker's MLS, you can use the platform to communicate to buyer agents that you're open to making concessions. These concessions could include a credit to the buyer at closing for various purposes, such as paying closing costs, compensating the buyer's agent, or providing a repair credit .
2. Separate negotiations: The buyer's agent fee will now be negotiated separately between the buyer and their agent . This change may lead to more transparent and competitive commission discussions .
3. Increased competition: With these changes, you might find agents competing more fiercely for your business. Take advantage of this by shopping around and interviewing multiple agents before deciding who to work with. Ask about their commission rates, marketing strategies, and track record in your area .
4. Potential impact on marketing: Be aware that some agents might not invest as much in marketing or might prioritize clients who are willing to pay higher commissions. This could affect how quickly and effectively your home sells .
5. Disclosure requirements: If you do negotiate any compensation arrangements with a buyer's agent outside of the MLS platforms, your broker will need to disclose these arrangements .

As these changes take effect, it may take some time for their full impact to be felt in the marketplace. However, the expectation is that this new system will create more opportunities for you to negotiate and potentially reduce your overall costs when selling your home.

Changes for Home Buyers

Written agreements with buyer agents

As a home buyer, you'll notice some significant changes in how you work with real estate agents. Starting August 17, 2024, if you're using an agent who lists properties on a Multiple Listing Service (MLS), you'll need to sign a written agreement before touring a home . This requirement applies to both in-person and live virtual tours .

These written agreements must include:

1. A specific disclosure of the amount or rate of compensation your agent will receive .
2. Objective compensation terms (e.g., flat fee, percentage, or hourly rate) .
3. A clause prohibiting the agent from receiving compensation exceeding the agreed-upon amount .
4. A statement that broker fees and commissions are fully negotiable .

This new requirement aims to provide you with a clear understanding of the services you'll receive and the associated costs . It's worth noting that several states already have laws requiring such agreements .

Negotiating agent compensation

One of the most significant changes is that you now have more flexibility in negotiating your agent's compensation. While this option has always been available, it's now more transparent and encouraged . You can discuss different compensation structures with your agent, such as a fixed-fee commission or a percentage of the home's sale price .

Some agents may offer lower commission rates, with "discount agents" potentially charging just 1% to 1.5% of the home's sale price . However, remember that an agent has the right to decline working with you if they're not satisfied with the proposed compensation .

Potential out-of-pocket costs

The new rules might lead to increased out-of-pocket costs for you as a buyer. Previously, the seller typically covered the buyer's agent commission, which was often around 3% of the home's sale price . Now, you may need to factor this cost into your budget.

For example, if you're buying a home for $450,000, a 3% buyer agent commission would be $13,500 . This amount would be in addition to your down payment and closing costs. On a $450,000 home with a 5% down payment ($22,500) and estimated closing costs of 2% ($9,000), you could be looking at a total out-of-pocket expense of $45,000 if you're responsible for your agent's commission .

However, there are some potential solutions to help manage these costs:

1. Seller concessions: Sellers can still offer concessions to help cover certain transaction costs, including fees for buyer broker services . These concessions can be communicated on the MLS but cannot be tied specifically to payment for a buyer's broker .
2. Financing options: Fannie Mae and Freddie Mac have clarified that if a seller pays the buyer's agent commission in line with local practices, these amounts won't count towards Interested Party Contribution limits . This means sellers can potentially cover buyer agent compensation in addition to other concessions .
3. Gift funds: There may be an increase in the use of gift funds to offset agent compensation .

As you navigate these changes, it's crucial to discuss all options with your agent and lender. Remember, all forms of compensation remain fully negotiable . Don't hesitate to ask questions about services, compensation, and the new written agreements to ensure you're making informed decisions throughout your home buying journey.

Implications for Real Estate Agents

The National Association of Realtors (NAR) settlement has ushered in a new era for real estate professionals, bringing both challenges and opportunities. As you navigate this changing landscape, you'll need to adapt your strategies and embrace new approaches to succeed.

New business models

The settlement has sparked a shift towards more consumer-centric business models. You'll need to reevaluate and adapt your strategies and operations to thrive in this new environment . This might involve offering more personalized services or exploring alternative revenue streams to reduce reliance on high-commission structures .

One way to stay competitive is by leveraging technology. Investing in digital tools and platforms can help you provide a more seamless, transparent experience for buyers and sellers . For instance, you might consider utilizing AI-based recommendation engines for personalized property searches or implementing chatbots for constant support .

Some agents are already adapting by shifting their focus. Philip Sexton, co-owner of the Sibbach Team with eXp Realty in Scottsdale, Arizona, notes that "Some are shifting their business to only work with sellers... Others are working harder to demonstrate their value to buyers and provide a menu of services the way listing agents do" .

Increased competition

The NAR settlement has intensified competition among real estate agents. With commissions potentially decreasing and buyers possibly responsible for paying their agent's commission, you'll need to find new ways to stand out . Simply having a license and access to listings is no longer enough to succeed .

To thrive in this competitive landscape, you'll need to focus on adding tangible value and differentiating yourself through unique service offerings . This might involve specializing in a particular niche or market segment. As one industry expert puts it, "The agent of the future is not a general practitioner. It's a professional that advertises, serves, and targets a community of people whose problems they unequivocally understand, and are passionate about solving them" .

The increased transparency in commission rates will further fuel competition . To succeed, you'll need to build strong, long-term client relationships and demonstrate your value consistently .

Adapting to transparent pricing

Transparent pricing is becoming more prevalent in the real estate industry, and you'll need to adjust your approach accordingly. In some markets, like the East Bay area, transparent pricing means listing a property at a price the seller will actually accept, rather than setting an artificially low price to spark a bidding war .

This shift towards transparency can be challenging. As noted in one report, "Transparent pricing can be misunderstood by the buyer population, because the price appears high and buyers are already conditioned to overbid" . You'll need to educate your clients about this new approach and help them understand its implications.

To adapt to these changes, you might consider offering a menu of services with clear, upfront pricing. This approach allows clients to choose the level of service they need and understand exactly what they're paying for. As Sexton explains, "We're having lengthier buyer consultation meetings before we work with buyers... We're finding sellers are mixed about it, too" .

Remember, despite these changes, buyers still value the guidance of a real estate professional. As Sexton notes, "Most buyers have heard of the changes, but they still want an agent to hold their hand and help them... They know we don't work for free, and we're educating them on how the process works" . By embracing transparency and demonstrating your value, you can navigate these changes successfully and continue to thrive in the evolving real estate landscape.

Potential Effects on the Housing Market

The National Association of Realtors (NAR) settlement is set to reshape the real estate landscape, potentially impacting home prices, buyer and seller behavior, and overall market efficiency. Let's explore these potential effects in detail.

Impact on home prices

The settlement could lead to a significant reduction in real estate commissions, with TD Cowen Insights projecting a decrease of 25% to 50% . This could translate to average commission rates falling to approximately 3% to 4.5% from the standard 6% . In high-priced markets where 5% was the norm, rates might drop to between 2.5% and 3.75% .

Lower commissions could potentially lead to lower home prices. The median price of a home in the US is $417,000, meaning the average seller could be paying more than $25,000 in brokerage fees under the current system . With reduced commissions, some of these savings might be passed on to buyers, potentially lowering home prices .

However, the impact on prices may not be immediate. Some experts believe that price changes due to the settlement agreement alone are unlikely to happen overnight . This is partly due to the industry's use of 'comps' or comparables for property appraisals, which won't immediately reflect the rule changes .

Changes in buyer and seller behavior

The settlement is already influencing behavior in the housing market. Some prospective homebuyers are planning to restart their housing search after the new rules are in place, hoping to find lower home prices . Conversely, some buyers may want to purchase now, concerned about how they will pay their agent's commission if sellers no longer cover it .

On the seller side, some are not waiting for the new rules to take effect in July to lower — or even eliminate — the commission they offer to buyers' agents . For instance, one seller changed his listing to offer "0%—negotiable" as the buyers' agent commission after the NAR settlement was announced .

The new rules require agents to enter into written agreements with their buyers before viewing a house . This could increase up-front costs for buyers if agents charge by the hour or per showing .

Market efficiency

The settlement is expected to increase transparency and competition in the real estate market. By uncoupling commissions from home prices, it opens the door to a more competitive housing market . This could lead to more diverse pricing models, including flat-fee and discount brokerages .

Increased transparency and opportunities to negotiate with realtors is generally seen as a win for consumer choice . However, it may pose challenges for first-time homebuyers, who made up 32% of home sales last year . These buyers, who already struggle with down payments and closing costs, may face additional burdens if they have to pay agent fees out of pocket .

The settlement could also improve geographic mobility. Currently, the high transaction costs of buying and selling a home can serve as a "tax on mobility" . Reduced commissions might lead to a reversal in the long-term decline in mobility, potentially allowing people to relocate more easily for better job opportunities .

In conclusion, while the full impact of the NAR settlement remains to be seen, it's clear that it will bring significant changes to the housing market. As a buyer or seller, staying informed about these changes will be crucial in navigating the evolving real estate landscape.

Conclusion

The NAR settlement has triggered a seismic shift in the real estate industry, having a profound impact on how homes are bought and sold. This agreement has the potential to lead to more transparent pricing, increased competition among agents, and potentially lower overall costs for consumers. As the changes take effect, both buyers and sellers will need to adapt to new negotiation dynamics and consider different approaches to agent compensation.

To wrap up, the full effects of this settlement will take time to unfold, but it's clear that the real estate landscape is evolving. Buyers, sellers, and agents alike will need to stay informed and flexible as they navigate these changes. While challenges may arise, this shift also brings opportunities to create a more efficient and consumer-friendly housing market. In the end, those who can adapt quickly and effectively to this new environment are likely to thrive in the transformed real estate industry.

FAQs

How will the NAR settlement impact Realtors?
The settlement introduces a rule that prevents agents from receiving compensation that exceeds the agreed amount in the buyer’s agreement. It also mandates a clear statement that broker fees and commissions are fully negotiable and not fixed by law.

Can I receive compensation from the NAR settlement?
It's possible. Many individuals who sold homes since 2014 might be eligible for a portion of the settlement, although a significant part will be allocated to legal fees. To check your eligibility, visit realestatecommissionlitigation.com.

What is the total payout of the NAR lawsuit?
The lawsuit has resulted in a settlement of $418 million with NAR, preliminarily approved on April 23, 2024, and an additional $250 million settlement with HomeServices America, preliminarily approved on August 9, 2024.

Is the NAR settlement likely to receive final approval?
The NAR settlement has received preliminary approval but awaits final court approval. A hearing for the final approval is scheduled for November 26, 2024. For more details on the settlement’s timeline and significant milestones, further information is available online.

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