Making Sense of the National Association of Realtors Lawsuit Settlement

You might have heard about a proposed (at the time of this writing) settlement to multiple lawsuits against the National Association of Realtors (NAR) and several real estate brokerages that, if approved, would lead to changes in the way real estate agents are compensated. The lawsuits focused on home sellers claim that the typical arrangement of paying a separate commission to their agent and to a separate buyer’s agent when selling their properties has unfairly inflated transaction costs and is anti-competitive. The home seller plaintiffs sued the NAR and multiple brokerages and won a class action lawsuit in Missouri and the jury awarded a judgement of over $1 billion in damages. Fearing a prolonged legal battle and copycat lawsuits, the NAR agreed to settle all similar cases for $418 million and make some rule changes to take effect as early as this July. The financial component of the settlement is a windfall only to the attorneys, as home sellers included in the plaintiff class could receive as little as $13 each, however the newly proposed rules will lead to changes in how buyers’ agents are compensated and how this compensation is advertised. Many media reports have sensationalized this news with intentionally misleading or incomplete headlines, or have drawn potentially erroneous conclusions. While the impacts have most likely been exaggerated and misrepresented, the proposed rule changes will modify the current model for compensation and they have the potential to create some negative unintended consequences.

Terms of the settlement

One of the key terms of the proposed settlement prohibits posting of compensation offered to a buyer’s agent on multiple listing services (MLS’s), which are affiliated with the NAR. The source of this compensation has always been from the seller’s agent (not the seller) who makes an offer of a split of the total commission stated in the listing agreement with the buyer’s agent as an incentive for bringing a successful buyer. The plaintiffs argued that this inflates commissions and the practice of advertising it on the MLS promotes steering by buyers’ agents to properties that offer a higher compensation. This settlement does not prohibit the payment of this commission or advertising it in other locations or calling it by another name, such as a seller concession, it only expressly prohibits the advertising of a cooperating broker compensation on the MLS. While this intends to solve the steering problem, the unintended consequences of this will be reduced transparency of the commission that is being paid, which is currently publicly available for MLS listings, and soon will not be, and the potential for agent negotiations for their own compensation that are put ahead of their fiduciary duties to the buyer. With reduced visibility of the compensation, will agents call ahead and only select listings offering a suitable compensation to show their clients or will they request compensation as a condition of the offer, putting their buyer at a financial disadvantage, possibly without the buyer’s knowledge or consent? This rule change does solve any key problems, but it leads to a potential end-around by some agents to secure compensation, which could lead to various unsavory situations at the expense of the consumer.

Another part of the settlement is the requirement for buyers to enter into a representation agreement with an agent prior to their showing properties to the buyer. These agreements will include setting a compensation to be paid by the buyer, which could be in addition to or instead of the compensation/concession that might be offered by the seller or seller’s agent to the buyer’s agent. In a way, establishing a fiduciary relationship and making clear the duties of the agent and compensation to be paid by the buyer up-front, as one would with most other professional service providers, could be a positive development and improve professionalism in an industry with very few barriers to entry. It also gives a buyer the opportunity to shop around, much as a seller would when selecting a listing agent. However, it reduces the agent’s ability to demonstrate their value prior to agreeing to representation and likely incentivizes many buyers, particularly in the less expensive end of the market, to shop based on the lowest price alone or to forgo representation entirely. To have the buyers compensate their own agent might make sense in theory. The buyer would pay their own agent and their agent would not be influenced by what is being offered by the seller’s side and the seller’s side would not compensate the agent whom they perceive to be negotiating against them. However, many buyers are not going to want to or be able to afford to pay thousands of dollars at closing for this service, while they might have been okay having it built into the price of the home and effectively financing it. This will lead them to not obtain the representation and support that would benefit them on probably the largest purchase in their lifetimes. Other compensation models could emerge, such as an hourly rate, which is not incentive-based, and could lead to dishonesty in calculating hours or even the opposite approach of an agent collecting an hourly fee not being motivated to help a buyer purchase a home quickly and instead to focus on accumulating as many paid hours as possible.

What are the implications of the changes?

While it would be premature to draw any long-term conclusions from the settlement, these proposed changes will absolutely influence the way real estate agents do business and will put some downward pressure on agent commissions. News stories with headlines such as “The 6% commission is Dead” are extremely misleading and serve to attract eyeballs rather than explain the story in a nuanced and balanced way. It is well known that commissions have always been negotiable and there have been options for the consumer to work with a full-service agent, a discount one, to negotiate a creative compensation model, or to sell their home themselves without an agent. In some circumstances it already is common for a buyer to compensate their agent directly. No one has put a gun to a seller’s head saying they must compensate a separate buyer’s agent. Most sellers choose to do this because they understand that it will lead to more exposure for their property and more incentive for agents representing buyers to help sell their home, which creates competition, leading to a higher sales price. Different people make different choices now and will still make different choices after the new rules take effect. The market may take some time to adjust to the new rules, but when all is said and done, I do not expect this to have a significant effect on home values, but will impact the procedures I take and the conversations I have with clients. It is clear that in order to be successful, practitioners of residential real estate, whether representing buyers or sellers, will need to do a better job of articulating their value propositions and strategies for a successful sale and new models will likely emerge for those who want to compete on price alone.