NAR Settlement (Fact vs Fiction)

In what is being called a landmark shift for the real estate industry, the National Association of Realtors (NAR) has reached a settlement that appears to reshape the landscape for home buyers, sellers, and agents alike. This moment comes with updates that, if you let the media tell it, will transform your experience in the property market. Listing protocols will be revamped, agency relationships will be altered, and the implications of the NAR settlement will undoubtedly change todays common practices, but not quite transform them. Whether you're eyeing the market for a new home or considering listing your property, being educated in the marketplace is essential.

This blog aims to demystify the settlement, arming you with the key insights you need to navigate the new terrain confidently. We’ll dissect what the settlement entails, its impact on the industry, and, most importantly, what it means for you as a current or future homeowner.

Background:

To begin, we first need to understand the case. The NAR settlement is the result of a class-action lawsuit that was filed in the Missouri Federal Court by a group of home sellers against NAR and other defendants. The suit claimed that real estate commission rates are too high and buyers' representatives are paid too much. The suit also claimed that the NAR code of ethics, and MLS handbook, along with the practices of the defendants' lead to inflated commission rates. The suit took particular issue with a concept called cooperative compensation which is when a listing broker makes an offer of compensation to the buyers' broker. After the initial suit attorneys in other jurisdictions saw the verdict and filed similar complaints.

Before the NAR Settlement, corporative compensation is how 90% of buyers' agents received payment. In order for corporative compensation to work, the sellers agent would charge the seller a negotiated commission rate. When the property was listed on the MLS, the listing agent would then offer a commission to any agent who produced a qualified buyer. If the deal closed, and the home was sold, the listing agent would then pay the buyers' agent out of the total commission sum that was originally charged to the seller.

To summarize, the lawsuit alleged that the National Association of Realtors, real estate brokerages, and local MLS's conspired to obligate a seller to pay a buyer agents commission.

Setting the Record Straight:

Misinformation about the NAR Settlement is flooding the media as of late. So let's make a few things clear.

1. The National Association of Realtors does not set agent commissions. Commissions have ALWAYS been negotiable, & they were negotiable long before this settlement.
2. The settlement clearly states that the NAR denies any wrongdoing and the settlement is not an admission of error.
3. The current compensation model was introduced in the 1990's in response to consumer suits for protection in the form of a buyers representative (we will revisit this later).
4. Reducing agent commissions does not make housing more affordable.

Key Terms of Settlement:

1. Buyer agent compensation offers will be removed from the MLS.
1. A seller offering compensation to the buyers' agent will continue to exist, but it will be a conversation/negotiation that happens outside of the MLS.
2. Buyers will be required to sign an exclusive agency agreement with their realtor.
1. This document states that a buyer agrees to work exclusively with their selected realtor.

What Changes for Buyers & Sellers:

Sellers: Quite frankly not much, compensation structure and commission have always been negotiable, and under the new settlement it will continue to be negotiable. There have never been rules as to how much commission a seller should pay, and that will stay the same. This entire lawsuit acts more as a reminder that commissions are negotiable rather than a drastic rule change. 

With that in mind, and since this settlement has been all over the news, I fully expect more sellers to negotiate lower commission rates or attempt to not offer any compensation for a buyers' agent. It is important to remember though, that if a seller does not offer compensation for a buyers' agent, and other listings in the area do offer compensation for a buyers' agent, what motivation does the buyer have to select your home? By electing not to pay a buyers agent you are effectively reducing the pool of potential buyers.

Buyers: Homebuyers will now be required to sign an exclusive agency agreement which will require them to work with a specific realtor for a specified amount of time. Most likely, the exclusive agency agreement will state that if the buyer elects to purchase a property where the seller refuses to compensate a buying agent, the buyer will cover the compensation costs. So, now the buyer will not only need to have enough funds for a down payment & closing costs, but they will also need to be prepared to pay a realtor in case the seller refuses.

Issues: Here are a few key issues with the lawsuit & settlement as it stands.

1. How do you know that there will not be discrimination in commissions?
1. The settlement makes it illegal for a sellers' agent to publicly post commission offerings on the MLS. When this goes into effect, it will be impossible to tell if a listing agent offers the same commission to all brokerages. For example, if agent A is selling a home; without a public record of compensation offers, what is to stop agent A from offering a commission of 3% to agent B who they know well and work with often and presenting a different commission of 1% to agent C who they that have never met, has different political views, or works at a small brokerage.
2. VA loans are not able to finance closing costs.
3. FHA loans are not able to finance closing costs.
1. This rule is pending and being considered for change.
4. This settlement does not reduce home costs.
1. One of the driving allegations behind the lawsuit is that the current compensation structure inflates home values making it harder for consumers to purchase homes. The lawsuit implies that a change would make homes more affordable. This is not true. Think about it, if a seller declines paying the buyers agent out of sale proceeds, then the buyer is responsible for coming up with that money upfront. Even if the bank allows the buyer to loop this cost into their home loan, the net cost to the buyer is still the same. Most sellers come into the market with a bottom line number that they need to walk away from the sale with after expenses. They set the sell price based on a target net gain, plus all expenses, including compensation costs. For example: target net gain (100,000) + listing agent commission (2% or 2,000) + buyers commission (2% or 2,000) = list price (104,000). Under the new settlement if a seller decided not to pay a buyers' commission the formulation of a sale price would look like this: target net gain (100,000) + listing agent commission (2% or 2,000) = list price (102,000).  The buyer still has to come up with the other 2,000. So, while the sale price is 102,000 the cost to the buyer is still 104,000.
2. Additionally, home values are not set by commissions, they are the result of the surrounding market dynamics.

I hope this was helpful for you readers. The media would have you thinking that the NAR Settlement was a major win for home buyers, but in reality, not much will change.

If there is anything I can do to help, I am happy to answer questions, please contact me directly at 513-490-7374 or cameron@gunnelsrealty.com

Happy Hunting-

Cam Gunns