The Potential Effects of the National Association of Realtors Settlement

Norton Hammersley Firm News, Real Estate Law

Written by: Kirsten E. Guerin

The recent $418 million settlement by the National Association of Realtors (“NAR”) could change the way homes are bought and sold across the country. This settlement agreement by the NAR was driven by an antitrust lawsuit filed against the trade group, where a federal jury found the organization (along with several large real estate brokerages) had conspired to artificially inflate agent commissions on the sale and purchase of real estate.

Up until now, when listing a property for sale, the seller negotiated with the listing agent to determine how much commission they would pay (through a listing agreement), which then appeared on the NAR’s multiple listing service (“MLS”). The agent representing the seller agrees to then pay part of that commission to the agent representing the buyer. Which effectively meant that the seller was responsible for paying both their own agent’s commission, as well as the buying agent’s commission at closing.

The proposed settlement, if approved by the court, would result in several changes to the current way agent representation and compensation is handled in the real estate industry including, without limitation:

  1. Commission offers would be completely removed from the MLS system;
  2. MLS participants working with buyers must enter into written representation agreements with their clients; and,
  3. Sellers are no longer responsible for paying or offering commission for both the buyer and seller agents.

Practically speaking, how could this settlement affect agents, sellers, and buyers? Beginning with commission offers being removed from the MLS system, this means that offers of compensation cannot be communicated via the MLS. However, this does not prevent compensation offers being communicated off-MLS, through negotiation and consultation between agents. As an example, although listing agents cannot show buyers’ agent’s commissions on MLS, they could include such information on their internal websites. Buyers’ agents would need to check websites or call the listing agents directly to know what the commission might be prior to showing a property.

As to number two above, although it has always been an option for buyers to negotiate a written agreement with their agent regarding the scope and cost of their services, this settlement has now made it a requirement for any MLS member dealing with a buyer to enter into a formal representation agreement.

With respect to the payment of buyers’ agent’s commission, the seller will no longer be responsible for paying those fees. While the settlement agreement does not prohibit the buyer’s agent from being paid or charging fees, the question becomes who is going to pay for those services moving forward. This is not to say that sellers cannot still offer to pay the buying agents commission, but this could also result in buyers having to pay their agents’ commission as part of their closing costs more often. An alternative to this would be buyers asking a prospective seller for a concession or credit that includes money to help cover the buyer’s agent compensation. However, a seller with multiple offers, for example, could refuse such a request, or opt to go with a bid from a different buyer who is not asking for such a concession. This could certainly become a trend, since sellers would stand to benefit by avoiding payment of additional commissions and retaining that portion of the buying agent’s commission for themselves. Conversely though, by offering to pay for a buying agent’s commission, this could have the effect of increasing the potential buyer pool for sellers, which in turn, could benefit sellers by increasing the amount of offer or broadening the type of offers received for a property.

This change could result in buyers deciding not to use an agent when purchasing real property, which would be particularly detrimental to first-time homebuyers, who are typically less experienced and have the fewest resources to leverage. However, even seasoned buyers should have representation when purchasing a home. Negotiating and signing the contract is just the beginning – so many issues can arise during the course of a closing that require expertise and navigation by someone who understands the process. The listing agent has a direct relationship and fiduciary responsibility to the seller, so they cannot, and will not, have the best interest of the buyer in mind. Accordingly, homebuyers should retain an agent or real estate attorney who will advocate on their behalf during the buying process.

The effects of this settlement will be nationwide, and the real-life applications of this settlement will begin to cement themselves over the coming years. If you are an agent, seller, or buyer, and have additional questions regarding how this settlement could affect you, please contact our law office and ask to speak with one of our real estate attorneys.