The NAR Proposed Settlement - Truth from Fiction

No doubt, most readers will have heard about the momentous settlement proposed by the National Association of Realtors (NAR) in March.  The proposal is sending shockwaves throughout the real estate industry.  Since it stands to impact the way we do business, The Ally Group feels it necessary to comment.

Background

Sellers have been suing the NAR for years contending that commissions for home sales are too high, that sellers are unfairly burdened with compensating both the listing and buyer agent to a transaction, and that buyer agent commissions in general are too high.  It is alleged the NAR promotes these higher rates through its policies and/or the policies of affiliated multiple listing services (MLS).  In so doing, the plaintiffs contend the NAR violates anti-trust law, resulting in higher home prices.

The NAR has not fared well in this matter, losing in court in October 2023.  An appeal probably would have hung the case up in court for years.  But, while admitting no wrongdoing, the NAR decided to settle, offering $418M dollars to the plaintiffs over 4 years, ending all other claims and cases for brokerages earning less than $2 billion per year.  It’s a whopping settlement but is a fraction of the amount that was originally sought, $1.8 billion for one case alone.  Although at this point the settlement is only proposed and still requires court approval, the NAR is confident the deal appeases all parties and will be approved within a few months.

The NAR proposal also agrees by mid-July to: 1) remove all trace of buyer agency compensation from every affiliated MLS; and 2) require all buyer agents to have a signed buyer agency agreement with their clients before any showing.  By removing compensation from the MLS, the NAR/MLS cannot be used to establish compensation, nor to encourage buyer agents to bring clients to properties offering greater rates.  The proposal also lays the groundwork for buyers to compensate buyer agents directly and in theory fosters competition over broker compensation.  Whether or not this intended consequence comes true remains to be seen as are the potential unintended consequences of the proposal.

Truth from Fiction

Before we go too deeply into the potential repercussions of the proposed NAR settlement, we think it’s important to dispel some of the misconceptions being reported about the role of the NAR.

Speaking from my personal experience and knowledge as a licensed broker and REALTOR® in both North and South Carolina, I can assure all that there has been neither a requirement nor encouragement by the NAR nor by our local MLS to charge sellers a certain rate either for listing or for buyer agency.  The common 6% listing rate to pay agents on both sides of the transaction – that has been “blown up” (to paraphrase many news sources) by the proposed settlement – in fact was never a NAR or MLS requirement.  The NAR doesn’t promote any agency compensation at all.

That is not to say the 6% rate hasn’t been normalized nor encouraged.  Pre-pandemic especially, charging 6% was common practice for many brokerages offering “full service”, that is, listing on the MLS, paid photography, marketing, measurement and so on.  The big firms encouraged brokers to charge 6% for full service and never to discount.  However, when the ultra-competitive sellers’ market arose during the pandemic era, sellers found alternatives, started seeking and negotiating lower rates.  In fact, real estate agents’ commissions have ALWAYS BEEN NEGOTIABLE.  But it took more aggressive and perhaps knowledgeable sellers to pursue this.  Even though the market has changed and is no longer ultra-competitive, we find 5% now to be much more common in the Greater Charlotte area than 6%.  I suspect the same may be true in many other markets around the nation.

Throughout, the message from the NAR, our own MLS and local resources has been: Don’t discuss commission with other agents in any forum and understand that doing so could be a violation of the Sherman Anti-Trust Act.  For example, hundreds if not thousands of Charlotte brokers rely on Facebook groups to communicate about listings, problems, questions and complaints.  Dozens of times, I’ve seen fellow REALTORS® shoot down even the smallest hint of a commission discussion.  Commissions are a topic of conversation we are trained to avoid amongst ourselves.

I cannot speak for every broker in North and South Carolina.  But my own training from pre-licensing through to annual continuing education has consistently reminded us to refrain from anything resembling rate-fixing.  In the Carolinas, our listing forms leave the fields for listing and buyer agency commissions blank.  How those blanks are to be filled is a conversation every broker should have with clients.  Sellers are free to negotiate rates, and if they don’t like the results offered by one broker, then they are free to find another with more amenable rates.  In the Carolinas, there are a variety of brokerage rates available from full service to discount brokers to flat fee service providers.

As for buyer agency agreements, fortunately they are already in use in the Carolinas.  Our current mandate is to ensure an agreement is signed prior to the first offer.  Taking it to the next level and requiring an agreement prior to the first showing shouldn’t be too difficult.  Though the language could use some tweaking, the state forms already allow compensation by buyers when not paid by sellers.  The challenge of course will be the new conversations with buyers advising that they will be primarily responsible for the buyer agent's compensation.  That is sure to flip some elements of the industry on its head.

The Deeper Dive

Is having buyer agency compensation on the MLS anti-competitive and/or used by agents to steer clients?  Maybe…or maybe not.  Data shows that fifty-two percent of buyers find the homes they will purchase themselves either online or in person.  Many others are found through online searches of the MLS or other software used by REALTORS® that by design are unable to filter by compensation.  In other words, seeking out homes by a certain commission level wouldn’t be easy on a mass search. 

However, it is certainly possible for brokers to study MLS listings one-by-one and lead clients to the higher-commission home.  Will keeping buyer agency compensation off the MLS change this?  Probably not.  It will change the tools, but not necessarily the mindset.  Brokers will find other ways to communicate compensation…websites, Facebook and other social media provide plenty of options.

But let’s think through the process a bit more:

  1. When a listing agent and seller discuss the listing agency agreement, they will have a conversation about compensation.  The listing agent will ask the seller to pay his or her desired level of compensation at closing.  The seller may or may not decide to offer anything for the buyer agent.  Sellers will do what they think is best.
  2. When a buyer agent and buyer discuss the buyer agency agreement, they will have a conversation about compensation.  The buyer agent will ask the buyer to pay his or her desired level of compensation at closing.  The agent must also point out that the seller of any particular property may or may not offer compensation for the buyer agent.  Some buyers will agree to cover the buyer agent’s compensation in its entirety, some buyers will only be willing to cover a part, some will balk at paying any buyer agency compensation at all.

Given this uncertainty over who will pay the buyer agent, it stands to reason that there will be some impact to the process of showing homes.  Some buyers won't see a home until they know that the seller will cover the buyer agent's compensation.  At the very least, we can expect a slowdown in the process as buyer agents must discover for their clients home-by-home whether the seller will offer any compensation.  Worst case, there could be a dropoff in showings if a buyer isn't getting the response they want from the seller side.  Certainly, bargain-hunting buyers will seek deals from buyer agents, or attempt to deal directly with listing agents or sellers.  Some career buyer agents are fearful of the impact the NAR settlement may have on their business.

All else being equal, buyers may be drawn to the properties where sellers are covering more of the buyer agent’s compensation.  So rather than fostering competition amongst agents, taking compensation off the MLS may ultimately and unintentionally pit buyers and sellers into a pseudo-competition or tug-of-war over who will cover the buyer agent’s commission, creating confusion over what is a non-issue today.

The NAR settlement is still just proposed but we brokers are receiving a clear message to prepare for the change.  Fortunately, at least in the Carolinas, savvy sellers and buyers already understand the 6% commission is a fiction and that there are options available for agency representation on both sides of the table.  I expect the rest of the country will be watching the Carolinas carefully for leadership if the NAR proposal becomes a reality. However, even in the Carolinas, if the settlement holds true, it’s likely that both sides of the real estate transaction are in for a bumpy ride.

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