National Association of Realtors Settlement – Listing Agents Win As Home Buyers Lose

National Association of Realtors Settlement – Listing Agents Win As Home Buyers Lose

On Friday, March 15, 2024, the National Association of Realtors (NAR) announced a nationwide proposed settlement that will resolve all claims against the NAR and its members related to broker commissions, and which will potentially change how real estate agents are paid going forward. The National Association of Realtors settlement agreement comes after an almost $1.8 billion jury verdict against the NAR in the Burnett v. NAR lawsuit, which we wrote about in this article, and other subsequent copycat cases. In those cases, class-action plaintiffs claimed the NAR’s commission practices caused inflated real estate prices, unfairly forced sellers to pay for buyers’ agents, and caused price-fixing by forcing sellers to pay 6% commissions. After the settlement, publications throughout the country claimed the settlement would bring an end to real estate agent compensation as we know it, and an exodus of real estate professionals from the market.

The reality is that the National Association of Realtors settlement represents a big win for listing agents, and a huge loss for home buyers who are no longer guaranteed independent representation in one of the largest financial transactions of their lives. In this article, we discuss the ins and outs of the agreement, and why it represents a loss for home buyers.

The Typical Real Estate Commission Structure Prior To The National Association Of Realtors Settlement

When a homeowner hires a real estate agent to assist with the sale of a property, the total compensation or commission paid to the agent by the seller is documented in a Listing Agreement. That amount has always been negotiable. In many markets, the typical commission is 6%. In most high cost of living markets, like Los Angeles, the typical commission is 5%, although recently it has become more common for that commission to be 4.5% or 4%. The entirety of the commission is paid by the seller, after the sale, out of the sale proceeds.

However, the agent who assists with marketing and selling the property, also known as the listing agent, generally does not earn the entire commission. The Listing Agreement typically provides that the total commission may be split with the agent representing the buyer. So if the total commission is 6%, the Listing Agreement may provide that the listing agent receives 3% and the buyer’s agent receives the other 3%. The commission paid to the buyer’s representative, or the “offer of compensation”, is generally posted in the MLS listing for the property (i.e. the offer of compensation is included in the advertisement for the sale of the property).

Importantly, most states (including California) allow one agent to represent both the seller and the buyer, in which case that agent (typically the listing agent) earns the entire commission. While California acknowledges the importance of independent legal representation by prohibiting lawyers from representing both sides of a transaction, no such similar law exists with respect to real estate agents.

How Recent Lawsuits Challenged The Typical Real Estate Commission Structure

We provided a detailed summary here of how the Burnett v. NAR case, and other similar cases, recently challenged the legality of the typical real estate structure. In short, the lawsuits alleged the compensation structure unlawfully did the following: (1) inflated the cost of selling a home by forcing the seller to pay commissions out of the sale price, (2) forced home sellers to offer high buyer-representative commissions in order to induce buyers’ agents to show the home to their clients, (3) unfairly kept commission percentages the same over time despite increasing housing prices, resulting in inflated compensation to agents, (4) unfairly restrained competition among buyer representatives by eliminating the need for buyer representatives to compete with one another based on their compensation, because sellers, not buyers, were paying those agents, (5) inflated home prices by eliminating price competition between buyer’s representatives, and (6) increased the profits of big brokerages at the expense of sellers and home buyers by engaging in the above acts.

The National Association Of Realtors Settlement Agreement

The proposed National Association of Realtors settlement agreement, which has yet to be approved by the court, will resolve almost all claims against the NAR and its members in connection with the above allegations. The primary, substantive terms of the settlement agreement are as follows:

  • NAR will pay $418 million over four years to the class action plaintiffs.
  • A new rule will prohibit sellers from including an “offer of compensation” on the MLS listing for the property. However, sellers can offer other “buyer concessions”, such as a credit to the buyer for closing costs, on the MLS listing.
  • Buyers’ representatives will be required to enter into written agreements with their clients.

The NAR’s full press release, as well as a video summarizing the proposed settlement, can be found here.

The Practical Impact Of National Association of Realtors Settlement

Many major news publications like CNN, CBS, and Wall Street Journal are claiming that the National Association of Realtors settlement will cause a mass exodus of agents from the profession, a significant drop in real estate prices due to a reduction in seller closing costs by virtue of not compensating buyer representatives, and the end of buyer representation entirely. These claims are far from the truth.

The most significant, and welcome, practical impact of the National Association of Realtors settlement is that it will force buyers and their agents to have a meaningful conversation about their relationship, and compensation, at the outset. The way things stand currently, buyers’ agents typically inform their clients that they need not worry about compensation, because buyers’ agents are paid by sellers. Buyers’ agents also often work without a written agreement in place with their clients, and without meaningful conversations about the extent of services they will provide. The settlement will change all of this. Buyers’ agents will be required to have a written agreement in place with their clients, and that agreement will necessarily include the agent’s compensation.

This does not, however, mean that real estate commission structures will change as a practical matter. As the National Association of Realtors settlement proposal specifically indicates , property listings may still include “seller concessions” such as credits to buyers for closing costs including, among other things, buyer representative compensation. This means that although buyers and their agents will have their own agreements concerning compensation, buyer representatives may still be paid through the seller’s funds. The practical reality is that buyers, particularly first time buyers, face a significant financial hurdle in generating the funds necessary for a down payment. Many buyers are not be in a position to also compensate their agents, which is largely why the current compensation structure typically involves the seller paying the buyer’s representative’s compensation. This practice will likely continue.

The National Association of Realtors settlement does, however, create a significant shift in the power dynamic between listing agents and buyers. Previously, buyers were essentially guaranteed that they could have an independent representative involved in the transaction, and that their representative would be compensated without the buyer incurring additional costs. Now, buyers will have three options: (1) pay their own representative, (2) ask the seller to pay their representative, or (3) use the listing agent as their representative. This significantly shifts the power away from buyer agents and puts the listing agents in a position of power. Listing agents, who are already involved in the transaction, will be able to leverage that position into dual representation by offering to also represent the buyer at a significantly reduced fee. This will be attractive to the seller, who will have greater control over the transaction by having their own agent representing the buyer, likely at a lower cost than paying an independent buyer representative. It will also be attractive to the buyer, who will not need to compensate their own representative and also will be able to submit an offer with lower costs to the seller, thereby making their offer more attractive to the seller. The listing agents and the sellers benefit greatly in this situation. The losers in this situation are the buyers, who no longer have an independent representative involved in one of the most important financial transactions of their lives.

By way of example, Seller Sandy decides to list his property for sale for $1 million. Buyer A makes an offer to purchase the home, and asks that Seller Sandy pay Buyer A’s representative a 2.5% commission, or $25,000, thereby netting Seller Sandy $975,000. Buyer B makes an offer to purchase the home, but has an agreement in place to pay his own representative a 2.5% commission, and so Buyer B offers to purchase the home for $975,000 making the total expenditure approximately $1,000,000, and thereby netting Seller Sandy $975,000. Buyer C offers to purchase the home for $1 million, but is unrepresented because he cannot afford to pay his own representative and does not want to ask for a seller concession. The Listing Agent, who is aware of all three purchase offers, offers to represent Buyer C for an additional $10,000 to be paid out of the seller’s proceeds, thereby netting Seller Sandy $990,000 and earning the Listing Agent an additional $10,000. Seller Sandy chooses Buyer C, whose purchase price is ultimately no different than the other offers, but nets both Seller Sandy and Listing Agent more proceeds. Buyer C, meanwhile, is represented by a conflicted agent who does not necessarily have Buyer C’s best interests in mind. This scenario becomes much more likely as a result of the National Association of Realtors settlement.

A law prohibiting dual representation is long overdue. The recent National Association of Realtors settlement highlights the need for that law. Without such a law in place and to the extent that the settlement has an impact on the industry, we expect to see a shift toward more dual representation as buyers look to find ways to avoid the costs of paying their own representatives. In this scenario, it’s ultimately the listing agents who win, and the buyers who lose.

If you would like to further discuss the National Association of Realtors settlement or how Esquire Real Estate Brokerage can help you in the Southern California real estate market, please call or email us at 213-973-9439 or info@esquirereb.com.

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