The truth: All your need to know about the $418 Million NAR Settlement

The truth: All you need to know about the $418 Million NAR Settlement

With headlines swirling and rumors abound, it's essential to cut through the noise and get to the heart of the matter. We'll dissect the $418 million NAR lawsuit settlement and break down the key points you need to understand.

With this article, we aim to provide a clear and concise breakdown of the settlement’s daunting 108 pages and what they mean for the future of real estate transactions.

You can download the NAR settlement PDF here:

  • The $418 million NAR lawsuit settlement aims to resolve claims related to broker commissions, it was announced on March 15, 2024 and is pending of approval.

    The settlement, expected to take effect in mid-July 2024, covers claims against NAR, REALTORS®, associations, MLSs, and brokerages meeting specific criteria.

    Key changes set to take effect include:
    Elimination of the requirement for listing brokers or sellers to offer compensation to buyer brokers. (This isn’t a requirement and has never been)
    Prohibition of making offers of compensation to buyer's brokers via the MLS.
    Requirement for MLSs to remove all broker compensation fields on the MLS.
    Prohibition of creating other websites by the MLS to facilitate compensation offers.
    Requirement for buyer agents to sign buyer agency agreements before showing properties. (The settlement reinforces the practice, already encouraged and sometimes required by local Realtor associations)
    Prohibition for REALTORS® and MLS participants from representing brokerage services as free unless no financial compensation is received.
    Requirement for realtors and MLS participants to conspicuously disclose and obtain seller approval for offers of compensation to the buyer. (This isnt a change either, it has always been this way)
    Clear statement that broker commissions are not set by law and are fully negotiable. (Not a change as it's already this way)

    Possible Implications of the settlement include:
    Risk for first-time homeowners due to potential lack of representation.
    Potential for inadvertent allowance of discriminatory practices.
    Mandatory written buyer agency agreements may complicate the buying process.
    Impact on real estate practices such as negotiation dynamics and 'double-ended' transactions.
    Misinformation in the media could affect public understanding and industry reputation.

    Possible Positive implications of the settlement include:
    Enhanced Transparency by requiring clear disclosure of broker compensation.
    Empowerment through negotiation, buyers and sellers may feel more empowered to discuss and agree upon fair compensation.
    The prohibition of compensation offers on the MLS could inspire real estate professionals to develop innovative marketing and negotiation strategies.
    The requirement for written buyer agency agreements ensures that buyers are fully aware of the terms of their representation.
    The settlement allows for a variety of compensation structures, giving consumers more options to find services that best suit their needs.
    The emphasis on written agreements and transparent compensation reinforces professional standards and ethical practices in the industry.

NAR and plaintiffs have reached a proposed settlement agreement

The National Association of REALTORS® (NAR) announced on March 15, 2024 a lawsuit settlement that would end litigation of claims brought on behalf of home sellers related to broker commissions. If approved, the settlement is expected to go into effect in mid-July 2024. Real estate professionals and consumers alike will need to adapt to these changes, which could reshape how transactions are conducted in the housing market.

The $418 million settlement (significantly lower than the initial $1.8 billion jury verdict) covers claims against NAR, any REALTOR®, state/territorial and local REALTOR® associations, association-owned Multiple Listing Services (MLSs), and brokerages with an NAR member as principal, provided their residential transaction volume in 2022 was $2 billion or below, as stated on the “18. Released Parties” section of the document.

Practice Changes: What's Different?

Here are some of the key points of the NAR lawsuit settlement, these changes are set to take effect in mid-July 2024 and will end 7 years after the class notice date (H-59)

  • H-58- i. “Elimination of any requirement for listing brokers or sellers to offer compensation to buyer brokers.”
    One of the most talked-about “changes” is the elimination of any requirement for listing brokers or sellers to offer compensation to buyer brokers. Contrary to popular belief and what misleading headlines depict, this isn’t a requirement and has never been; there is no fixed percentage rate. Some outlets have suggested that the National Association of Realtors (NAR) previously set guided commissions to a standard rate of 6%. Even President Joe Biden, in recent comments, misspoke by suggesting that the settlement makes commissions negotiable for the first time.

    NAR does not set commissions, and commissions were negotiable long before this settlement. They are and will remain entirely negotiable between brokers and their clients.

  • H-58-ii. “Prohibition of making offers of compensation to buyer's brokers via the MLS.”
    The prohibition of making offers of compensation to buyer’s brokers via the MLS is a notable change. This signifies that the practice of disclosing total broker compensation or buyer broker compensation on the MLS is coming to an end. Indeed, this is a change; however, while it may appear to be a significant shift, it is essentially a change in where these negotiations will take place. There is no prohibition on the compensation itself; it will simply need to occur outside of the MLS. Under this new rule, offers of compensation cannot be communicated via an MLS, but they can still be an option that consumers may pursue off-MLS through negotiation and consultation with real estate professionals..

  • H-58-iii “Requirement for MLS's to eliminate all broker compensation fields on the MLS.”
    MLSs are required to remove any fields related to broker compensation.

  • H-58-v “Prohibition of creating other websites to facilitate offers of compensation.”
    The creation of other websites by the MLS to facilitate compensation offers is prohibited, However, this does not preclude the creation of such websites by other entities.

  • H-58-vi “Requirement for buyer agents to sign buyer agency agreements before showing properties.”
    It is now a requirement for buyer agents to sign buyer agency agreements before showing properties. The settlement reinforces the practice, already encouraged and sometimes required by local Realtor associations, of having written buyer agency agreements in place before showing properties. The written agreement must be signed before the buyer tours any home, including open houses. The agreement should include:

    a. to the extent that such a REAL TOR® or Participant will receive compensation from any source, the agreement must specify and conspicuously disclose the amount or rate of compensation it will receive or how this amount will be determined (A clear statement regarding compensation from any source, specifying and conspicuously disclosing the amount or rate of compensation the agent will receive, or how it will be determined.)

    b. the amount of compensation reflected must be objectively ascertainable and may not be open-ended (e.g., "buyer broker compensation shall be whatever amount the seller is offering to the buyer")

    c. such a REALTOR® or Participant may not receive compensation for brokerage services from any source that exceeds the amount or rate agreed to in the agreement with the buyer (For example, if a buyer’s agent in North Carolina agrees to a 2.5% commission with the buyer, but the seller is offering 3%, the agent cannot claim the additional 0.5% that exceeds the agreed-upon rate.)

  • H-58-viii “Prohibit REALTORS® and REAL TOR® MLS Participants from representing

    to a client or customer that their brokerage services are free or available at no cost to their

    clients, unless they will receive no financial compensation from any source for those services.”

  • H-58-viii “Requirement for realtors and MLS participants to conspicuously disclose and obtain seller approval for offers of compensation to the buyer.”
    This isnt a change either, it has always been this way

  • H-58-ix “Clearly State that broker commissions are not set by law and are fully negotiable”
    It has always been this way but it has to be made perfectly clear for the seller.

  • H-58-xiii “The practice changes in Paragraph 58 of this Settlement Agreement shall not prevent offers of compensation to buyer brokers.”  
    The settlement allows for compensation to buyer brokers and other representatives to be negotiated outside of the MLS. It also permits sellers to offer concessions to buyers, such as covering closing costs, provided these are not contingent upon hiring or paying a specific broker or representative.

Dispelling myths about the NAR settlement

Myth 1: The NAR Settlement Eliminates Standard Commission Rates

  • Truth: There has never been a standard commission rate set by the NAR. Commissions have always been negotiable and will continue to be so.

Myth 2: Sellers Are Now Prohibited from Offering Buyer Agent Compensation

  • Truth: The settlement does not prohibit sellers from offering compensation to buyer agents; it simply moves these negotiations off the MLS.

Myth 3: The Settlement Forces Brokers to Reduce Their Compensation

  • Truth: The settlement does not force brokers to reduce their fees. Compensation remains negotiable between brokers and their clients.

Myth 4: The Settlement Is a Significant Win for Buyers in Fee Negotiation

  • Truth: While the settlement may increase transparency, it does not inherently provide buyers with an advantage in fee negotiations.

Myth 5: The Settlement Will Make Homeownership More Affordable

  • Truth: The affordability of homeownership is determined by many factors, and the settlement alone is not likely to have a significant impact on this.

Myth 6: All Compensation Will Now Be Paid by Buyers

  • Truth: Although the settlement allows for the possibility of buyers paying agent compensation, it does not mandate this as the only method. Sellers can still offer compensation in various forms.

Myth 7: The Settlement Will Lead to Widespread Reductions in Agent Compensation

  • Truth: The settlement may lead to changes in how compensation is negotiated, but it does not necessarily mean that agent compensation rates will decrease across the board.

 Potential Positive Outcomes from the NAR Settlement

Enhanced Transparency: The settlement promotes transparency in real estate transactions by requiring clear disclosure of broker compensation, which can build trust between clients and agents.

Empowerment through Negotiation: With commissions being negotiable and not rated publicly on the MLS, both buyers and sellers may feel more empowered to discuss and agree upon fair compensation.

Innovation in Marketing: The prohibition of compensation offers on the MLS could inspire real estate professionals to develop innovative marketing and negotiation strategies.

Clarity in Representation: The requirement for written buyer agency agreements ensures that buyers are fully aware of the terms of their representation, fostering a more informed client-agent relationship.

Consumer Choice: The settlement allows for a variety of compensation structures, giving consumers more options to find services that best suit their needs.

Professional Standards: The emphasis on written agreements and transparent compensation reinforces professional standards and ethical practices in the industry.

Potential Negative Implications

Risk for First-Time Homeowners

  • One concerns is the potential risk facing first-time homeowners who may find themselves without representation due to the seller's decision not to pay for the buyer broker. This scenario could force buyers on a tight budget to navigate complex transactions without professional guidance, echoing a time when buyer representation was virtually non-existent. Such a regression raises red flags, considering the legal disputes that ensued from the lack of buyer advocacy in the past.

Potential for Discriminatory Practices

  • The settlement’s language might inadvertently allow sellers to discriminate by offering compensation based on the buyer agent’s gender, race, or age, while illegal, the concern is that the settlement could enable covert discriminatory behavior.

Mandatory Written Buyer Agency Agreements

  • The settlement mandates written buyer agency agreements before property showings, which could slow down the buying process.

Impact on Real Estate Practices:

  • The prohibition of compensation offers on the MLS may lead to a shift in how agents market their services and negotiate fees, the settlement could lead to more transactions being ‘double-ended’ by listing agents, raising questions about the benefits for consumers.

Misinformation and Public Perception:

  • Misinformation in the media about the settlement and real estate commissions could affect public understanding and industry reputation.

Conclusion

The NAR settlement is more than just a legal resolution; it’s a catalyst for change in the real estate industry, the settlement paves the way for a new kind of market. As we look ahead, the real estate community must adapt to the evolving landscape, and continue to uphold the highest standards of professionalism and ethical conduct. The settlement not only closes a chapter on past disputes but also opens a door to a possible future where fairness and clarity are at the forefront of every transaction.

This article aims to provide a balanced perspective on the NAR settlement, addressing also the concerns it raises for buyer representation, the impact on real estate practices, and the importance of combating misinformation.