A Rundown of The National Association of Realtors Settlement

In this post, we will take you through the many aspects of the $418 million National Association of Realtors lawsuit settlement. We will explore the prevailing system of real estate transactions and the changes and the impact the settlement will have on all stakeholders in a real estate deal. These include not only the buyers and sellers of properties but their agents and brokers too.  

Before we get down to the analysis proper, it is necessary to explain the functioning of two main protagonists in this issue, the NAR itself and the MLS or Multiple Listing Service. 

National Association of Realtors (NAR) 

Anybody who is in the real estate industry, whether an agent, a broker, an appraiser, a counselor, or a property manager can become a member of NAR. In such a case, they will be called a realtor. In the USA, there are almost 1.5 million realtors and this body is the largest trade association in the country. It sets benchmarks of ethics, honesty, and trustworthiness for realtors  

Multiple Listing Service (MLS)

The Multiple Listing Service is a database that contains detailed information about properties for sale in a specific location. Real estate agents refer to this database when looking for properties for their prospective buyers. Since the MLS is run geographically that is each has information about a particular region, there are hundreds of MLSs in the country. In short, an MLS links up sellers of houses with buyers looking for comparable property.       

You will see in this post that these terms come up frequently when analyzing the NAR Settlement. 

Why the NAR Settlement – Issues With The Present Commission Structure 

The earnings of a real estate agent or broker in the USA are typically through commissions which range between 4 to 6 percent of the sale price of a house. The commission on this deal is paid by the seller to the agent and this amount is split with the buyer’s agent according to a contract drawn up before closing. The commission is divided 50:50 unless agreed otherwise by the two agents. 

There is a very important reason behind this traditional sharing of commissions between buyers’ and sellers’ agents and why sellers foot the bill.

As in the case of a seller, buyers too need an agent to handhold them through the complexities of a homebuying process. But after paying the down payment for a mortgage loan and the closing costs, buyers can ill-afford to pay hefty commissions to their agent. 

For example, if the cost of a house is $500,000 and assuming the buyer’s part of the agent’s commission is 3%, the amount would be $15,000. This is no small figure by any yardstick. Hence, sellers conventionally pay the buyer’s agent’s commission. It helps to sweeten the deal and motivates the buyer to purchase the house. 

Now that we have seen the commission structure in the real estate industry, let us check its impact on sellers and buyers. 

How does the present commission structure affect sellers 

Over the years sellers have generally been dissatisfied with this commission-payment format. Not only is the commission amount substantial but they also feel that it is not fair that they must pay the buyer’s agent’s commission as well. 

However, if they negotiate for a lower commission with their agent, there is always the fear that their listings will not be optimally promoted. After all, a 1% drop in commission from 6 to 5 on a $500,000 property comes to a whopping $5,000, enough for de-motivation to creep in.

How does the present commission structure affect buyers

From a buyer’s perspective, it is not fair that the commission payable to the agents is included in the sale price. If this was not the case, home prices would have been cheaper and more affordable. It is also probable that buyers’ agents show their clients only high-priced homes so that they earn high commissions.

The question here is that are buyers’ agents following ethical standards and acting in the best interest of their clients?

All these issues, as we shall see now, have been attempted to be ironed out in the NAR Settlement.

Particulars of the Lawsuit Against NAR 

The lawsuit against NAR in effect questions the way properties are listed on the MLS. As per reports from the Department of Justice, the lawsuit questions the “rules, policies, and practices that have widely been adopted by its members which have resulted in a lessening of competition among real estate brokers to the detriment of American homebuyers.” 

Three points emerge from this lawsuit. 

The first is that MLS databases operated by NAR cannot disclose the commission payable to buyers’ agents and is only applicable to homes bought from MLS listings. 

Next, buyers’ agents cannot mislead their clients into thinking that since they are not paying any commission, the services received by them are free.

The third plea in the lawsuit is very important. MLS listings on NAR-run databases cannot filter the data from high to low commissions payable to buyers’ agents. This is because agents tend to ignore houses for sale that have lower commissions and focus on showing properties to clients that have high commissions attached to them. 

Commission Rules After The NAR Settlement       

NAR has settled on a $418 million payout to the plaintiff spread over 4 years, although it is not clear yet from where this huge amount will be sourced. Either NAR’s existing funds will be dug into or a special assessment fee will be charged to its members. 

While the financial settlement is one side of the coin, the other has changes to the commission structure that has far-reaching implications. 

The changes envisaged may be divided into three categories. 

• At present, the percentage of buyer’s agent’s commissions as part of the sale price is displayed in the MLS listings. This is prohibited now and buyers have to negotiate directly with their agents about their fees. This does not stop sellers from helping buyers out in this regard to quickly sell their properties by lessening the burden on the buyers.   
• Buyers must enter into a written contract with their agents about the fees payable before any property is shown. This is necessary even if a Buyer Representation Agreement exists which merely confirms that agents are entitled to a commission and not the rate or amount. 
• Realtors or brokers are not required to subscribe to the MLS listing service. In the past, they had to do so to receive any compensation for their services.        

It can therefore be said that NAR has tried to bring solutions to the table that address issues related to buyers’ agents’ commissions and how this info is given to buyers through NAR-run MLS databases.  

The NAR Settlement – The Stakeholders’ Perspectives

It is important to now understand what the NAR Settlement has in store for the main stakeholders in a real estate deal – the buyers and the sellers. However, as we shall see, there are pros and cons of the Settlement for both.

Sellers – Pros

Sellers will no longer be required to pay buyers’ agents’ commissions and hence will get substantially more from a sale. They can of course work out a deal with buyers and pay a certain portion of their agents’ fees to sweeten the deal and motivate them to buy a property. 

Further, the MLS listing will now show home values minus the commission payable and hence the prices will be lower. This will be appealing for buyers to get their dream homes.   

Sellers – Con

The settlement might not go too well for sellers as it is expected to slow down the sale process. This is because as against the previous flat 5 to 6% commission rates, each contract now for a deal will be negotiated separately and decided. This is more so as the commission rates are now prohibited from being displayed on the NAR-operated MLS databases.   

Buyers - Pros

Buyers and their agents will henceforth directly negotiate the commission to be paid and sign a contract to that effect. However, as before, buyers’ agents are still permitted to work together with sellers’ agents and have a part or their full commission paid y them. Buyers gain a lot as their agents will show houses that match their requirements and not only high-commission ones.      

Buyers – Con

Previously, the commission paid comprised a part of the sale price of a property and for the buyers, was included in the mortgage loan amount. Now, the commission is not a part of the total sale price and has to be paid separately as out-of-pocket expenses. This adds to the financial burden of the buyer as it must be included in the savings for down payment and closing costs. 

At a stroke, it therefore reduces the financial capability of a buyer to invest in a property. 

While the clauses of the NAR settlement are still at the drawing board stage and not easy to understand, it does increase the negotiating power of buyers with their agents.