How Does The NAR Settlement Reshape The Industry?

By Ciprian Morariu Published: April 10, 2024

NAR Settlement Reshape The Industry

In a landmark turn of events, the real estate industry has witnessed a historic judgment that is poised to transform decade-old practices and policies. 

The National Association of Realtors (NAR) has decided to settle a series of class action antitrust lawsuits filed against the association. 

According to the agreement between the US Department of Justice and the NAR, there is going to be a decisive change in the deeply entrenched policies and practices of the country’s largest trade association.

The NAR comprises more than 1.5 million real estate professionals and it is estimated that 9 out of 10 homes sold or bought in the United States are directly or indirectly associated with the NAR’s property database or associated members. 

The landmark decision is all set to change the way consumers buy and sell real estate in the country. 

Since the real estate industry is worth trillions of dollars, this decision will significantly alter the future course of the real estate buying and selling process. 

It will also impact the commissions earned by a real estate agent. Any person who has obtained a real estate license after going through a real estate course and passing the licensing exam will expect to earn handsome commissions. 

The NAR settlement can make a big difference between the mode of earning commissions then and now, especially for buyers’ agents.   

The NAR settlement can reshape the real estate industry in unprecedented ways, thanks to the groundbreaking impact of the changes in decade-old real estate policies and business practices. 

Whether you are an agent, realtor, or a consumer, this judgment is going to be a pivotal point in the turnaround of America’s real estate industry. 

The settlement is poised to be the tipping point for sweeping changes that herald a new era of transparency, efficiency, and fair practices in the real estate industry. 

The industry is on the verge of undergoing unprecedented transformation reshaping the way consumers buy and sell homes. 

In this article, we are going to take a detailed look at the NAR settlement, its immediate implications, and how it is going to affect the real estate landscape of the United States. 

Sellers can expect faster turnaround times and frictionless negotiations with the buyers. 

On the other hand, buyers can decide on the most suitable agent on the basis of their skills, knowledge, and quality of services. 

What exactly was the lawsuit against NAR

Since the early 90s, the National Association of Realtors (NAR) has been operating on a predetermined commission structure for agents, brokers, and realtors. 

The commission typically ranged between 5 to 6 percent of the property’s market value. It is estimated that the NAR members and their affiliates earn around $2 billion in commissions every year. 

The NAR made it mandatory for a seller or property owner to determine the commission amount before adding their property for sale to its property database, called the MLS (Multiple Listings Database). 

These policies favored the interests of the agents and brokers and gave little to no transparency to the consumers to understand the agents’ commission rates, structures, and amounts. 

Due to their decades-long business policies and practices, it became impossible for sellers and buyers to negotiate on the agent’s commission amount, leading to significantly higher costs incurred as part of every real estate deal. 

The rising costs and fixed additional commissions discouraged many buyers from seeking the professional services of a real estate broker or realtor. 

Further, the fixed commission structure led to a lack of competition amongst agents as they had no incentive to improve their service offerings and quality. 

It is estimated that the commission earned by the members of the NAR amounts to billions of dollars every year. The impact of the NAR lawsuit was felt following a $1.8 billion verdict against the association and its member groups. 

As the member of the NAR faced antitrust scrutiny from a collective of homeowners and critics of the trade association, the NAR eventually caved in to announce a nationwide settlement of $418 million in agreements over a period of four years. 

It also promised to dismantle existing policies and archaic practices to include more transparent, fair, and flexible rules and regulations.

Understanding the NAR settlement

In defense against the multiple antitrust lawsuits challenging the fairness of agent commissions, the National Association of Realtors (NAR) has agreed to make significant changes in its business practices, policies, and regulations.  

According to the judgment, the National Association of Realtors (NAR) has agreed to pay a whopping $418 million to settle the claims filed against them by homeowners and industry critics. 

In addition to paying the monetary compensation, the NAR has also agreed to eliminate existing policies and reshape their practices to enhance transparency in real estate transactions. 

This settlement stems from a series of lawsuits filed against the NAR and its members for establishing and practicing policies that encouraged real estate agents to charge higher commissions from sellers and buyers. 

The lawsuit alleges that the standard practices of the NAR have stifled competition and innovation in the real estate industry. 

Further, NAR’s existing policies have also led to homeowners and buyers getting overburdened by unduly agent commissions which are non-negotiable and highly inflated. 

According to the federal judge, the NAR has agreed to implement the aforementioned changes effectively from mid-July 2024. This change will prompt sellers and buyers to have control over the commissions and fees charged by agents. 

Post-implementation of the revised policies and guidelines, real estate buyers will get a clear and transparent understanding of the costs involved in availing the services of an agent, broker, or realtor. 

Additionally, buyer’s agents will also no longer have to rely on the predetermined commission rates set by the seller or their agent(s). 

As a result, the buyer's agent will no longer have to steer their clients towards properties where the interests of the sellers are vested.   

In addition to removing the mandatory pre-determined commission rates, the NAR settlement decision is also going to bring much-needed competitiveness and innovation to the industry. 

Impact of the NAR settlement on consumers

The decision made by the US Department of Justice was based on the antitrust investigation ongoing for many years. 

Industry experts have not fully recovered from the landslide impact of this unprecedented judgment and settlement.

To fully understand the impact of this historic judgment, one has to look at it from the perspective of the real estate industry, the consumers, and the housing market in general. 

Undoubtedly, the NAR settlement is going to have the most transformative impact on the lives and purchase decisions of real estate consumers. 

By getting rid of rigid, rigged commission structures and listing policies, the judgment has empowered buyers and sellers to make decisions with clarity and confidence. 

Let us look at the impact the NAR settlement has on homebuyers who are looking to purchase real estate. 

Industry estimates suggest that the removal of the fixed commission structure will give back a significant amount of savings to the consumers. 

It is estimated that on average, a real estate buyer will save up to $10,000 on the final expenses required to make a home purchase in the country.

Economists predict that sudden or gradual reductions in commissions will result in massive savings for consumers and will serve as a positive factor to boost their buying confidence. 

Further, as the compensation details will no longer be made available on a property listing, buyers will get more flexibility in negotiating the final commission rate with their agent. 

Similarly, sellers are also poised to gain from this monumental judgment and seismic shift in the real estate industry and its operating practices. 

Due to the removal of the mandatory fixed commission structure, property sellers will no longer be tethered to the 5 to 6 percent range of real estate commissions. 

This will give sellers a huge negotiating power and the ability to establish agent commissions outside of the old framework of the NAR. 

Ultimately, both sellers and buyers will be able to experience a more transparent, flexible, and consumer-friendly set of cost and commission structures.

Impact of the NAR settlement on real estate professionals 

The most immediate impact of the NAR settlement is going to be for the 1.5 million members of the trade association. These consist of agents, brokers, realtors, home appraisers and attorneys among others. 

From mid July 2024 onwards, it is likely that the commission earned by the agents and brokers will reduce to one-third of the amount they used to earn in the past. 

It is estimated that the whopping $100 billion earning pool will shrink significantly and might lead to significantly lower commission rates. 

This might lead to a period of uncertainty in the minds of real estate professionals, and some experts suggest that many agents and brokers might quit the industry altogether. 

However, many brokers and realtors have already started working on new ways to work with their clients and earn a steady commission while complying with the new jugement. 

Some suggest that agents might suggest working on a flat fee model as a way to mitigate the financial risks involved with letting go of the old commission structure. 

Lastly, the new NAR model will breed more competition amongst agents and brokers. It will also encourage them to provide better and superior service to their clients in order to duly earn their commissions. 

Impact of the NAR settlement on the real estate industry

While the NAR settlement might make many people anxious and nervous about the future, it is going to be a watershed moment for the real estate industry by and large. 

The United States’ real estate industry has rarely seen judgments of such national scale and widespread impact and it is certainly going to take the market into a period of uncertainty. 

Ultimately, it is believed that the new rules, regulations and policies are welcome changes to keep up with the changing needs and expectations of the consumers. 

Some experts believe that the NAR settlement might lead to a reduction in home prices in the country. 

On the other hand, there are experts who believe that prices are a function of demand and supply and if the new rules encourage buyers to purchase, it could result in fluctuations in real estate prices. 

This could happen as a result of the significant reduction in the agent’s commissions which resulted in increase in the final cost of a property. 

In the long term, the restructuring of the commission structures of the buyer’s agent will also lead to higher accountability and transparency in the real estate purchase journey. 

As part of the settlement, the NAR has also committed itself to establishing a rule to mandate the formation of a predefined agreement between the agent and the buyer outlining the costs, commissions and services. 

Clearly, the NAR settlement is a signifier of an unprecedented shift in the real estate industry, leading to many important, inevitable and innovative changes. 

In the short term, the industry will see changes in earnings for professionals and savings for consumers. 

In the long term, the industry will witness increased transparency, buyer’s agency and flexibility in real estate transactions.