Overview of the NAR Settlement – Commission Structure Changes & Pros and Cons

Recently, there has been a massive churn in the real estate industry in the USA. The National Association of Realtors (NAR) proposed a $418 million settlement to draw the curtains on a nationwide class-action lawsuit. It was alleged that realtor commissions payable by sellers had been artificially inflated. 

This influenced the price of homes and by default, homebuyers who had to shell out more for closing deals. On the presumption that this offer of a settlement by NAR is approved by a federal judge, the whole concept of negotiating a 5 to 6% commission is in for a change. 

This post will not only go through the impact of this Settlement on buyers and sellers but will also analyze the pros and cons of this offer from NAR.   

While analyzing the Settlement, we will be using several terms exclusive to the real estate industry. Some of them will be first explained briefly to help the reader better understand the core topic that is, the NAR Settlement. 

Common Terms Related to The Real Estate Industry

Readers who are not very familiar with the real estate industry should know about some important terms related to it. Only then can they understand the full impact of the NAR Settlement. 

Given below are the key ones. 

• Realtor: There is nothing specific about being a realtor. Any member of the real estate fraternity who has taken membership of the National Association of Realtors is called a realtor.  
• National Association of Realtors (NAR): This body consists of members from every field of real estate, regardless of whether they are agents, brokers, appraisers, property managers, or counselors. Currently, there are about 1.5 million real estate professionals who are members of NAR, making it the largest trade association in the country. 
• Multiple Listing Service (MLS): Real estate agents or brokers refer to the MLS when they search for properties for their clients. It is a database that contains all the information about properties for sale in each geographical location. Hence, there are hundreds of them operating regionally in the USA. The goal of MLS is to act as a bridge between sellers’ agents and buyers’ agents to quickly move housing inventory in the market. 

Now that we know about the terms that will come up frequently while analyzing the NAR settlement, let us get on with the topic on hand. 

Issues That Led To The NAR Settlement 

The general rule of commissions payable for a real estate transaction is 4 to 6 percent of the sale price. This amount is paid by the seller to the seller’s agent and then split with the buyer’s agent as per a pre-decided agreement. 

This is the general rate in most real estate markets in the USA. Though on paper this commission structure is negotiable, agents stand firm on it when finalizing contracts with their clients. 

The reasons why this arrangement of splitting commission is prevalent are two-fold. First, buyers should get professional assistance when navigating such a crucial process as homebuying. Second, it will impact their financial capability further if they have to pay hefty commissions to buyers’ agents. As it is, buyers are already burdened with down payments and closing costs. 

Impact on Sellers With This Commission Format

Generally, sellers have always felt that the commission structure has been on the high side and that it was not fair that they had to pay the commission to the buyers’ agents too. Moreover, sellers do not negotiate hard for lower commissions with their agents for fear that it might affect the agents’ motivation to optimally promote their listing. 

A lower commission of say 5% from the more common 6% might lead to a drop in interest in finding a buyer quickly.  

Impact on Buyers With This Commission Format 

From the buyers’ point of view, it was not fair that the commission for their agents was included in the sale price. Otherwise, home prices could have been cheaper for them if this large amount did not go towards commissions on real estate transactions. For example, a 6% commission on a $500,000 house sale comes to a whopping $30,000.

Another possibility was that buyers’ agents showed them only expensive homes to earn higher commissions. Did that not mean that their agents were not acting in their best interests? 

What is The Lawsuit Against NAR All About 

The lawsuit brought against NAR challenges the modus operandi of how properties are listed on the MILS. According to the Department of Justice, the lawsuit alleges that 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.” 

There are three main points that form the basis of the lawsuit against NAR.

• Barring NAR-operated MLS databases from disclosing the commission that agents of prospective buyers will earn. This is only applicable if homes are purchased from among those listed on the MLS.
• Letting buyers’ agents mislead their prospective clients into thinking that they are getting all services without any cost to them.
• Allowing filtering of NAR-run MLS listings by buyers’ agents according to the commission payable. This leads to homes that offer lower commissions not being brought to the notice of prospective homebuyers. 

The New Rules of NAR About Commissions To Agents

NAR has agreed to pay $418 million to the plaintiff which will be spread out over 4 years. However, at this stage, it is not clear from where this amount will be sourced. It might come from a special assessment to be levied on all NAR members or from already existing funds with NAR. 

Apart from the financial settlement, NAR has also agreed in principle to change a few of the rules that govern commissions payable to agents.

The three main changes are as follows: 

• Prohibiting the publishing of agents’ commissions on MLS. In the present system, the MLS listing reveals how much the buyers’ agents could expect as commissions of the sale prices. This was entered in a designated MLS field. Listing of this information is not allowed now. The goal of this change is to allow buyers to directly negotiate with the agents their fees. If sellers help buyers in this regard, it will be just like a concession.
• Buyers must have a written agreement with their agents that must be signed before a single property is shown. This contract must clearly spell out the compensation agreed by the buyers and their agents and must be drawn up even if you have an existing Buyer Representation Agreement in place. Currently, this exclusive Representation that only confirms that agents are entitled to their portion of the commission is required. 
• Realtors or brokers need not subscribe to the MLS service. The prevailing practice for many local MLS services is that agents must subscribe to the service to receive compensation for their work. This is now not allowed.  

In short, the Settlement is an effort by NAR to address critical issues related to buyers’ agents’ commissions and how they are informed to potential buyers through NAR-operated MLS databases. 

Pros and Cons Of The NAR Settlement

The NAR Settlement does not solve all issues related to commissions in real estate deals. Rather there is both good and bad news for sellers and buyers. 

Buyers

Pros

Buyers will now negotiate directly with their agents about the quantum of commission to be paid and sign an agreement to that effect. That does not stop buyers’ agents from working in tandem with sellers’ agents and having the full or part of the commissions paid by them. 

Further, buyers will be shown homes that match their requirements and not those only that have high commission levels attached to them.

Con

Commission payable cannot be included in the mortgage amount. It must be paid separately just like the down payment of a mortgage loan. This immediately increases the upfront expenses of home ownership and decreases the prospective buyer’s financial capability to buy a house.  

Sellers

Pros

Because sellers will not have to pay the buyers’ agents’ commissions, they get more money in hand from the sale price. However, this does not stop them from still paying a part of the buyers’ commissions as an incentive to buyers to quickly go through with the deal. 

The listed price on the MLS will be minus buyers’ agents’ commissions and will thus be lower, thereby increasing the appeal of a property from the buyers’ perspectives.    

Con

Following the NAR Settlement will slow down the selling process as commission negotiations must be done for each deal separately. Before, the commission that sellers would pay buyers’ agents would be listed on the MILS which is now not permitted.  

The effects of the NAR Settlement are not easy to understand. However, the revised commission rules and structure will offer buyers more transparency and negotiating power with their agents.