Proposed National Association of REALTORS Settlement
In March 2024, the US real estate industry witnessed an unprecedented judgment in its history.
The National Association of Realtors (NAR), which is one of the country’s most historic and monumental associations, agreed to settle an antitrust litigation.
The class action lawsuit was filed against the NAR who was accused of inflating the commissions paid by sellers to the realtors.
The lawsuit described the main concern as ‘tying’, wherein members of the National Association of Realtors (NAR) established the norm of requiring the seller’s agent to determine the buyer’s agent’s commission in advance at the time of listing a property.
As per the NAR, the average commission rate is around 6% and they required the seller of the property to agree to it before listing their property.
The National Association of Realtors (NAR) boasts of more than 1.5 million active members of real estate salespeople, brokers, and realtors among other industry professionals.
The NAR operates and maintains an active, countrywide database of properties for sale, purchase, and rent, called the Multiple Listings Service (MLS). As per the lawsuit, close to 90% of the properties sold in the country originate from the MLS.
Given the size of the industry, it is estimated that a whopping $100 billion is paid in commissions every year by consumers.
This means that almost every real estate entity is practically a part of the NAR’s exclusive database, and henceforth, affected by this practice.
The lawsuit argued against this practice as it led to higher prices for buyers and limited competition in the industry while hindering innovation.
To propose a solution to the lawsuit, the NAR has agreed to a monetary settlement as well as immediate changes to their existing prices.
These changes will impact the industry in a major way as 9 out of 10 homes sold in the country are handled by members of the NAR.
We will dive deeper into all the key details of the settlement and its current status.
Plus, we will also discuss in detail the implications of the changes and how they will affect the economy and the consumers.
Let us look at the past, the present, and the future which lies ahead for the real estate industry.
What is the NAR
The National Association of Realtors or NAR is the country’s largest and oldest trade association which includes more than 1.5 million active members.
The association brings together real estate professionals such as agents, brokers, property managers, appraisers, and realtors among others.
Members of the NAR are known as REALTORS and they are required to adhere to a code of ethics.
The NAR requires every member to strictly follow the rules, regulations, and guidelines established by the association and its members.
What is the lawsuit against NAR about
For years, sellers have complained about paying the standard commission rate of 5 to 6 percent to both sellers’ as well as buyers’ agents as part of a real estate transaction.
Along with the sellers, many industry critics and authorities believe that anyone should be allowed to list their property for sale without having to bear the commission charges for the buyer’s agent.
This has been a widespread industry practice since the early 1990’s and has led to realtors controlling the sales commissions and, in many cases, inflating the charges as well.
A group of home sellers had filed the class action antitrust lawsuit against the National Association of Realtors, including agents, and state and local realtors.
It claims that the largest trade association has been leading property sellers to pay extra commissions and making it harder for sellers to negotiate extra fees and charges.
The lawsuit also claimed that the NAR’s practices have led agents and realtors to nudge their clients towards homes that offer a higher commission opportunity.
In legal terms, this is known as ‘tying’ the commissions i.e. pre-mandating the commission amount to be paid as part of a real estate transaction.
In simple terms, tying a commission refers to the prerequisite action of finalizing the commission even before a buyer can be sure of the services offered by their agent.
Due to these ongoing practices, there have been two major damages to consumers.
According to the US Department of Justice, there are two key issues arising due to the set of rules, policies, and practices adopted by the members of the NAR.
Firstly, buyers have not been legally allowed to negotiate the commission paid to the buyer’s agents. This means a buyer does not have any say in determining how much commission should be paid to an agent on the basis of their skills and experience.
Secondly, brokers are not authorized to publish the commissions, most buyers are generally unaware of the fact that their agent might try to steer them towards choosing properties where the agent can make a higher commission.
A series of antitrust lawsuits claim that these practices have prohibited innovation in the industry and led to inflated fees and have driven up commission prices.
What is the NAR settlement?
The crux of the lawsuit is the fact that the National Association of Realtors (NAR) has been violating antitrust laws for decades to inflate prices and benefit its members.
On March 15, the US Department of Justice reached a settlement with the National Association of Realtors which includes paying monetary compensation along with making changes to the business practices of the NAR.
Firstly, the NAR has agreed to pay a sum of $418 million in damages over a period of four years in order to compensate for the claims against the antitrust lawsuits.
Secondly, the NAR has agreed to remove its existing policies and business practices by removing the mandatory Buyer’s agent commission.
This means that the mandatory commission rate reserved goes away and any property under the MLS will no longer declare how much commission will be earned by the buyer’s agent.
The buyer now has the right to negotiate the industry standard commission rates previously established by the NAR.
No seller is allowed to mention or advertise the blanket commission amount to be paid as part of the real estate transaction. This could lead to the buyer choosing to pay their agent’s commission directly.
Thirdly, home buyers will now be required to sign a legally binding contract with the agent before they start working with them.
The upfront document will clearly outline the terms and conditions related to the commission agreed between the buyer and their agent.
As per the federal judge, the proposed changes will go into implementation by or around mid-July 2024.
What does the NAR settlement mean for the consumers?
If you have ever tried to sell a property or buy one, you probably understand how real estate agent commissions can feel like an extra, almost unwanted yet important expense.
Since the federal judge passed the judgment, the mandatory 5 to 6 percent commission for the buyer’s agent goes out of the transaction.
This means that you as a buyer have the power and the choice to negotiate your agent’s commission on the basis of their skill, knowledge, and quality of services.
This means you can easily decide whether your agent of choice has the expertise to demand a certain commission rate or not.
Another advantage of the NAR settlement for the buyers is that now you will have to sign an upfront agreement with a real estate agent regarding their compensation (including their fees and commissions).
This removes ambiguity and uncertainty and gives buyers more transparency and control over their expenses.
Note that both the seller and the buyer will pay commissions to their respective agents in exchange for their services. However, the standard industry commission rate is no longer the mandatory requirement to close a deal.
For buyers, the NAR settlement is a reflection of the judgment of protecting the rights and interests of consumers in a real estate transaction.
Giving more control, transparency, and agency to the buyers will promote better competition among agents and realtors to earn their share of buyer’s commission.
Most importantly, the judgment has given the American consumer the flexibility to choose the right commission on the basis of their relationship with their agent of choice.
This means that a buyer no longer has to choose the services of a NAR member - buyers can now easily represent themselves in a real estate transaction.
Many industry experts and economists also believe that the NAR judgment will ultimately reduce the costs of buying a home.
However, in some cases, it could also lead to a higher upfront cost as some sellers might include the buyer’s fees in the sale price.
This means that buyers might have to shell out extra upfront money to move further in the real estate deal.
The higher additional costs may hinder some individuals from purchasing a home, especially first-time buyers.
Going Forward
The landmark judgment could result in rewriting the rules of one of the biggest and oldest industries in the country.
It could result in massive cost savings worth thousands of dollars for homebuyers looking for more transparency, flexibility, and control in a real estate deal.
For sellers, the judgment is a welcome move as they will be saving money by not having to follow the industry standard commission rate of 5 to 6 percent. Moreover, sellers will no longer have to pay the buyer’s agent commission fee from their own pocket.
The lawsuit and the recent settlement between the US Department of Justice and the National Association of Realtors is a pivotal moment in the real estate industry.
It signals a shift towards increased transparency, higher accountability, and greater flexibility for both sellers and buyers.
The changes in the rules and regulations concerning property listings and the MLS will lead to better competition and innovation in the industry.
As far as the members of the NAR are concerned, agents and realtors will have to look for new ways to earn higher commissions.
They can set fixed hourly rates or opt for a flat fee payment structure to protect their earnings.
For the real estate industry, it is predicted that there will be a noticeable decrease in home prices soon. Although the exact magnitude of the outcome is unclear, the move will disproportionately benefit the consumers in the immediate and long run.
Some experts also predict that this outcome might reduce the number of real estate agents over time.