With all of the fake news regarding the National Association of Realtor’s $418 million settlement for a lawsuit filed by the U.S. Department of Justice, I want to point out the facts from the fake. The media continues to spread myths about this settlement, and even President Joe Biden suggested that the settlement makes commissions negotiable for the first time. I’m not sure if this is nefarious, incompetence, or maybe both.
Changing Business Practices
The settlement agreement mandates two key changes to the way members and MLS participants do business.
NAR agreed to create a new MLS rule prohibiting offers of compensation on the MLS. This would mean that offers of compensation could not be communicated via an MLS, but they could continue to be an option consumers could pursue off-MLS through negotiation and consultation with real estate professionals.
NAR also agreed to create a new rule requiring MLS participants working with buyers to enter into written agreements with their buyers before the buyer tours a home. NAR has long encouraged its members to use written agreements to help consumers understand exactly what services and value they provide, and for how much.
- Myth: The settlement covers only a small amount of members.
- Fact: All NAR members are covered by the settlement unless they are affiliated with HomeServices of America or one of its affiliates, or they are employees of a defendant in the remaining Gibson/Umpa lawsuits in Missouri.
- Myth: NAR requires a standard 6% commission.
- Fact: There has never been a “standard” commission. NAR has never set commissions – they have always been negotiable. Realtors have always been able to offer their services for any amount they choose, even zero!
- Myth: Sellers didn’t know how much they were paying in commissions.
- Fact: To be valid, every listing agreement must contain the brokers compensation. The escrow settlement statement also includes commission amounts.
- Myth: The cost to sell a home will fall by 50%
- Fact: The settlement changes nothing about commission amounts, only how they are advertised. MLSs will no longer be able to advertise offers of compensation or be the binding agreement for commissions between agents, but they can still be offered outside of the MLS.
- Myth: Agents representing sellers will have to work for free.
- Fact: This is one of the dumbest ones I’ve seen. I don’t think this business plan will work. Buyers could pay more. If the listing agent isn’t offering compensation buyers might have to pay their agent. The settlement requires an agreement between the buyer and their broker which includes compensation.
The settlement requirement for a buyer/broker agreement is something I have advocated for. Most buyer’s agents haven’t required it, so most people don’t want to sign them. Unfortunately, this leaves agents open to being used. Every buyer’s agent has a story about working for months only to be ghosted by their clients when they find a home. Unfortunately, this will also create problems. For example, open houses would require every attendee to sign a buyer/broker agreement.
We will see how things shake out for selling agents offering compensation. Third-party companies may create services outside the MLS to advertise and create binding commission agreements between brokers. This seems silly and accomplishes nothing except to create an additional cost for agents, but it may comply with the settlement. There has also been talk that commissions could be included in the MLS through a seller concession to the buyer, then the buyer could use that money to pay their agent per the buyer/broker agreement.
However, if sellers believe that they should not pay the buyer’s agent, this could greatly impact buyers who would have to now pay for their agent’s compensation. I believe this is ethical, but buyers will have a downside. The days of a buyer looking at dozens of homes, writing multiple low-ball offers, then changing their mind about purchasing and owing nothing may be over. Buyer’s agents could begin charging an hourly rate like lawyers. Many buyers, especially first-time buyers, are struggling to afford a home with rising prices and interest rates. The additional cost of paying an agent will push homeownership even further out of reach. Some buyers will try to save money by going directly to the selling agent unrepresented. Of course, many of these transactions will end in disaster, and attorneys will be more than happy to sort out the mess. Ironically, these lawyers charge on average 36% yet the DOJ attorneys claim it’s the Realtors making too much money.
