The National Association of Realtors (“NAR”) is the largest trade organization in the United States, representing 1.5 million realtors. The NAR, which has been in operation for over 115 years, maintains a strong presence in the real estate market through its realtor members, influential lobbying efforts, and its operation of Multiple Listing Services (“MLS”). This level of influence and the NAR’s previous controls on real estate transaction commission fees have been the basis for antitrust lawsuits. Recently, the NAR agreed to a $418 million settlement in which the Association agreed to curtail its oversight of important aspects of the real estate industry.
What is the Issue?
The main issue that has been the subject of litigation against the NAR is the coupling of buyer and seller commissions. One of the first cases in a series of cases filed against the NAR was Moehrl, et. al. v. National Association of Realtors. In Moehrl, the plaintiffs were home sellers whose brokers had used MLSs. An MLS, or Multiple Listing Service, is generally controlled by a local NAR association and allows real estate brokers to list houses for sale and find houses for buyers. To gain access to MLSs real estate brokers must follow the mandatory NAR rules. One of those rules, and the one that is the basis of the lawsuits, requires brokers representing home sellers to post what commission the buyer’s broker would receive.
Plaintiffs argued that this rule amounts to a conspiracy that keeps real estate broker commissions high and violates antitrust laws. Plaintiffs argued the mandatory rule artificially inflated commissions and home prices. That is because listing a home on an MLS, and therefore abiding by the mandatory NAR rules, is essential in the modern real estate market. Without an MLS listing, the home would not be visible to seller agents or listed on popular real estate websites like Zillow or Redfin. The plaintiffs also alleged that buyer agents were more likely to steer their clients away from homes that did not offer at least the standard buyer broker commission rate of 2.5-3%, typically almost half of what commission rate the seller negotiated with their broker. Because of NAR’s mandatory buyer broker compensation rule, plaintiffs argued home sellers were forced to shoulder the cost of artificially high commission rates. The NAR’s mandatory rule left sellers no choice but to instruct their brokers to offer at least the standard rate if they wanted their homes to be sold.
The plaintiffs alleged that this conspiracy kept buyer broker commissions artificially high, which kept total commission rates high. The plaintiffs alleged that, without the buyer broker compensation rule, the commissions for the brokers for the buyer and seller of the property would be decoupled, meaning each broker’s commission would be paid by their respective clients. Through this decoupling, buyers would then be able to negotiate the commissions they pay to their brokers (property sellers already negotiate commissions). Further, the fact that the buyer broker’s commission offer was shielded from the property buyer meant there was a lack of transparency that disincentivized buyer brokers from competing for business through lower commissions or other concessions. The plaintiffs emphasized that this increased competition and negotiation that could result in better fees and service for home buyers and sellers was exactly what the NAR’s rules prevented.
What did the NAR Argue?
In 2023, a jury awarded $1.8 billion in damages to the sellers of more than 260,000 homes in Missouri, Kansas, and Illinois in Burnett v. National Association of Realtors, et. al. The NAR appealed and finally reached a settlement in April of 2024. The NAR initially pushed back, arguing that the buyer broker compensation offer rule, what the NAR calls cooperative compensation, is negotiable and does not mean that money must be paid. The NAR argued the offer can be any amount, even $0. The NAR argued that its policies “promote competition and pro-consumer local broker marketplaces that ensure equity, efficiency, transparency and market-driven pricing options for home buyers and sellers.” The NAR also claimed the cooperative compensation model is good for consumers by bringing more buyers to the real estate market. The NAR emphasized the importance of buyer representation and argued that the cooperative compensation model especially benefited first time home buyers. The NAR argued that by allowing the home seller to pay the commission, first time home buyers had more money to spend on a down payment because they did not have to pay for a buyer broker at the beginning of the transaction. Ultimately, the jury was not convinced and returned a verdict for the defendants.
2024 Settlement
The April 2024 settlement resolved four antitrust class actions against the NAR and other defendants. In lieu of the $1.8 billion judgment, the NAR agreed to pay $418 million and change its rules governing real estate broker compensation. The changes are expected to take effect on August 17th of this year. Some of the most important changes are:
- The NAR will eliminate and prohibit any requirement of offers of compensation in the MLS between listing brokers or sellers to buyer brokers or other buyer representatives
- The NAR will retain and define “cooperation” for MLS participation.
- The NAR will eliminate and prohibit MLS participants, subscribers, and sellers from making any offers of compensation in the MLS to buyer brokers or other buyer representatives.
- The NAR will require the MLS to eliminate all broker compensation fields and compensation information in the MLS.
- The NAR will require compensation disclosures to sellers, as well as prospective sellers and buyers.
- The NAR will require MLS participants working with a buyer to enter into a written agreement with the buyer prior to touring the property.
The lawyers for the plaintiffs believe that this settlement includes extensive real estate industry reforms that “will increase transparency and fairness regarding buyer broker commissions, while eliminating requirements that a seller must offer on multiple listing services to pay the commission of brokers representing the buyers they are negotiating against. The changes contained in the settlement will make it less likely that independent sellers feel powerless to negotiate a better deal for themselves because of the risk that offering lower commissions will cause brokers to steer buyers to other properties.”
What’s Next?
The settlement releases many of the NAR’s members from liability. The settlement covers all brokerages with a NAR member as principal whose residential transaction volume in 2022 was $2 billion or below. Brokerages who are not covered by the settlement can opt in and be released from liability as well.
From an industry standpoint, many professionals and experts believe the settlement and accompanying NAR rule change will have large effects. Under the previous buyer broker compensation offer rule, many prospective property buyers felt as though they were getting the help of the buyer broker for free because the commission came from the seller’s broker. After the settlement, buyer brokers will have to negotiate and enter into written agreements with prospective buyers. Many industry professionals believe this will lead prospective buyers to forgo using a broker, causing some real estate brokers to exit the profession. Some believe that those who exit the profession will be unexperienced real estate agents and brokers, leading to better representation by more experienced agents and brokers.
For those who stay, especially on the buyer’s side, the way they conduct business will likely change. Buyer brokers will modify their business strategies to target what consumers want. Some buyer brokers may focus on consumers who do not want to spend much on a broker but want the basics of representation. Other brokers may occupy the luxury side of the market and charge a higher commission percentage but offer more services in return.
Most industry professionals believe there will be a shift in the typical commission percentage from the previous 5-6% to 2-3%. With the median home price being $420,800, the savings could be over $16,000. There may also be a shift in the way consumers purchase homes. Where they may have gone with a realtor, many industry professionals now believe buyers will instead use various websites, such as Zillow or Redfin, to find and purchase homes.
Many people involved in the real estate industry also do not believe that home sellers will stop paying buyer broker commissions altogether. The MLS rule changes that the NAR agreed to will result in the commission for the buyer broker to no longer be advertised on the MLS. Many real estate professionals believe that home sellers and their brokers will simply advertise the fact that they are willing to pay the buyer broker commission in a different way, such as over the telephone or in the contract. Some home buyers may include the payment of their broker’s commission as a contingency. Real estate and mortgage professionals are also anticipating new laws that would allow a home buyer to include their broker’s commission in the mortgage.
Industry professionals believe it will take some time for the effects of the settlement to really affect the industry. Until August 17th, home buyers and sellers can expect the property transaction to operate as it would before the settlement. In the next few years, home buyers and sellers may notice some significant changes as real estate agents and brokers change their business practices to conform with the new rules.
For more information please contact HDZ at 920-430-1900.