Thinking of buying or selling a home? Check the new rules first.

What just happened in the Real Estate business?

In March of 2019 the first lawsuit (Moehrl v. National Association of Realtors (NAR), et al) was filed by home sellers alleging that NAR and other real estate brokers conspired to 1) Require sellers to pay higher broker fees, 2) Restrict price competition among buyer brokers and 3) Keep buyer broker commissions between 2.5% and 3.0%.  NAR was said to require sellers to pay buyer broker commissions more or less secretly, require seller brokers to advertise commission splits in the MLS (helping agents to steer buyers to sellers with best splits), prohibited buyer brokers from negotiating commission, etc.

In October 2020 the defendants’ motion to dismiss the lawsuit was denied. In march of 2023, the court granted a class action certification to Moehrl. This produced a rash of class action antitrust lawsuits against NAR and many other defendants. In October 2023, a Missouri federal jury for Burnett v. NAR found NAR and two large companies liable for conspiracy and ordered them to pay nearly $1.8 billion in damages. Then, in April 2024, the court granted preliminary approval of a $418 million settlement which includes industry-wide injunctive relief for NAR from future antitrust claims.  This is significantly less than the jury verdict of approximately 1.8 billion, and is said to represent “a concerted effort to address the claims without crippling the real estate industry financially.”

NAR has agreed to implement rules that change the way Realtors are paid and who pays them. These rules change decades of informal rules that have supported the industry’s traditional payment methods. This method  was the well-known process whereby the property seller were generally responsible for paying the fees for both the buying and selling brokers, usually a 5%-6%  commission on the sale price, to be divided as agreed upon by the brokers. A series of lawsuits alleged this standard practice violated antitrust laws. NAR has long argued that the commissions were always negotiable.

Historically, the selling agent listed the commission split particulars in the Multiple Listing Service (MLS), along with information on the property for sale. The centralized MLS data base was said to have made it easy for buying brokers to search for selling agents who agreed to pay the highest split, thus discriminating against sellers whose agents would pay a lesser amount of commission to the buying broker. Additionally, the commissions were generally believed to be wrapped into the sellers’ sale pricing decisions, thus inflating property values nation wide. As a result of the settlement, the MLS will no longer contain the commission split information, though Brokers can put the information on their personal websites, etc.

The new rules are effective as of today, Saturday August 17th, 2024. The settlement is still subject to a final court approval hearing on November 26, 2024.

What is the “spin” on the settlement’s future effects ?

The settlement states that NAR denies any wrongdoing and continues to maintain that “cooperative compensation” and their current policies are good, in that they benefit both buyers and sellers. They promote access to property ownership, especially for lower end and middle income buyers. Though the NAR has long argued that the commissions were always negotiable, it is generally perceived that many buyers and sellers never benefitted from that possibility.

In a statement, Kevin Sears, NAR’s president, said that the changes “help to further empower consumers with clarity and choice when buying and selling a home.” “I am confident in our members’ abilities to prepare for and embrace this evolution of our industry and help to guide consumers in the new landscape,” he said.

In the months since the settlement was announced, Realtors everywhere have been training, learning the details of new contracts for prospective buyers, etc.  Some agents believe the changes may cause many full-service Realtors to leave the industry. Others are less concerned and feel that both agents and customers will eventually adjust to the changes, particularly since there is nothing that prohibits the seller from continuing to pay all the commission. It just must be agreed upon in writing by all parties. There is also a belief that many agents will continue to advise their sellers to pay all the commissions. This could well be the case. Most parties involved in buying and selling real estate, overwhelmed by the vast quantity of details, engage agents for their guidance.

If buyers are aware that they can negotiate commissions and do come to take ownership of that “right” over time, it could possibly result in a more competitive real estate market in the future. According to a March analysis by TD Cowen Insight, it is possible that the long-term fall out of these rules could result in commissions that are 25% to 50% lower than current levels. All of this “transparency” could encourage the rise of flat-fee, discount or other alternative business models in the future.

How could this affect me when I buy property?

The biggest change for buyers is that the “free ride” they’ve enjoyed of touring homes with little to no “attachment” is over, beginning this week. Buyers must now sign a legally binding representation agreement with their agent before they can begin touring homes together. This agreement will spell out all the particulars of who is responsible for what, and who is due what  “loyalty” in the accomplishment of property purchases. This will apply both to the buyers and to the agent. The contract must  also clearly inform the buyer that fees are, indeed, negotiable.

The largest elephant in this room, though, is that the contract will spell out the particulars of the buyer’s agent’s compensation. This has heretofore not been information to which the buyer was necessarily privy. If the selling agent does not convince his client to pay the commissions, someone must negotiate this factor. Buyers are not used to being in this position.

If the buyer is a good negotiator, this could benefit them. It would be possible to negotiate to pay for certain services and “do it yourself” on other items.  However, for less aggressive buyers, it is yet another hill to be climbed in purchasing property.

Already, many brokers have realized that buyers may not be anxious to sign anything, since many even put false information on sign-in sheet at home tours to avoid being contacted. Some brokers have created short term contracts (a few hours to a few weeks) to encourage buyers in the process. As always, buyers should be careful about signing anything that is legally binding without reading it thoroughly.  It is good to keep in mind that something that is “legally binding” puts the signer on one side and the person who provided the agreement on the other.

How could changes affect me as a seller of property?

Some in the real estate profession are warning that the home-buying market could immediately cool down because of the new rules. Part of this could be from confusion and hesitance as new rules go into effect. Also, buyers having to fact the possibility of finding the money to pay an agent could also cause a short-term decline. There could be less entry level buyers in the market.

It is possible that many sellers will agree to pay the commissions in order to facilitate the sale of their property. This is legal, but payment details must still be written and available to all parties. On the other hand, sellers could theoretically benefit from negotiations that put part of the commission on the seller’s side of the agreement.

For now, most professionals will likely agree that mortgage rates are still far more of a market influence that how the division of commissions works out. If mortgage rates are reasonable, other factors will be of less overall importance to buyers.

In the long-haul, though, knowing the history of buying and selling in general, it seems likely that there will come a point when companies that are willing to “take a little less” will come along to revolutionize the real estate industry, and likely prosper.

How did Moehrl lawsuit come to be?

More information about Buyer Agreements: https://www.nar.realtor/magazine/broker-news/network/help-agents-explain-the-importance-of-written-buyer-agreements