The instructors at our New Jersey real estate schools used to know many of the questions from people in their real estate license classes would be about “How much can I earn?” and “How do I find the best real estate broker?”
In the past few weeks, that has changed. Now the questions are, “What is this ‘NAR commission lawsuit all about?” and, “How will this affect my new real estate career?”
The lawsuits.
Both the US Justice Department and several law firms have for some years been suing large real estate brokerage firms and the National Association of REALTORS® (NAR). Their claim was that the industry was conspiring to obligate sellers to pay commission to the buyers’ agent. This stemmed from the NAR requirement—and NAR controls most of the Multiple Listing Services (MLSs) around the country—that for a seller’s agent’s listing to be shown on the MLS, the listing must include an offer of commission to a “cooperating broker,” meaning the buyer’s broker.
On its face, it would seem unfair that a seller is forced to pay the buyer’s broker—the very agent who is aggressively negotiating on behalf of his buyer to get the lowest possible price from the very seller who NAR said must pay him! NAR could have resolved this dispute years ago, and several large brokerage form leaders urged them to do so, but NAR was insistent that “cooperating broker compensation” must be given if the listing was to be included in the MLS.
And since the seller’s listing in the NAR-controlled MLS is then funneled through to more than a hundred consumer-facing real estate sites such as Zillow, Realtor.com, and Homes.com, every seller’s agent essentially had no option but to list every property in the MLS.
Commissions and the media misinformation.
The tantalizing headlines have begun.
“NAR Settlement Destroys Realtor Commissions Forever!” screamed real estate coach Jackie Kravitz’s YouTube blog this week. Real estate commissions “Can be negotiated all the way down to zero,” said one announcer on Fox News. The settlement “will put money back in the pockets of home sellers” declared a CNBC pundit.
Since the NAR settlement announcement last weekend, multiple media outlets have made statements such as “This is the end of REALTORS’ standard six percent commission.” Nothing could be further from the truth. In every state, the licensing law requires real estate agents to state that all commissions are negotiable. As a real estate agent for 36 years who had more than 600 transactions, I have never once even heard another agent suggest that we conspire to set our commissions at a standard rate.
That said, tradition often dictates everyday practices. An individual broker is allowed to tell her agents what her company’s policy regarding compensation is, and many brokerage firms do tell their agents that they should charge somewhere in the 5-6% range. That commission is then typically split 50/50 with a buyer’s broker—although that, too, is always negotiable. There is no prohibition against a listing broker giving 40% or 60% to a cooperating broker, provided the amount of the split is communicated to the seller on the listing agreement.
The average total commission sellers paid in the U.S. in 2023 was 5.37%, according to NAR.
The Big Guns have now been fired.
And boy, have they ever hit their target!
In October, a Missouri jury found NAR, HomeServices of America and Keller Williams Realty guilty of “colluding to inflate or maintain high commission rates through NAR policies” and awarded the plaintiffs $1.78 billion. With triple damages that would likely have followed, this amounted to potentially a $5.36 billion award—with the likelihood of multiple copycat suits to follow in other states and against other brokerages and NAR.
They had to settle.
Last week, the settlement was announced. NAR and most of the other defendants agreed to a $418 million settlement. The agreement has enormous repercussions on how buyers, sellers, and their real estate brokers will do business in the future.
The Highlights (or lowlights!)
- Real estate brokers will no longer be allowed to advertise or offer compensation to cooperating brokers on the MLS.
- The MLS and NAR local Boards of REALTORS® will be prohibited from showing any form of buyer-broker compensation on its listings.
- NAR and its member MLSs cannot require membership in their Board or their MLS in order for a buyer’s broker to receive compensation.
- An agent who represents a buyer must enter into a buyer agency agreement with their buyer client before ever showing them a property. That agreement must include a specific amount of compensation the buyer will pay their broker for the services of buyer representation “and how this will be determined.”
- The seller is permitted to offer compensation to the buyer’s broker. It just cannot be shown on the MLS. In this case, the broker representing the seller must “conspicuously disclose” to sellers and obtain seller approval for any payment or offer of payment that the listing broker will make to a broker representing the buyer. This written disclosure must be made in advance of any payment or agreement of a payment and must specify the amount or rate of such payment.
- The seller is permitted to offer concessions to the buyer (not the buyer’s broker), such as a seller concession towards the buyer’s closing costs. This may be shown on the MLS. Such a concession may not be conditioned upon the payment of compensation to a buyer’s broker.
- The listing broker is permitted to share part of his commission with a buyer’s broker (with the seller’s permission). It just cannot be shown on the MLS.
- The buyer’s compensation to their broker must be “objectively ascertainable and may not be open-ended.” This means the buyer representation agreement cannot state, for example, “Whatever buyer-side commission the seller offers.”
- The buyer’s broker “may not receive compensation for services from any source that exceeds the amount agreed to in the agreement with the buyer” client. This means, for example, that if the buyer agreement provides for the buyer to pay their broker a $2,000 commission, and the seller has instructed the listing agent to offer a buyer broker 2.5% (and the house sells for $400,000), the buyer’s broker is only allowed to collect $2,000, not the $10,000 that the seller had offered.
- A real estate agent or broker cannot represent to a client or customer that their brokerage services are free unless they are receiving no compensation from any source.
How will this change the way sellers do business?
The theory of those who brought about the lawsuits is that this will save both buyers and sellers millions of dollars. If Realtor® Joan provides her seller with a CAM showing the market value of his house is $400,000, and says he now only has to pay her 3%, because the buyer will compensate her agent directly, do any of us think John will say, “Well, then, let’s drop the listing price to $388,000, to account for the 3% buyer-side commission I no longer have to pay?” In my opinion, there’s not a chance that will happen. The seller will look at the current market value and will want to sell his home for $400,000. Thus, if the buyer now pays $400,000 and pays her broker, she has actually paid more for the property as a result of the settlement.
What should a listing agent tell her seller? Remember, the seller can still pay a buyer-side commission, but the listing agent cannot advertise it on the MLS. So, a buyer’s agent will have to call the listing broker for every property they may want to show and ask, “Is the seller offering a buyer-side commission?”
In many cases, the listing agent may be well advised to suggest his client still provide compensation for the buyer’s broker. One can imagine a seller calling their agent a month into the listing and asking, “Why have we had no showings?” And the listing agent then having to say, “Well, I’ve had 11 buyer’s agents call this month and ask if you are offering them compensation, and when I told them you had chosen not to, they told me they were not interested in working for nothing, because their buyer cannot afford to pay them a buyer-side commission.”
How will this change the way buyers do business?
Real estate agents know that buyers do not expect to pay for representation. Only time will tell what will happen now:
- Buyers, who previously had no control over how much their Realtor® earned, will now determine their agent’s compensation. First-time home buyers may have the greatest challenge, because they usually have the least amount of money scraped together to just make the downpayment and closing costs (and maybe costs to buy furniture and make repairs). They need the most help because they have no property-buying experience and now they may have to pay thousands of dollars for an agent.
- How will buyers using low-money-down mortgages, such as VA/FHA/USDA loans come up with enough money to pay a buyer’s agent on top of the already-steep costs of buying a home? Having to pay a buyer’s agent could add thousands of dollars they don’t have to the home-buying process.
- Will there be an upsurge in discount buyer-side brokers that offer to act as transaction brokers with no agency duties for a flat fee? Essentially an offer of, “You find the house on Zillow, and I’ll get you through the transaction for a flat fee of X.”
- Will buyers balk at the idea of paying an agent anything, and simply go to the listing broker, then hiring an attorney to represent them once their offer has been accepted?
- Will buyers who cannot afford to pay for their representation tell their agent, “Only show me homes where the seller is paying a buyer’s agent’s commission”? In such event, does this mean sellers who do offer co-op commissions will sit on the market for much longer?
- Will this be the end of dual agency? A buyer could go directly to the seller’s agent, but the agent cannot collect compensation from both sides in the same transaction.
How will this change the way real estate agents do business?
As stated above, before even taking buyers out to see a property, the agent must have the buyer sign an agency representation agreement that states how much the agent will earn, whether from the buyer or from the seller or the seller’s broker.
The buyer’s agent cannot earn more than the buyer representation agreement—executed at the very beginning of their relationship—states. This means that if the buyer’s agent and her client agree that she should receive a $5,000 commission from the buyer, and the client then buys a home where the seller had agreed to a $10,000 buyer-side commission, the buyer’s agent can only collect $5,000.
If a buyer’s agency agreement does not include compensation from his or her client, then prior to showing every property, the agent will have to call the listing agent to ask if the seller has agreed to pay a buyer-side commission. There will be no central clearing house, such as the MLS, where buyers’ agents can see the co-op commission.
Listing agents will have to ask seller to decide whether they will allow compensation to a buyer’s agent, and if not, they should probably warn them that the property may suffer from far fewer showings and thus take longer to sell. No buyer’s agent—nor any professional—is going to work for no pay.
Will real estate agents and brokers see a need to maintain their membership in NAR? Tens of thousands of licensees have already resigned their membership, angry at NAR’s scandals in 2023 and now the perception that the organization has thrown agents under the bus. The decades-long stranglehold NAR has held, of forcing every agent in an NAR-member brokerage to pay NAR and local Board dues and belong to the cartel-like NAR-chosen MLS may have come back to bite them.
Glenn Kelman, CEO of Redfin, has stated that his company will now focus on “going direct to the consumer.” Does this mean the industry’s large brokers will adopt a business model where they focus more on attracting buyers to their own listings, rather than cooperating with other brokers?
Conclusion
While the settlement agreement must still be approved by the court, it surely heralds a sea-change in the way we will do business in the future. NAR predicts the changes will take effect this summer, although that seems to be an arbitrary timeline.
The headlines proclaiming that commissions “being destroyed forever” and that they “can be negotiated all the way down to zero” are nonsense. It does seem that listing agents fared the best in the settlement, unless one considers that it may take much longer for them to sell a home that is priced at full market value and where the seller refuses buyer-agent compensation. Sellers could be the big winners, and buyers the big losers, with buyers’ agents coming in a close second on the losing side of the ledger.
The real estate industry has gone through many changes, and it will handle this one. People will still realize the benefits of real estate careers and real estate schools like Garden State Real Estate Academy will still help people earn their real estate licenses. Sellers and buyers will still need to sell and buy real estate, and they will still need professional help in reaching their goals in these complex transactions.
Garden State Real Estate Academy has evening, daytime, in-classroom and online real estate classes that start every couple of weeks. For information on the real estate school’s upcoming New Jersey licensing classes, click here: https://www.gsreacademy.com/pre-licensing-courses/
