The National Association of Realtors Settlement: What It’s About and What It Means for Buyers and Sellers.

On March 15, 2024, the National Association of Realtors (NAR) proposed a $418 million settlement to end a nationwide, class-action lawsuit that alleges NAR artificially inflated the realtor commissions sellers must pay, ultimately increasing home prices. If approved by a federal judge, the long-standing, average 5-6% commission sellers typically pay may be negotiated differently.

So, what exactly does this mean for homebuyers and sellers going forward? The industry jargon can get confusing so let’s start by becoming familiar with important terms related to the real estate industry:

What is a real estate agent?
A real estate agent is a licensed professional who represents buyers and sellers in real estate transactions (buying and selling property). They are typically paid a commission when a deal is completed.

What is a seller’s agent?
Seller’s agents are real estate professionals who help prepare and list a property for sale. They represent the person selling a property and work to get them the best price possible.

What is a buyer’s agent?
Buyer’s agents are real estate professionals who work with prospective homebuyers. Their primary responsibility is to help buyers find the home that best suits their needs and budget.

What is a real estate broker?
Real estate brokers do the same work as a real estate agent but may employ other agents. Brokers are paid commission when they facilitate a real estate transaction but also get part of the commission when the agents who work for them are paid.

What is a Realtor?
A realtor is real estate agent who is also member of the National Association of Realtors.

What is the National Association of Realtors (NAR)?
The National Association of Realtors is the largest trade association in the United States with approximately 1.5 million members including real estate agents, real estate brokers, salespeople, property managers, appraisers, counsellors, and more. Real estate agents who are members of NAR are called Realtors which is purported to give them more industry credibility and access to more robust industry data. Members must also adhere to the rules, policies, and practices adopted by NAR, its member boards, and multiple listing services.

What is a Multiple Listing Service (MLS)?
A multiple listing service (MLS) is a database that provides information to cooperating real estate brokers about properties listed for sale. It’s essentially an agreement to list each other’s properties with the goal of connecting seller’s agents with buyer’s agents. An MLS is usually broken down by geographical region, therefore there are hundreds of regional MLS databases, which comprise all the listings in the United States. Most MLS databases are online.

What Is the Lawsuit Against NAR About?
The lawsuit against NAR essentially addresses antitrust issues with how it lists properties in NAR-run MLS databases. According to the Department of Justice, the lawsuit alleges the association has implemented a series of “rules, policies, and practices that have widely been adopted by its members which have resulted in a lessening of competition among real estate brokers to the detriment of American homebuyers.” The Department of Justice further states that these rules, policies, and practices include:

• Prohibiting NAR-run MLSs from disclosing to prospective buyers the amount of commission the buyer’s agent will earn if the buyer purchases a home listed on the MLS.
• Allowing buyer’s agents to mislead buyers into thinking that their services are free.
• Enabling buyer’s agents to filter NAR-run MLS listings based on the level of buyer agent commissions offered and to exclude homes with lower commissions from consideration by potential homebuyers.

What Are the Terms of the Settlement with the NAR?
The settlement is intended to address how compensation to buyers’ agents is structured, negotiated, and communicated via NAR-run MLS databases. There are two main changes being proposed:

1. NAR-run MLS databases will no longer include a field that shows what the buyer’s agents will earn off the deal.
2. Buyers will secure a buyer’s agent and sign an upfront agreement outlining how much they are willing to pay for their services.

What Does the NAR Settlement Mean for Buyers and Sellers Going Forward?
It's important to reiterate the proposed changes have not yet been approved by a federal judge, and if approved, they won’t go into effect until mid-July 2024.

Today, in a typical real estate transaction, a buyer pays the seller the agreed upon price of the home. The seller then pays an average of 5-6% in commission that is split between their agent and the buyer’s agent. This split is generally 50/50 with each agent receiving equal pay. However, these percentages can vary based on the terms of the deal and have always been negotiable. The key takeaway is today the buyer usually does not directly pay any commissions to their agent. That responsibility is typically on the seller and the funds come from the sale of their home. Also, a buyer’s agent can currently search NAR-run MLS listings to see how much commission the seller is willing to pay them which could influence whether  they will show that home to their client.

If the proposed changes are approved, a buyer will be required to secure a buyer’s agent and sign an upfront agreement indicating how much they are willing to pay for the agent’s services. A buyer will still pay the seller the agreed upon price of the home, and the seller will still pay their agent an agreed upon commission. However, it will likely no longer be an average 5-6% commission split 50/50 between the buyer’s and seller’s agents. Buyers will likely pay their agents out of pocket for their services based on the up-front agreement they signed.

It's important to note that commissions will remain negotiable on both sides. The seller can still agree to pay all or some of the buyer’s agent’s fees, but NAR-run MLS databases will no longer disclose what percentage, if any, the seller is willing to pay the buyer’s agent.

What Are the Pros and Cons of the Proposed NAR Settlement to Buyers and Sellers?
The proposed settlement can be confusing and could mean good and/or bad news for both buyers and sellers:

Buyers

• Pro – They will sign an upfront agreement with their buyer’s agent so they will know exactly how their agent will be compensated.
• Pro – They have the power to negotiate how much they are willing to pay their agent.
• Pro – They can still have their agent work with the seller’s agent to try and get the seller to pay all or some of the buyer’s agent’s commissions.
• Pro – They will be shown homes based on their needs/preferences as opposed to how much their agent could earn in commission.
• Con – Buyer’s fees can’t be lumped into the mortgage so they will pay their agent out-of-pocket much like they would pay their lender a down payment. This increases the up-front cost of homeownership and may limit or delay a potential homebuyer’s ability to purchase. For example, if the price of the home is $350,000 and the buyer agrees to pay their agent a 3% commission, that would be a $10,500 check they have to write to their agent in addition to the $70,000 check they will write to their lender if they pay the standard 20% down payment.

Sellers

• Pro – They may be able to pocket more of the sale price of their home because they are no longer expected to pay the full commission to the buyer’s agent.
• Pro – They can still agree to pay all or part of the buyer’s agent’s commission, which could be a selling point to potential buyers.
• Pro – If the listing price is lowered by the amount they previously would have been expected to pay the buyer’s agent, it could make their listing more attractive to potential buyers.
• Con – Seller’s agents will no longer be able to disclose on NAR-run MLS databases what they are willing to pay the buyer’s agents. This commission, if any, will need to be negotiated for each transaction which may attract fewer buyers and/or slow the selling process.

While the impacts of the proposed NAR settlement are complicated, if approved by a federal judge, the revised terms will ultimately provide more transparency to buyers and increase their negotiating power with their buyer’s agents. If you have questions on how the settlement could impact you, contact a real estate professional or an FNBO Mortgage Loan Officer.