What Home Buyers Need to Know About the $418 Million NAR Settlement

What Home Buyers Need to Know About the $418 Million NAR Settlement

As a home buyer, navigating the real estate market can be daunting, especially with the recent $418 million settlement involving the National Association of REALTORS® (NAR). This settlement could significantly impact how you buy your home and the costs involved. Let’s cut through the legal jargon and focus on what this means for you.

You can download the NAR settlement PDF here:

  • The $418 million NAR lawsuit settlement aims to resolve claims related to broker commissions, announced on March 15, 2024 and is pending of approval.

    The settlement, expected to take effect in mid-July 2024, covers claims against NAR, REALTORS®, associations, MLSs, and brokerages meeting specific criteria.


    Key changes set to take effect include:
    Elimination of the requirement for listing brokers or sellers to offer compensation to buyer brokers. (This has never been a requirement )
    Prohibition of making offers of compensation to buyer's brokers via the MLS.
    Requirement for MLSs to remove all broker compensation fields on the MLS.
    Prohibition of creating other websites by the MLS to facilitate compensation offers.
    Requirement for buyer agents to sign buyer agency agreements before showing properties. (The settlement reinforces the practice, already encouraged and sometimes required by local Realtor associations)
    Prohibition for REALTORS® and MLS participants from representing brokerage services as free unless no financial compensation is received.
    Requirement for realtors and MLS participants to conspicuously disclose and obtain seller approval for offers of compensation to the buyer. (This isnt a change either, it has always been this way)
    Clear statement that broker commissions are not set by law and are fully negotiable. (Not a change as it's already this way)

    Possible Negative implications of the settlement include:
    Risk for first-time homeowners due to potential lack of representation.
    Potential for inadvertent allowance of discriminatory practices.
    Mandatory written buyer agency agreements may complicate the buying process.
    Impact on real estate practices such as negotiation dynamics and 'double-ended' transactions.
    Misinformation in the media could affect public understanding and industry reputation.

    Possible Positive implications of the settlement include:
    Enhanced Transparency by requiring clear disclosure of broker compensation.
    Empowerment through negotiation, buyers and sellers may feel more empowered to discuss and agree upon fair compensation.
    The prohibition of compensation offers on the MLS could inspire real estate professionals to develop innovative marketing and negotiation strategies.
    The requirement for written buyer agency agreements ensures that buyers are fully aware of the terms of their representation.
    The settlement allows for a variety of compensation structures, giving consumers more options to find services that best suit their needs.
    The emphasis on written agreements and transparent compensation reinforces professional standards and ethical practices in the industry.

Key Changes for Home Buyers:

Negotiable Commissions: The settlement reaffirms that real estate commissions are not fixed and have always been negotiable, some outlets have suggested that the National Association of Realtors (NAR) previously set guided commissions to a standard rate %. Even President Joe Biden, in recent comments, misspoke by suggesting that the settlement makes commissions negotiable for the first time.

NAR does not set commissions, and commissions were negotiable long before this settlement. They are and will remain entirely negotiable between brokers and their clients.

Compensation: One of the most talked-about “changes” is the elimination of any requirement for listing brokers or sellers to offer compensation to buyer brokers. the truth is sellers will no longer be able to offer compensation to buyer brokers through the MLS but there is no prohibition on the compensation itself; it will simply need to occur outside of the MLS.

Written Buyer Agency Agreements: The settlement reinforces the practice, already encouraged and sometimes required by local Realtor associations, of having written buyer agency agreements in place before showing properties. The written agreement must be signed before the buyer tours any home, including open houses. This document will clearly state the compensation your agent will receive, ensuring there are no surprises or hidden fees.

More Control: You’ll have more control and responsibility over the costs of buying a home, as agent fees become a point of discussion.

Clarity and Confidence: With all terms laid out in writing, you’ll have clarity on what you’re agreeing to, giving you confidence in your decisions.

Dispelling myths about the NAR settlement

Myth 1: The NAR Settlement Eliminates Standard Commission Rates

  • Truth: There has never been a standard commission rate set by the NAR. Commissions have always been negotiable and will continue to be so.

Myth 2: Sellers Are Now Prohibited from Offering Buyer Agent Compensation

  • Truth: The settlement does not prohibit sellers from offering compensation to buyer agents; it simply moves these negotiations off the MLS.

Myth 3: The Settlement Forces Brokers to Reduce Their Compensation

  • Truth: The settlement does not force brokers to reduce their fees. Compensation remains negotiable between brokers and their clients.

Myth 4: The Settlement Is a Significant Win for Buyers in Fee Negotiation

  • Truth: While the settlement may increase transparency, it does not inherently provide buyers with an advantage in fee negotiations.

Myth 5: The Settlement Will Make Homeownership More Affordable

  • Truth: The affordability of homeownership is determined by many factors, and the settlement alone is not likely to have a significant impact on this.

Myth 6: All Compensation Will Now Be Paid by Buyers

  • Truth: Although the settlement allows for the possibility of buyers paying agent compensation, it does not mandate this as the only method. Sellers can still offer compensation in various forms.

Myth 7: The Settlement Will Lead to Widespread Reductions in Agent Compensation

  • Truth: The settlement may lead to changes in how compensation is negotiated, but it does not necessarily mean that agent compensation rates will decrease across the board.

 Potential Positive Outcomes from the NAR Settlement

Enhanced Transparency: The settlement promotes transparency in real estate transactions by requiring clear disclosure of broker compensation, which can build trust between clients and agents.

Empowerment through Negotiation: With commissions being negotiable and not rated publicly on the MLS, both buyers and sellers may feel more empowered to discuss and agree upon fair compensation.

Innovation in Marketing: The prohibition of compensation offers on the MLS could inspire real estate professionals to develop innovative marketing and negotiation strategies.

Clarity in Representation: The requirement for written buyer agency agreements ensures that buyers are fully aware of the terms of their representation, fostering a more informed client-agent relationship.

Consumer Choice: The settlement allows for a variety of compensation structures, giving consumers more options to find services that best suit their needs.

Professional Standards: The emphasis on written agreements and transparent compensation reinforces professional standards and ethical practices in the industry.

Exploring Potential Negative Implications from the NAR Settlement

Risk for First-Time Homeowners

  • One concerns is the potential risk facing first-time homeowners who may find themselves without representation due to the seller's decision not to pay for the buyer broker. This scenario could force buyers on a tight budget to navigate complex transactions without professional guidance, echoing a time when buyer representation was virtually non-existent. Such a regression raises red flags, considering the legal disputes that ensued from the lack of buyer advocacy in the past.

Potential for Discriminatory Practices

  • The settlement’s language might inadvertently allow sellers to discriminate by offering compensation based on the buyer agent’s gender, race, or age, while illegal, the concern is that the settlement could enable covert discriminatory behavior.

Mandatory Written Buyer Agency Agreements

  • The settlement mandates written buyer agency agreements before property showings, which could slow down the buying process.

Impact on Real Estate Practices:

  • The prohibition of compensation offers on the MLS may lead to a shift in how agents market their services and negotiate fees, the settlement could lead to more transactions being ‘double-ended’ by listing agents, raising questions about the benefits for consumers.

Misinformation and Public Perception:

  • Misinformation in the media about the settlement and real estate commissions could affect public understanding and industry reputation.

Conclusion

The NAR settlement is more than just a legal resolution; it’s a catalyst for change in the real estate industry. As you embark on your home buying journey, take advantage of the opportunity to negotiate and understand the full scope of your agent’s compensation. Stay informed, ask questions, and ensure your interests are protected every step of the way.

This article aims to provide a balanced perspective on the NAR settlement, addressing also the concerns it raises for buyer representation, the impact on real estate practices, and the importance of combating misinformation.