Denver Homes Online

National Association Of Realtors® Lawsuit & Settlement

UPDATED: April 16, 2024

 

- This is a continuing story and will be updated as more information comes available -

 

NAR LAWSUIT, SETTLEMENT, AND POSITION STATEMENTS

The National Association of REALTORS® reached an agreement with the parties to this class action lawsuit that aims to resolve nationwide claims brought by home sellers.  The lawsuit, ongoing for years, alleges that Real Estate Brokers colluded to inflate costs of homeownership (and home values) through the coupling of buyer agent and seller agent commissions.  In all fairness, the accusations require context. Over the years NAR has continued to deny the allegations, but ultimately felt it was best to move on. 

The Department of Justice has posted a background statement and summary here. 

NAR has also posted its position statement here. 

The news of of the settlement proposal are so recent that real estate agents and brokers are still trying to absorb the news, understand the implications to our current business practices, and put it all into perspective.  More updates and edits to come.

 

WHAT'S GOING ON?   

What have you heard?  

Have you read up on the new changes and agreements for buying a home?  

Do you know about the new rule for showing properties, agency, commissions, and how it all works?

How will the proposed new rules affect the real estate industry?

What questions do you have?

If you've been planning to buy or sell a home soon, let's take some time to better explain the controversy and examine some forthcoming changes, below.

 

SENSATIONAL MEDIA HEADLINES

Wading through all the media ruckus, many fascinating headlines have popped-up in recent weeks.  Large media outlets all the way down to ubiquitous social media sites have posted headlines everywhere.  Many articles and posts purport all sorts of misleading claims, many of which are untrue.  Here are a few that I've noticed myself:

"Real Estate Commissions Are Eliminated"

"The End Of Real Estate Agents"

"Cost Of Homeownership Reduced Significantly"

"Buying Now Cheaper For Millions"

Let's take a few minutes to separate truth from fiction.  Allow me to explain current practices and compare to actual and coming changes.  We'll even breakdown some of the winners & losers of this litigation with some of my own personal thoughts.  

 

NO COURT APPROVAL YET

As of the date of this writing, the lawsuit has not yet been approved by either the DOJ or the courts.  A target date for approval is slated for mid July 2024 at the earliest.  Due to various complexities and several major unintended consequences of the proposed settlement, the date for final resolution may be extended.  Stay tuned.  Updates will be provided as they are available and confirmed.

 

2 NEW RULES OF PROPOSED SETTLEMENT

The FIRST of two new rules will PROHIBIT offers of broker compensation from being posted on the MLS (Multiple Listing Service).  This removes any OBLIGATION of the seller to pay a buyer agents commission.  The seller 'MAY PAY' a buyer agent commission, however.  Should the seller determine that paying a buyer agent commission is in their better interest, because of  perceived or actual opportunities to market the property or sell with better terms, then that will remain within the sellers subjective discretion.

A SECOND new rule will require all real estate agents hired by the buyer to execute a written representation agreement that includes the buyer agent's compensation, PRIOR TO SHOWING/TOURING ANY PROPERTY. An important detail of the representation agreement will require the buyer to pay their agent’s compensation, in the event the seller does not agree to pay. Other agreements may require both the buyer and seller to pay percentages of the buyer agent’s compensation. It remains to be seen whether any method dominates over time. The bottom line is that the buyer will be responsible for their agent’s compensation.  Market conditions along with supply and demand will also influence how these agreements are structured from transaction to transaction, going forward.

 

DRAWBACKS OF THE PROPOSED NEW RULES

A glaring and significant problem with the proposed new rules is that they create an additional financial burden for many home buyers. Given the current state of the real estate market, high home prices, high interest rates, and high buyer-paid closing costs are daunting obstacles for many future homeowners.  Scores of willing buyers will be unable to absorb the additional cost of paying a buyer agent's commission without the traditional seller-paid commission that has been so prevalent in the real estate industry for decades now.  

 

WINNERS AND LOSERS

In light of the enormous change resulting from this settlement, there will be winners and losers as the new rules are implemented.  Below are the expected beneficiaries, and others who will experience more barriers to homeownership, in the absence of additional legislation that fixes the unintended consequences:

WINNER - SELLERS

Some industry observers believe that sellers will be the biggest winner by retaining more of their sales proceeds without obligation to pay a buyer agents commission.  In reality, the actual amount saved will be a function of market dynamics.  If inventory is low and buyers are plentiful, perhaps mostly true. If inventory is high and buyers scarce, mostly untrue.  With a more balanced market, factors like buyer agent coops, asking price, location, condition, will all impact the ultimate net proceeds realized.  Sellers who fail to compete with other listings in terms of offering seller paid buyer agent coop compensation, will likely experience less market activity, fewer showings, and declining prices.  Informed, prepared, and flexible sellers will always command the best price and terms that the market can produce. 

 

WINNER - SELLER AGENTS

The new rules mean more potential business for listing agents who are directly approached by (unrepresented) buyers interested in purchasing the property.  The listing agent is tasked with managing both sides of the transaction, and performing all the work that a buyers agent would normally perform.  Typically a higher listing commission is paid to the listing broker under these circumstances where the listing broker manages both sides of the transaction. Unrepresented buyer customers also create additional layers of risk for the broker.  Potential conflicts of interest may arise, which raise the prospect for "dual agency."  Dual agency is the practice of representing both parties to the transaction without express consent, and that increases the potential for a lawsuit. 

 

WINNER ATTORNEYS

Some buyers may seek out attorneys for assistance if they are financially unable or unwilling to pay a buyers agent for representation.  Although hiring an attorney is a possibility for some buyers who are self-motivated (knowledgeable, brave, fearless), and feel that they can handle all aspects of a home purchase on their own.  For these buyer they simply want an attorney to prepare the contract.  For most buyers though, this is not realistic, or a very good option. Attorneys are not designed to handle many of the tasks that buyers agents perform for their clients.  Attorneys do not possess the tools, knowledge, experience, qualifications, training, schedules, or temperament to do the job of a buyers agent. Imagine for a moment:  You need an answer to a pressing question at 3pm on a Saturday. Who do you call? Your attorney?  Unlikely!  Or, you're trying to set a showing on a few new listings you just noticed on a website. You want to know more about them and tour them as soon as possible. Who do you call - your attorney?  No!  Do you call the listing agent for each property?  Maybe?  But, it will be very difficult to coordinate showings for several properties in one fell swoop.  The listing brokers are not likely to drop what they're doing and run over to open the door for you, on short notice (especially when they don't know you, don't know your qualifications, and have no guarantee you're able to buy the property).  On the other hand, you're buyers agent is usually "on call" waiting for you to send a text message to arrange impromptu showings any day of the week. Buyer agents are ready when you are are, and will get you in!  

 

LOSER - BUYERS IN GENERAL

Buyers appear to be the biggest losers in all of this, regardless of what some media outlets portray. It's well established that home buyers shoulder most of the transactional costs in a typical real estate sale.  The hard truth is that a buyer agent commission will add another layer of expense on top of the already high costs for homebuyers. As previously mentioned, high prices, high interest rates, and high closing costs already create steep barriers to many prospective home buyers, and prevent many from succeeding in todays real estate market. 

 

BIG LOSER - FHA & VA BUYERS

Veterans who've devoted their service to this country will soon lose the benefit of buying a home with 100% financing, and no down payment. Current VA rules PROHIBIT VA buyers from paying agent commissions, forcing VA buyers to forego professional representation. This is another unintended consequence created by the new settlement rules, and an issue which requires immediate attention by the Dept of Veterans Affairs and lending institutions to fix.  

FHA buyers are also big losers.  FHA buyers typically rely on very low down payments to gain entry to the real estate market.  These buyers are unlikely to possess the additional cash resources to pay for buyer agent representation, similar to VA buyers.  

 

LOSER - NEW & INEXPERIENCED REAL ESTATE AGENTS

Inexperienced agents and newcomers to the industry will find the new rules to be an enormous barrier to entry, and survival in a fully commissioned job.  The fallout is anticipated to eliminate 30-40% of practicing real estate agents nationwide.  Those who do not have the staying power to adapt to the new rules and survive with fewer clients, sales, and lower gross commission dollars.

 

UNINTENDED CONSEQUENCES

Given the unintended consequences that the newly proposed rules are creating for many buyers, especially for those in the affordable housing sector, it has sparked significant lobbying efforts to find solutions.  The DOJ, courts, lending institutions and real estate participants need to come together and implement additional changes that will minimize the harmful impact of these new rules. 

 

HISTORICAL COOP-BASED COMMISSION MODEL

The cooperative commission model currently in use was introduced in the early 1990s.  It came about in response to calls from consumer protection by advocates for 'exclusive buyer representation'.  Prior to exclusive buyer representation, most buyers had "no representation" in real estate transactions!  Agents working with buyers were typically considered to be a "sub-agent" of the listing agent.  Both agents were tasked with legally representing the seller’s interests only.  This model created significant risks and unfairness in real estate transactions, which ultimately opened the door to today's model of exclusive buyer representation (buyer agency).  With the advent of buyer agency, buyer’s agents were compensated through a commission amount (split) displayed on the MLS, and paid out of the sellers proceeds upon successful closing of a transaction.  Sellers benefitted from this practice because the buyer’s agent compensation vastly increased their market exposure, and the seller’s pool of prospective home buyers.  In turn, the increased exposure and demand generated by the posting and sharing of real estate commissions naturally increased the value of residential real estate over time. 

 

WHO TRADITIONALLY PAID BUYER AGENT'S COMMISSIONS?

Ask one person and you will likely hear "the seller pays" because the commission comes from their seller proceeds at closing.  Another might say "the buyer pays" because the buyer brings the money to the closing, thus allowing everyone to get paid.  Which point of view one subscribes to often depends on which side of the transaction they're on.  The truth lies somewhere in the middle with both the buyer and seller contributing to the commissions.   

 

COMMISSIONS HAVE ALWAYS BEEN NEGOTIABLE, AND WILL CONTINUE TO BE

Real Estate commissions have always been negotiable before and after the NAR proposed settlement.  Commission amounts have varied from one property to another depending on the agent's marketing decisions and various property factors.  During my real estate brokerage career spanning some 35+ years, I've typically seen commissions range from 5% to 7%, and were often split (half & half) between the listing and selling brokers.  Going forward, however, greater TRANSPARENCY over brokerage commissions will increase as the newly proposed rules take effect.

 

AGENT COMMISSIONS ARE NOT DISAPPEARING

The MLS will no longer be allowed to "advertise" offers of compensation to buyers agents. Other allowable methods to communicate offers of seller paid compensation to buyers agents will be permitted through various methods of communication such as phone calls, property flyers, website postings, as long as the compensation is not displayed on a central database such as the MLS.  It remains to be seen what other methods of advertising or communicating buyer agent coops will be allowed?  Bottom line, buyer agent commissions will be decoupled from the seller side of the transaction. Both buyers and sellers will proceed to pay their own agent commissions, except for pre-established seller concessions that conform to the new rules.  

 

MANY SELLERS WILL CONTINUE TO OFFER BUYER AGENT COMPENSATION

Listing agents have many fiduciary duties, one of which is to determine how to maximize the exposure of the seller's property to all potential home buyers, in seeking the best price and terms.  Seller paid buyer-agent commissions will motivate more agents to actively promote the sellers listing to their clients, which may result in more, or multiple offers. Incentivizing buyer agents with seller paid commissions has been proven to maximize exposure for the sellers' property, attract a much larger pool of qualified buyers, and lead to a quicker sale overall.  Considering the sheer power of mobilizing the entire real estate agent community to show a property may be a worthwhile investment.  Seller offers of buyer agent compensation will also help to minimize the time a home spends on the market, avoiding an impression that the property is undesirable or problematic.  For these reasons and more, listing agents will give significant consideration to the potential benefits in marketing conversations with their sellers.  As the real estate markets adapt to the new rules and changes. I anticipate that most home sellers will continue to see the value proposition of offering a buyer’s broker commission.

 

BUYERS, LIKE SELLERS...
WANT AND EXPECT PROFESSIONAL REPRESENTATION

Some sellers falsely believe that buyers will learn to live without buyers agents, or in those instances where the buyer cannot afford to pay an agent to represent them. Expecting a buyer to choose between paying for a real estate agent, versus no representation, will lead to serious consequences for the buyer.

Real estate transactions are complex and can be risk-laden for most buyers.  Purchase transactions require a lot of time and energy.  Buyers can feel overwhelmed even with an experienced buyers agent by their side throughout the transaction.  The buyer's agent will assist their client to best navigate the entire process from start to finish, protecting their best interests all the way.  

Commissions aside, consumer sentiment is extremely high (about 87%) that confirms home buyers want exclusive representation in their real estate transactions. A home purchase is among the largest asset acquisition and investment in a buyers lifetime, which buyers understand. Numerous opportunities exist for unpresented buyers to make serious errors and mistakes during a real estate transaction.

 

IMPORTANCE OF BUYERS AGENTS & WHAT THEY DO

• Provides expert information and counseling.
• Pledges confidentiality.
• Assesses your financial qualifications.
• Assists with securing mortgage financing.
• Searches for specific properties matching buyers' requirements.
• Provides detailed knowledge on the market, neighborhoods, local governments,
• Prepares market analyses on properties to determine fair market values.
• Explain offers to purchase.
• Prepare purchase contracts and other associated documents.
• Develops negotiation strategies.
• Provides disclosures required by law.
• Counsels you regarding numerous NEGOTIATION POINTS (at least 40 different) within a typical transaction!
• Counsels you about home inspections, deadlines, title, deeds, inspections, permits, repairs, contractors, surveys, financing, appraisals, possession, HOAs, and much more.
• Seeks seller disclosures and available information regarding property defects.
• Provides advise about when to seek legal counsel when necessary.
• Reviews closing documents and settlement figures.
• Attends closing with you.
• Works to ensure a smooth process from beginning to end.
• Works 24/7, and on call, to address your questions and needs.

 

LENDERS ARE TAKING A HARD LOOK AT EXPANDING SELLER "CONCESSIONS"

The lending industry is working around the clock to help mitigate the trouble these newly proposed settlement rules have created regarding buyer financing.  At last check, the allowable concessions that a seller may offer a buyer is subject to limits based upon loan type and down payment amount. 

The current restrictions for allowable seller concessions for the most popular types of financing are as follows:

FHA LOANS: 6%
VA LOANS: 4%
USDA LOANS: 6%
CONVENTIONAL LOANS: 2%, 3%, 6%, or 9% (based upon property type and down payment)

Also being scrutinized are whether the current and allowable concessions can be expanded to include buyer agent commissions?  At first blush that does not appear likely this will happen, except perhaps for VA Buyers. 

Without expansion of the allowable concessions that sellers may contribute towards the buyers financing, first time and VA buyers will struggle under the newly proposed rules. Homeownership opportunities will suffer for many.  

 

ADDITIONAL CHANGES FORTHCOMING

If you've made this far reading this article, it is now more clear how complex these newly proposed settlement rules will have on the real estate process that's largely been unchanged for decades. 

For now, its business as usual until at least mid-July 2024.  Those of us in the real estate industry are working diligently to adapt and keep everyone in the loop.  Most sellers continue to offer cooperative buyer agent compensation through their listing broker.  Existing approved real estate contracts and forms still work.  

More progress reports to come soon!

 

ABOUT

Michael Dagner is a licensed real estate broker in the state of Colorado.  Mike was initially licensed in 1977, worked as a homebuilder from 1978-1987, and attained employing brokers license 1988 to present.  

Thank you for your business over the years.  I appreciate your loyalty, and look forward to serving you again soon!

 

DISCLOSURE

This article has been updated with some of the most current media reports, feedback from real estate organizations and attorneys, and includes much of my own personal experiences and opinions.  Nothing herein should be construed as legal advice.

 

THIS ARTICLE IS A WORK IN PROGRESS.   ADDITIONAL INFORMATION IS FORTHCOMING.  

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