Denver Homes Online

National Association Of Realtors® Lawsuit & Settlement

UPDATED: September 10, 2024

 

SCROLL DOWN TO BOTTOM TO SEE THE MOST RECENT UPDATES (in blue).  

 

NAR LAWSUIT, SETTLEMENT, AND POSITION STATEMENTS

The National Association of REALTORS® (NAR) reached an agreement with the parties to a class action lawsuit that resolves 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, those accusations require a lot of 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 involved with buying a home?  

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

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

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 surfaced over the past few months since the settlement was announced.  Large media outlets all the way down to ubiquitous social media sites have posted extreme headlines.  Many articles purport all sorts of misleading claims, many of which are untrue.  Here are a few that I've noticed:

"Real Estate Commissions Are Eliminated"

"The End Of Real Estate Agents"

"Cost Of Homeownership Reduced Significantly"

"Buying Now Cheaper For Millions"

Let's separate truth from fiction.  Allow me to explain current practices and compare to actual and forthcoming changes.  We'll even breakdown some of the winners & losers of this litigation, and I'll share some of my own personal thoughts.  

 

COURT APPROVAL PENDING

As of the first week in May 2024, preliminary approval has been granted by the court.  The court has determined that the provisions that NAR agreed to were “fair, reasonable and adequate.”  A final approval hearing is set for November 2024.  Due to remaining complexities and some unintended consequences of the settlement, the date for a final resolution may need to be extended.  Stay tuned as 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 agent 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 to sell with better terms, that will remain within the sellers subjective discretion.

A SECOND new rule will require a real estate agent hired by the buyer to execute a written representation agreement that includes the buyer agent's compensation, PRIOR TO SHOWING/TOURING A PROPERTY. An important detail of the representation agreement will require the buyer to pay their agent’s compensation (commission) in the event the seller does not agree to pay, or to contribute.  Alternative or hybrid methods of compensating a buyers real estate agent may also be devised, as commissions ultimately remain negotiable.  It remains to be seen whether any particular 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 influence how these agreements are structured on a transaction to transaction basis, going forward.

 

DRAWBACKS OF THE PROPOSED NEW RULES

A significant problem with the new rules is that they create an additional financial burden for many home buyers. Given the current state of the real estate market with high home prices, high interest rates, and increasing buyer-paid closing costs.  All combined, these are daunting obstacles for many future homeowners.  Scores of ready and willing home 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.  

 

**** BACKUP FOR A MOMENT... WHAT IS THE CURRENT SYSTEM?

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 by way of the vast pool of prospective home buyers the system created.  The increased exposure and demand generated by the display and sharing of real estate commissions undoubtedly 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 ALWAYS NEGOTIABLE

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.

 

**** BACK TO THE NEW RULES & FORTHCOMING CHANGES

 

WINNERS AND LOSERS OF NEW CHANGES

In light of the enormous changes resulting from this settlement, there will be winners and losers as the new rules are implemented.  Below are the anticipated winners, and some of the losers who will experience more barriers to homeownership without additional legislation to fix the unintended consequences:

WINNER - SELLERS

Some industry observers believe that sellers will be the biggest winner in those instances where they can avoid paying a buyer agent commission.  The actual amount saved will be a function of market dynamics, however.  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 asking price, location, and condition will impact the ultimate net proceeds realized.  Sellers who fail to compete with other listings in terms of offering seller paid buyer agent 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 will then be 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 circumstances like this, when the listing broker manages both sides of the transaction.  It is important to note that in these type of scenarios, unrepresented buyers can create additional layers of risk for the broker.  Potential conflicts of interest may arise, raising the prospects of "dual agency."  Dual agency is the practice of representing both parties to the transaction without express consent, which increases the potential for a lawsuit. Seller agents must be very cautious to avoid situations like this and document the transaction thoroughly.

WINNER ATTORNEYS

Some buyers may seek out attorneys for assistance if they are financially unable or unwilling to pay a buyers agent for representation.  Hiring an attorney is a possibility for certain 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 buyers they simply want someone qualified to looking over their shoulder.  That said, this may not a very good option for most buyers. Attorneys are not designed to handle many of the tasks that buyers agents perform for their clients.  Attorneys do not possess the data, systems, experience, schedules, or temperament to do the job of a buyers agent. Imagine for a moment:  Your a buyer and you need an answer to an important question at 3pm on Saturday afternoon. Who do you call?  Your attorney?  You'll likely get voicemail.  Or, you want to see inside a few new listings you just noticed online. Who do you call?  Maybe skip the attorney and call the listing agent directly, for each property!  Listing brokers are not likely to drop what they're doing and run over to open the door 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.  They are likely going to try and qualify you before making an appointment, on their schedule.  A buyers agent on the other hand will help anticipate all the issues that will prepare you for successful tours and offers from the get-go.  They'll constantly be on the lookout for every new listing that you'd be interested in, before it hits the market.  Your buyers agent can then arrange impromptu showings most days of the week.  They'll be ready when you are are, serving your needs with the highest degree of attention and professionalism.  

 

LOSER - BUYERS IN GENERAL

Buyers appear to be the biggest losers in all of this!  Given that home buyers shoulder most of the transactional costs in an average real estate transaction, the landscape for many buyers has become increasingly difficult to navigate.  Asking the buyer to now begin paying the buyer agents commission will simply attach another layer of expense on top of the already high costs buyers face.  The collective burden of high prices, interest rates, and closing costs may prevent many from succeeding in todays real estate market.   

 

BIG LOSER - FHA & VA BUYERS

Veterans who've devoted their service to this country may lose the benefit of buying a home with 100% financing (no down payment) once the new rules are implemented. 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.  UPDATE:  As of May 2024, both NAR and the Mortgage Brokers Association (MBA) have met with VA officials to stress how veteran borrowers will be disadvantaged if VA buyers are prohibited from directly compensating their buyer agents.  As a result, the Veterans Administration has temporarily lifted its ban on buyers directly paying for professional real estate representation (until further notice).  Ultimately, the VA will likely remove the prohibition and modify VA loans rules to allow commissions to be rolled into the VA financing.  This is currently speculation, but more details will be forthcoming soon. 

On the FHA side, 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.  Will the FHA implement changes like the VA that address how FHA buyers are disadvantaged by changes resulting from the settlement?  Although there have been no press releases yet, its likely they are busy formulating new regulations behind the scenes.  More to come!

 

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 their survival in a fully commissioned job.  The fallout is anticipated to eliminate 30-40% of practicing real estate agents nationwide.  Those agents who do not have the staying power to adapt to the new rules with fewer clients, fewer sales, and lower gross commission dollars, will soon pursue other occupations.

 

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, and fast!  The DOJ, courts, lending institutions and real estate practitioners all need to come together and make adjustments that will minimize the harmful impact of these new rules. 

 

BOTTOM LINE:  AGENT COMMISSIONS ARE NOT DISAPPEARING

White the MLS will no longer be permitted 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 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 TAKING HARD LOOK AT EXPANDING ALLOWABLE 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.  

 

BUSINESS AS USUAL - UNTIL AUGUST 2024

If you've made this far, it's clear how these new rules will complicate a real estate process that's largely been unchanged for decades.  For now, its business as usual until we get closer to August 2024.  Sellers are continuing to offer cooperative buyer agent compensation on the vast majority of transactions.  Buyers are busy touring and making offers as the Spring/Summer market is about to crescendo.  Buyer agents continue to be compensated like normal under the existing MLS rules.  And, as of now, there have not been any changes to our approved real estate contracts and forms.   

Coming in August 2024, here's a summary of the specific procedural changes to be implemented:

• Written agreements are required before buyers and agents can tour homes.
• MLS no longer displays buyer agent commissions.
• Disclosures emphasize that brokerage commissions are fully negotiable.
• Sellers may offer buyer concessions on the MLS.

In the coming months, my seller clients will acquire a better understanding of the pros and cons of offering buyer agent commissions as a key part of the marketing strategy.   For buyers, I anticipate a majority will seek to limit their interest to properties where the seller agrees to coop and pay the buyer agent commission, skipping properties that do not.  Those directives will be spelled out in the buyer representation agreement between broker and client. Ultimately, the approach taken will vary from client to client based upon seller concessions available and the buyers financial wherewithal.  

More updates to come as we work through the changes together.  

 

DISCLOSURE

This article is routinely updated with the most relevant information from NAR, MBA, various real estate organizations, media reports, and includes some of my own opinions.  Nothing herein should be construed as legal advice.

 

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!

 

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

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