NAR Settlement – What Does It Mean for NC Real Estate Agents?
On Friday, national media outlets announced a preliminary settlement has been reached between the National Association of Realtors and class action plaintiffs—the outpouring of misinformation, unsubstantiated opinion, and general terror was astounding over the weekend. The information proffered in this article are a combination of objective analysis of what was announced and the writer’s informed opinion about what it means for real estate agents in the state of North Carolina. As with anything you read on this topic, please consider it in light of all the other advice and information that you get.
What Happened?
For years now, there have been lawsuits working their way through state and federal courts centered on allegations of antitrust and consumer exploitation. This particular suit included a slew of major national brokerages, multiple listing services, and the National Association of Realtors. The lawsuits alleged that policies/rules established by the NAR and MLS created a collusive environment that discouraged (or even prevented) negotiation between the buyer and the buyer’s real estate agent with respect to commissions that would be paid. Once the settlement is approved, NAR will owe some $418 million dollars in settlement dollars to the class of plaintiffs, in exchange for the release of NAR (and any of its agents), MLSs, and other various entities from liability.
At the center of the lawsuit was a rule put forth by MLS that required a listing to include information about the amount of commission a listing agent was offering to a cooperating buyer’s agent, to be paid by the seller at closing. The lawsuit alleged that a seller could not negotiate that commission after listing, which resulted in commissions that did not deviate from a market norm—a marker of implicit collusion or fee-fixing that the plaintiffs believe was promoted by NAR and MLS practices.
The settlement includes prohibitions against the NAR moving forward: significantly, the NAR cannot establish any rule that would allow a seller’s agent to set compensation for a buyer’s agent. Agents will still be able to use cooperative compensation so long as they pursue it off-MLS through negotiation. The NAR has also agreed to put in place a new rule that prohibits offers of compensation on the MLS. The lawsuit also requires that MLS participants acting for buyers would be required to enter into written agreements with their buyers before touring a home—this would be a minor change for NC agents but would likely mean that buyer agency agreements will have to occur earlier in the process.
Will this Impact NC Agents? When?
At this stage, this is a news story about a proposed settlement. It has a long way to go before it will start directly impacting NC realtor rules or practice. First, it must be approved by the court (which is a substantial hurdle), and once approved, it still remains to be seen how the US Department of Justice accepts the concessions offered by NAR. Full resolution of the lawsuit is still months (or more) away.
Timing-wise, the settlement information provided by NAR suggests a timeline in mid-July 2024 for changes in their policies and practices. Assuming that stands, I would strongly suspect that NCAR will have updated rules and forms in place to facilitate the change. As I’ll mention below, there will be much fewer substantial changes to workflow and process then I think many would suggest. This is certainly a settlement that will have implications across the nation for the way real estate agents practice and state/local associations govern, but the end result is likely to be adjacent to the current established set of real estate practices in our state.
What Does It Mean for Real Estate Agency?
Practically, in the state of North Carolina, the standard North Carolina Exclusive Buyer Agency Agreement includes language that already leans into the possibility that the seller may not be willing to pay the buyer’s agent commission at closing. The NC Standard Form 201 (which, in my experience, is the most commonly used compensation form in our state), includes provisions that handle any situation that does not have a “cooperating listing firm.” Revisions to that form are likely to result, but the idea will remain the same—a buyer will be responsible for paying their agent’s fees in the event that the seller does not agree to pay them. The change will be that the listing itself will not include information about the listing firm’s offer to pay a buyer’s agent commission.
In other words, the OTP (or some other assisting document), will likely spell out the terms of the cooperation between the buyer’s agent and the listing party with respect to paying a buyer’s agent commission. No longer will this be governed within the confines of the listing itself and within the MLS—as part of the offer and acceptance process, the buyer’s agent is going to have to make sure they understand where their commission is coming from and will need to approach the negotiation knowing that this is a point of negotiation.
This could mean that buyers and sellers become more reluctant to compensate a buyer’s agent. It could be that the listing agent encourages the seller to refuse offering cooperating fees. It could mean that a buyer does not hire a buyer’s agent because they cannot afford to pay the buyer’s agent commission in the event they find a seller that does not offer to pay part of their agent’s commission. Theoretically, the buyer’s agent commission becomes a point of negotiation and attention throughout the offer/acceptance process. We will see more situations where the seller offers to pay “closing costs” at a higher clip to facilitate payment of buyer’s agent commissions. We may also see more situations where the buyer compensates their agent in a more market-responsive way. Flat or hourly fee arrangements will help link the amount of commission paid to the agent to the amount of work that they put in as an agent.
This might also change nothing at all in terms of commissions. The buyer’s agent fee has always been a point available for negotiation, it was just rarely actually negotiated. It could very well be that a standard practice of offering a 3% buyer’s agent commission at closing continues off the MLS but in the standard drafting of agency contracts in our state. Do not forget that a buyer’s real estate agent is more likely to steer a client to a listing that offers a cooperating agent compensation from the seller’s side. This change just means that the agents have to have those conversations with their clients at the outset, and the commissions that are charged at closing will be come part of the open and clear negotiation that takes place during the contract process.
Misinformation or Responsible Speculation
The media misinformation machine was in full swing this weekend. If you believe the news, this “seismic” settlement will “dramatically reduce the cost of buying and selling a home…”, and it will “help countless American families”, and it will mean “the number of real estate agents will shrink dramatically”, and it will “eliminate real estate brokers' long-standing commissions, commonly of up to 6% of the purchase price”. The sky appears to be falling in our industry.
If you play out the economics on this, it is certainly possible that home prices will go down as a result of this settlement. Simply, if it plays out that more buyers have to pay the costs of real estate commissions, less buyers will have the financial power to buy homes. Demand for homes will decrease over time, and the price of homes will decrease as a result. In that sense, perhaps this change will help shift us away from the last 5-7 years of intense seller preference in our market. Less buyers would mean a better supply situation and more eager/anxious seller. Which, incidentally, would mean that more sellers would offer buyer’s agents compensation to bring them buyers. The market should resolve itself, in that sense, such that this settlement should not have a substantial impact on the transaction itself.
Following that logic, there will be fewer homebuyers that have the ability or capacity to buy a home. Probably the biggest potential tragedy here is that the settlement is likely to disadvantage first-time homebuyers or unsophisticated buyers more than any other interested party. To say that this settlement “helps countless American families” is horrifically misguided.
As for costs, as in real estate commissions, I do think that this settlement has the potential to reduce the pure volume of commissions paid over the long-haul. It should be, theoretically, easier to negotiate a buyer’s agent commission if it does not have to be set in stone before the seller places the home on the MLS. Still, there is nothing to suggest that the standard 6% commission will change. Interestingly, in our state, the traditional 6% commission seems to be more prevalent than in other states, and that is purely because the cost of homes in our state is much lower than many other states. I can tell you that most luxury deals we complete, anecdotally, include a commission that is less than the standard 6% (sometimes even as low as 3-4%).
What Is Going to Happen?
Let’s operate under the assumption that the settlement stands and is substantially similar to what is proposed. I saw someone say that they think more than 80% of buyers will decide not to proceed with a real estate agent so they don’t have to pay a commission. Some are speculating that more than half of the real estate agents currently in practice will “be forced” out of the industry because of the unavailability of buyer’s agent commissions.
Please do not see this in the light of panic or let the media steer your understanding of what is likely. I wouldn’t even listen to the YouTubers and Instagram pundits that tell you to start sharpening your knives and preparing your negotiation tactics to go to war. Don’t decide tomorrow that you are going to be a listing agent only, and you aren’t going to talk to buyers about how to pay commissions because it is too hard or awkward.
Simply, the practice of the 3%/3% split is something that was borne out of real estate agents failing to have a difficult conversation with their buyers and sellers about how fees are paid at closing. In many cases, the consumer (buyers and sellers) does not know who is paying the commission. My observation is that most real estate agents rely on the tradition of the commission split arrangement and fail to use the commission as a negotiation and leverage tool for their client’s benefit.
As with any change in any industry, but especially an industry as stagnant and traditional as ours, this settlement represents an incredible opportunity to improve your understanding and capacity as a real estate agent. I do believe that good agents will have to become more adept at having difficult conversations early with their clients about how the agent will be paid, and how much the agent will be paid. I do also think that agents will have to be creative and flexible in negotiation, and this change (if it bears the fruit some predict) will make that negotiation process more difficult and complex.
The sky is not falling in real estate agency. The rules are changing though, so prepare to learn and adapt as a real estate agent walking into a new world.
