Understanding the NAR Settlement
Part 1 in a series: What buyers and sellers need to know about industry changes
Later this summer, residential real estate will enter a brave (and confusing) new world.
For decades, the general practice was for the seller to pay the commissions not only to their own listing broker but also to the buyer broker. A majority of transactions had total commissions of 5-6% of the sale price. This longstanding practice was the target of two class actions in 2021 alleging the National Association of Realtors (NAR), multiple listing services (MLS), and major brokerages broke antitrust laws and colluded to perpetuate this commission structure.
On October 31, 2023, the NAR and the brokerages were found guilty.
On March 15, 2024, the NAR settled the major suits, mostly to control the amount to be paid out and also prevent and protect members from ongoing suits. As part of the settlement, NAR outlined plans for changes to industry practices. The biggest changes are:
Sellers will no longer be required to pay the buyer broker (but they may if they choose). The previously combined commissions will be “decoupled”—sellers can decide how to pay each broker as separate line items.
The MLS field alerting buyers and agents the amount of commission to the buyer broker will be eliminated. Each state or local MLS will decide if they want to replace it with a new, approved field for “seller concessions.” (The Honolulu Board of Realtors will not have this optional concessions field. The old commission field will be removed from August 12.)
Buyers who want representation must sign a written buyer agreement before an agent shows them any listings.
The buyer agent’s minimum fee will be stipulated in the written buyer agreement. A buyer must agree to pay their agent in the event a seller isn’t paying any or the full amount of their buyer agent’s minimum fee.
These new rules go into effect August 17, 2024 for NAR member brokerages and the MLS boards who opt into the settlement. (Keep reading to learn of one notable MLS that’s opting out. The Honolulu MLS I belong to has opted in.)
The entire industry is scrambling right now to prepare new forms all while wondering exactly what the proper interpretation and implementation of the new rules will look like. Each state or local MLS will probably develop their own practices which may evolve over time, and change with market conditions.
It’s too early to say much definitively, but I’ll try to clarify what we know at this point. This first post will cover changes to the listing and offer paperwork, written mainly for sellers (but good-to-know info for buyers). I’ll mostly report on the facts here, with an opinion or two. A future post will be a little heavier on my opinions!
(Disclaimer: As of the original date of this post, I’ve reviewed initial drafts of the new forms from the Hawaii Association of Realtors. Each state or local MLS across the country will be producing their own standard forms. This post will be revised as necessary after the final forms are released on August 12, 2024.)
Choices for sellers
The news articles with clickbait titles like “sellers no longer have to pay buyer agents” are correct, but sellers can still choose to pay—and many will see the advantages of doing so. Choose and choice are the key words, and a specific seller’s situation and/or market conditions may influence how many sellers will continue to pay something to the buyer broker.
Although the final versions of the new contracts have not yet been released, here are a few things we might expect:
· When hiring an agent, sellers will continue to sign a listing agreement. Instead of one line item with both agents’ commissions combined, the new form will first have a fill-in-the-blank paragraph stipulating how much they will pay their listing agent. It could be stated as a percentage of the sale price or a set dollar amount. Previously where you saw a number like 5-6% for the combined fee, now you may see the seller paying their listing agent a number like 2.5-3%, for example.
· In a separate, second paragraph, sellers will indicate if and what they will offer to the buyer broker, or to the buyer directly. The commission amount will no longer be allowed anywhere in the MLS listing, so buyer agents must ask the listing agent for details. Details about any seller concessions (credits) are still allowed in the MLS remarks.
· Regardless what a seller might have indicated on the listing agreement, now buyers and their agents may submit their desired compensation in their offer. This would be negotiated like the offer price or any other term. Whatever was originally agreed in the listing agreement can be overridden.
· Lastly, there is a paragraph where, if checked, sellers can choose to postpone their decision about compensation to the buyer’s side. This allows sellers to review each incoming offer as the sum of various parts: the offer price, various terms and timelines, and perhaps a commission, credit, and/or concession to the buyer’s side. As always, the seller may choose to accept, counter, or reject any part of the offer.
State up front, or postpone: How will I guide my sellers?
When I am wearing my listing agent hat and working for my seller’s best interests, I feel the option to wait to review each offer (the last bullet point above) will give sellers the most flexibility. For example, if we are in a hot seller’s market and receive multiple simultaneous offers, it may be advantageous to the seller to allow buyers and their agents the flexibility to make their offer more attractive by possibly reducing the commission amount, or taking it out altogether. Sadly, this gives cash-rich buyers even more of an upper hand than they already have. A future post in this series will go deeper into this conundrum.
Listing agents and sellers will need to do a little math to review and compare offers that come in apples to oranges. We do this now to some degree, for example: Buyer A offers over-asking but requests a large credit toward closing costs or a buy-down mortgage loan; and Buyer B offers under-asking but without any seller credits.
If I have a seller who tells me up front they won’t give anything to the buyer’s side, I might suggest they at least choose to postpone the decision. We already know the longer a listing sits, the softer the seller’s expectations become on price; their views on paying the buyer agent might similarly soften.
However, this “seller will wait and see” option could backfire and be misunderstood by buyers and their agents. Say there are two similar homes for sale: Seller A says up front they will give 3% commission to the buyer’s agent; Seller B says they’re deferring their decision. Will listing A see more buyer activity? Possibly.
More competition, less transparency?
Besides what they charge for their listing service, some listing brokerages may recommend—or even require—through a company policy that the sellers they represent continue to pay the buyer’s side. Of course, a seller can choose not to list with such a company. I strongly encourage sellers to interview several listing brokers; you may find a wide variety of requirements or minimums.
This is precisely the goal of the Department of Justice’s on again, off again, antitrust investigation of NAR. Abolishing the previous standard total 5-6% commission opens up competition among listing brokerages, with the consumer (at least the sellers) possibly saving money. In a future post in this series I will outline suggested interview questions for sellers as they talk with listing agents.
The new NAR rule removing the commission field from the MLS is an attempt to thwart bad-acting buyer agents from filtering listings based on how much commission is being offered. However, the MLS for Western Washington state has opted out of the new NAR rules, claiming the removal of the commission field is actually a reduction in transparency for consumers and could open up deceptive practices.
Ethical listing agents will report exactly how much the seller indicated they will give to the buyer’s side (or not). In addition, it would be an excellent practice to remind buyer agents they can suggest otherwise in their offer. As has always been my practice, I will continue to cheerfully tell any buyer agents inquiring on my listings: “Any written offer is welcome and will be presented to the seller for their review.”
Commission vs. Compensation vs. Concessions vs. Credits
Although the new NAR rules prohibit commission or compensation details in the MLS, the rules still allow mentions of seller concessions or credits. I suspect this will be a source of confusion among agents; we sometimes mistakenly use these terms interchangeably.
I searched online and found this official NAR definition of seller concessions. Although examples are given, what constitutes a concession is somewhat open and undefined—we could see some creative offerings in the upcoming Wild Wild West environment. An extreme example in a recent post by industry pundit, Rob Hanh, hypothesizes if a seller offers the buyer’s agent a trip to Maui, could this be mentioned in the MLS? (And, would it go against a buyer agent’s fiduciary duty to accept the trip?)
This kind of question will need to be hashed out this fall and winter as the new changes take effect IRL. If interest rates persist in the 7% range, we may see creative incentives like the Maui trip (although it’s not much of an incentive for us agents who live and work in Hawaii!). Later, perhaps in 2025, when mortgage interest rates hopefully drop and a wave of buyers return to the market, will sellers assert their right not to offer anything to the buyer’s side?
Unrepresented Buyers
The last tip for sellers is to look out for a paragraph outlining possible additional fees if the buyer is unrepresented. The listing agent and brokerage do more work and shoulder a bigger liability servicing both the seller and an unrepresented buyer, thus this additional fee or percentage commission. This is already in place at many companies already.
There is a fear more buyers will opt not to have representation, especially when the seller is not offering compensation to the buyer’s side. There is even talk that some buyers may instruct their agents not to show them any such listings—which I would strongly advise buyers against doing. In the next post in this series (link here), I discuss how the new NAR rules affect buyers.
More posts in this series coming soon
Sellers, stay tuned for a future post with interview questions for potential listing agents, as well as why you might seriously consider paying something to the buyer’s side.
Buyers, you’ve already had it rough with interest rates between 6% and 8% since the end of 2022. The NAR changes could affect affordability even more. The next post in this series (link here) is to help buyers understand and navigate these changes—and not lose hope.
Those of us in the industry are worrying how these changes will play out. There has already been less business for many of us recently; we fear even less pay ahead. If you are a real estate agent or loan officer looking for encouragement, please check out this previous post.
I welcome your comments and questions—comment here publicly or message me privately, but if you have a question, there might be others who have the same question and would benefit from seeing a public, open dialogue. Subscribe to my blog for free to receive all the future posts in this NAR series in your email inbox. Aloha and God bless, Ali
Thanks, Ali! This provides a lot of clarification in a soon to be very opaque environment.