What to Know About the National Association of Realtors Settlement Agreement

In October, a Federal Court in Missouri ruled against the National Association of Realtors (NAR) and some of the largest real estate brokerages in the Country. The Court awarded the plaintiffs in the case – a class action suit filed by homebuyers – a verdict of $1.8 billion. NAR has recently announced that they, and some of the other Defendants in the case, have reached a Settlement Agreement. Because of the nature of the class action lawsuit, this Settlement needs to be approved by the Court. Court approval is expected in November 2024.  But NAR and the defendants will start to make the changes in these agreements in August.

I work with many real estate agents. They all want to know “What does the Settlement Agreement mean, and how will it affect selling homes in the future?”  I will try to give my best predictions for realtors moving forward.

 What was the case all about?

The case is known as Burnett et al. v. National Association of Realtors, et al. Defendants include NAR and the following large real estate brokerage firms: Anywhere, RE/MAX, Keller Williams, and Berkshire Hathaway HomeServices. The complaint boils down to this standard practice: when a Seller lists their home for sale on a local Multiple Listing Service (MLS), the Seller’s real estate agent agrees to split the Seller’s commission with the Buyers real estate agent. The agreed-upon split of the Seller’s agent’s commission is listed in the MLS. Only approved real estate agents have access to the MLS. All agents who are on the MLS agree to put all of their listings on the MLS.

The complaint said that this practice forced Sellers to pay higher commissions because of the split with Buyer’s agents. The complaint also alleged that Buyer’s agents would steer their clients to the homes on the MLS where they would get the biggest commissions. The Court ruled that these practices violated anti-trust law. These practices, according to the jury, created a conspiracy among real estate agents to fix higher prices and to restrain trade.

 What will Happen to Real Estate Agents Now?

The verdict in Burnett will have an immediate impact on the MLS. Seller’s agents will still be able to list homes on the MLS; however, they will not be allowed to mention splitting commission with the Buyer’s agent.

It is possible that the MLS system may fundamentally change. Right now, it is a closed system. That is, the real estate agents in the geographic area decide who can and cannot use the MLS. To eliminate the anti-trust potential, I think that some MLS’s will open up their systems to anyone who wants to sell a house. This includes For Sale By Owners, Banks, and other non-traditional real estate sellers. This is just speculation on my part, but it would solve a lot of the problems in Burnett.

After that, the impact of Burnett is not clear.

 Will Real Estate commissions go down?

Most news agencies are saying that Seller’s agents’ commissions will go down. This is not necessarily true. It is true that the standard commission is somewhere around 6%, and it is standard to split half with the Buyer’s agent. But Burnett does not mean that commissions get split in half automatically. Seller’s agents have always been free to negotiate the agent commission with the Sellers. This will not change. After all, the Seller’s agent is doing the same work to find buyers for the house. If that was worth 6% of the sale price before Burnett, it might be worth the same amount after the Agreement. On the other hand, if the Seller’s agent is not splitting commissions, maybe they will negotiate for a lower commission for themselves, putting themselves in the same financial condition and saving the Seller money. The Seller’s agent commission is an agreement between the Seller and his or her agent.

Practically, I do not see how the Seller’s agents will be able to split commissions with Buyer’s agents. One of the biggest problems with the current MLS system is that only real estate agents know about the split commissions. I do not know how to avoid this. Maybe the Seller’s agent can put a sign under the “For Sale” sign that says “4% Commission split with Buyer’s agent! Plus, Updated Kitchen!” But another problem in Burnett was that commission splits encouraged Buyer’s agents to steer their clients (allegedly) only to those properties. If the Buyer can see that there is a commission split, it solves some of this problem. But I do not think it solves it completely.

 How will Buyer’s agents get paid?

This will probably be the most dramatic change on account of Burnett. The Buyer’s agent cannot rely on a commission based on the promises in the MLS. Most likely, the Buyer and Buyer’s agent will make an agreement on the agent’s compensation ahead of time. At the end of the day, the Buyer, and not the Seller, will be responsible for paying the Buyer’s agent.

This process is already present in the standard Pennsylvania Association of Realtors (PAR) Buyer Agency Contract. The form contains a section that describes how the Buyer’s agent will be paid. Currently, this section has language that the Buyer’s agent will be paid a certain percentage of the sales price by the Seller’s agent. That language will need to change. The PAR form always allowed the Buyer and Buyer’s agent to negotiate a fee that was not connected to the sales price or the Seller’s agent’s commission. Moving forward, this might be the primary way that Buyer’s agents are paid.

The Seller and Buyer could agree that the Seller pays the Buyer agent commission.  This would be part of the Agreement of Sale.  That means it is agreed to up front, and is essentially part of the sales price of the home.  In today’s housing market, I am skeptical that many Sellers will agree to something like this.

 Are there any silver linings?

The way that I expect real estate sales to change will fix one common problem: What to do when a Buyer contacts the Seller’s agent (or new home builder or the Seller) without the Buyer’s agent knowing? This situation is a consistent problem for real estate agents. Since I expect that the Buyer’s agent contract is going to be more direct, this might not matter as much anymore. If the Buyer’s agent contract in the future says “Buyer will pay Buyer’s agent 3% of the sale price of any home that the Buyer buys” during the covered period, then the two real estate agents do not need to fight about who is entitled to a commission.

Of course, this is a big practical change for Buyers. It could add tens of thousands of dollars onto the costs of their new homes. This increased cost will need to be considered for mortgages and closing costs. Because of this, it might actually decrease the amount Buyers are willing to pay, and reduce the amount that Sellers receive. So, we could go through all of this change, and hundreds of millions of dollars in Court settlements, and not really change the bottom line for Sellers and Buyers. Regardless of how the Buyer’s agent contract changes, it will be especially important for Buyer’s agents to be very upfront and transparent with the Buyer from the start of their relationship.

Seller’s will always need professionals to help them sell their homes. Buyers will always need someone to help them find homes and negotiate the sale. Both sides need professionals to help get them to the settlement table and beyond. These needs will not go away because of the NAR Settlement Agreement. Real estate agents will just need to be more proactive about their relationships with their clients.