The NAR Settlement and What It Means For San Carlos Buyers and Sellers.

July 31, 2024

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Changes Are Coming.

If you're in the market to buy or sell a home, or if you've just been keeping a casual eye on the news, then you're probably aware that there has been recent legal action taken against the National Association of Realtors (NAR) via a class action lawsuit that was filed in the state or Missouri. In addition, the US Department of Justice (DOJ) re-inserted itself into their long-standing dance with NAR to institute additional changes that were not part of the Sitzer-Burnett class action suit.

I've been meaning to post about this settlement for a number of months, but I sensed there were going to be a LOT of changes in how the terms of the settlement would be implemented, and was I ever right. But after sitting through countless Zoom calls and reading equally as many legal briefs and updates, it's very apparent that the dust has finally settled and the agreed-up changes will be implemented no later than August 17, which is less than 3 weeks away.

Some Background.

Before we dive into the changes, it's important to grasp a basic understanding as to what the suit was actually about. There's no possible way to summarize all of the details of the lawsuit and the DOJ action in this post, but here's a 50,000 foot snapshot that I found in a trade magazine:

Sitzer-Burnett is a class-action lawsuit that was filed in Missouri federal court by a group of home sellers in the state against NAR and other defendants, including Anywhere, Berkshire Hathaway HomeServices, Keller Williams and RE/MAX. The plaintiffs claimed that real estate commission rates are too high, buyers’ representatives are paid too much, and NAR’s Code of Ethics and MLS Handbook, along with the corporate defendants’ practices, lead to inflated commission rates.

At the October 2023 trial, the plaintiffs took particular issue with cooperative compensation, i.e., when a listing broker makes an offer of compensation to the cooperating broker.

–Realtor Magazine, 2/9/2024

The latter statement pertaining to “cooperative compensation” is actually where the biggest impact of these changes will be felt, as it will affect both sellers and buyers significantly. Let's dive into both…

Changes for Sellers.

In the previous version of the California Association of Realtors (CAR) Listing Agreement, the listing brokerage would ask for a compensation fee in exchange for selling the house. The listing brokerage would then split this fee in some manner with the brokerage that brought in the winning buyer, or in other words, they would pay a “cooperating compensation”.

The practice of setting the buyer's agent's compensation in advance has been a thorn in the DOJ's side for many years, as they believe it is an anti-trust violation and the changes that are coming are intended to decouple the two as much as possible. However, it's important to know that it is still legal and acceptable for a seller to offer compensation the buyer's brokerage. It's just how it's done that is going to change.

Here's the impact to sellers moving forward:

  • The new version of the CAR Listing Agreement has stripped any mention of cooperating compensation (i.e. no more split). As a seller, you are only addressing how you will pay your listing agent.
  • While offers of compensation are still allowed, they cannot be published anywhere on the Multiple Listing Service (MLS), which means the commission field in the MLS will be removed.
  • If a seller still wants to compensate the buyer's brokerage, it is now handled through a separate addendum and the payment goes directly from the seller to the buyer's brokerage through escrow. Or, the seller can simply state that they don't want to compensate the buyer's brokerage any amount.

It's important to know that both the compensation that is paid to a listing brokerage AND the cooperating compensation (split) paid to the buyer's brokerage have always been negotiable and not set by law, and that will not change going forward.

Changes for Buyers

As if buyers in this market aren't facing enough challenges, this settlement is actually going to add a few layers of complexity (and potentially cost) for the average home buyer since some sellers may not agree to pitch in to pay the buyer's agent. Here are the key changes for home buyers moving forward:

  • If a home buyer wishes to enlist the help of a real estate agent in buying a home, they must now enter into a written agreement with their agent before they view any homes together. This was an option before — now it is mandatory.
  • These agreements, often referred to as “Buyer-Broker Agreements”, must specify at a minimum 1) what the responsibilities of the buyer's agent will be, and 2) how much the buyer's agent is to be compensated. It also should specify which areas/properties that are covered by the agreement.

I'm actually in favor of making these agreements mandatory for buyers and their agents because they've been mandatory for sellers and their agents for a long time (listing agreements). It holds agents to a more defined and higher standard, and it greatly reduces the possibility of a buyer's agent losing their client to an unscrupulous listing agent (believe me, it happens).

What to Expect Moving Forward

For buyers, these new rules of the road present a very real possibility that they will be on the hook to compensate their agents out of their own pocket rather than expecting the seller to do so, as it has traditionally been done. If the seller is offering no cooperating compensation, or less compensation than what is specified in their Buyer-Broker Agreement, then the buyer will have to make up that difference, or potentially look for another house if they are unable to do so.

For sellers, they have to decide whether they are going to offer cooperating compensation, and if so, how much. The idea of offering no compensation at all may seem like saving money on the sale of the house, but it could very likely reduce the number of buyers that could be writing offers on their home if the buyers don't have that extra amount of funds on hand to pay their agent. Fewer buyers means less competition, and less competition usually means lower prices.

Also, if sellers are offering little or no cooperating compensation, there's a high likelihood that any offer they receive will have the buyer's agent's compensation included as part of the negotiation.

It's probably going to take about 6 months after these changes are implement to fully understand the impact on the market, and there's certain to be a lot of confusion on everyone's part until they become the norm.

But one thing is for sure — the changes will definitely be in place by August 17, and our landscape will most certainly change at that point.

Questions? Feel free to contact me directly if you have any questions about how these changes may impact you.

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