The NAR Settlement: Four Months Later – Part I.

Four months ago, new rules were put into place as a result of a class-action lawsuit against the National Association of Realtors (NAR). These rules made significant changes to the way properties are marketed, and how real estate agents are potentially compensated. It's important to note before we launch into the details that there are actually two different actions being taken against NAR — one is the class-action lawsuit, and the other is an ongoing effort by the Department of Justice (DOJ) to change some of the long-standing practices of selling real estate. Many of the changes as a result of the lawsuit do overlap the efforts by the DOJ, but as you'll see in this article, there are some key differences.

In this first of two articles on the topic, we'll talk about how the new rules have impacted buying residential real estate in San Carlos. In Part II next week, I will discuss the impact on sellers .

The Impact on Buyers.

To understand the changes that are taking place in the way we now buy homes, it's essential to quickly summarize how things were done before the new rules went into effect.

Traditionally when you enlisted the help of a real estate agent to purchase a home, your buying agent was compensated by the brokerage who represented the seller at the close of the sale. The amount of compensation that the buyer's brokerage received was already predetermined in the listing agreement that was executed between the seller and the listing brokerage. So regardless of which agent or brokerage represented the buyer, or how good or bad of a job they did on the transaction, their compensation was already fixed. This is what is referred to as “Broker-to-Broker Compensation” and it's the cornerstone of both the class-action lawsuit and the DOJ actions.

As a result of the settlement, the buyer is now primarily responsible for the compensation of their agent, not the seller — as it was in the past. In order to ensure compliance, the settlement also requires that a written agreement must be in place between the buyer and their agent before the agent can show the buyer a single property. In that agreement, these two topics must be agreed upon:

1. The responsibilities and duties of the buyer's agent, and
2. The amount of compensation the buyer agrees to pay the buyer's brokerage.

This agreement is commonly referred to a “Buyer-Broker Agreement”, and it's somewhat analogous to the listing agreement that has long been required between the seller and the listing brokerage.

You can see the obvious impact that this has on any buyer, but especially those in expensive housing markets like the Peninsula. Many buyers, most notably first-time buyers, are literally emptying their piggy banks just to be able to produce the down payment for their home. Now, they have to factor in a non-trivial amount to pay their agent — should they choose to employ one. That alone can change the entire trajectory of the transaction for the buyer.

But as you'll see below, there are a number of legal workarounds that a buyer can utilize which allows them to purchase a home without having to directly compensate their agent.

What's Actually Happening.

In order to avoid a situation where the new rules knock a potential buyer entirely out of the market (everyone loses in that situation) there are at least five ways that a person can purchase a home without having to *directly* pay their agent, or at least minimize the amount that they do:

• Broker-to-Broker Compensation: Remember we mentioned it above, and how it's cornerstone of the anti-trust case? Well, it's still technically legal for a listing brokerage to offer compensation to the buyer's brokerage, but it just cannot be advertised on the Multiple Listing Service or any 3rd party website. But if a seller still wants to agree up front to pay a fixed percentage to any brokerage, they can do so. This is one area where the class-action lawsuit and the DOJ diverge, however. While it was still allowed in the class-action settlement, the DOJ has long been opposed to this practice, and I believe they're going bar it in the near future. The transfer of funds here goes from the listing brokerage to the buying brokerage, so the buyer doesn't have to pony up additional funds to close the sale even though one can argue that it's still baked into the sales price.
• Seller Concession: In this scenario, the buyer essentially requests that the seller provide a “concession” in the transaction that enables the buyer to fulfill their obligation of compensation to their agent. In other words, the seller pays the buyer's brokerage an agreed upon amount out of the proceeds of the sale. This is different from Broker-to-Broker compensation above because the funds go from the seller to the buyer's brokerage, NOT from listing brokerage. It's a seemingly small difference, but it's significant because it's outside of the DOJ's current warpath. This is the most common approach that I'm seeing in transactions since the rule went into place.
• Seller Credit: This scenario is slightly different from a Seller Concession in that the buyer simply asks for a generic credit for a certain amount at the end of the sale. The intent is that the buyer will then use these funds to pay their agent directly, but technically the funds can be used for anything. Note here that the transfer of funds goes from the buyer to the buyer's brokerage, but technically the seller is providing those funds.
• Attorney: Buyers have always been able to hire a qualified real estate attorney to help them complete the sales contract and other statutory forms. But note that while the fees may be less than an agent's commission, the attorney will most likely not negotiate the sale on your behalf – that's up to you.
• Go Solo: The other option to avoid paying for a buyer's agent is to simply not use one. There's no law that makes it mandatory to use an agent to purchase a home. There's also no law that says you can't perform surgery on yourself. But at the risk of sounding self-serving, I wouldn't recommend doing either.

The plaintiffs in the case have long touted that these new rules will “lower the cost of buying and selling real estate”, but it remains to be seen what impact it will have. At the end of the day, nobody is going to work for free, regardless of what industry they're in, so it's unrealistic to expect that the cost of selling a home is going to drop dramatically. This new rule does, however, give the buyer more control over how much their agent gets paid, and what tasks the can expect in return.

Recap

I hope I didn't lose you in the weeds, but it's tough to boil down a $400M lawsuit into just a few paragraphs. If you made it this far, here's what you need to know if you're buying a home in the current market:

1. If you choose to work with an agent to help you buy a home, you'll have to sign an agreement with that agent before you can see a home together.
2. While you *may* be on the hook to compensate your buyer's agent as part of the aforementioned agreement, there are several legal ways to have the seller compensate your agent instead. A competent buyer's agent can walk you through all of these options.
3. Just like when you sell a home, commissions are fully negotiable and are not set by law.

I hope you found this explanation useful. Next week, I'll outline how these new rules are impacting home sellers in the market. Feel free to reach out to me if you have any questions!