The NAR Settlement: Four Months Later – Part II.

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 second of two articles on the topic, we'll talk about how the new rules have impacted sellers of residential real estate in San Carlos. Last week in Part I we discussed the impact on buyers.

The Impact on Sellers.

Just as we did in Part I, to understand the changes that are taking place in the way we now sell 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 sell your home, you signed a listing agreement that specified how much you would compensate the listing brokerage for selling your home. From that total agreed upon compensation amount, the listing brokerage would then offer what is referred to as “cooperating compensation” to the brokerage that represented the winning buyer. So in a typical example, you would agree to pay the listing brokerage 5% of the sales price to represent you, and some portion of that (typically 50%) would be shared with the buyer's brokerage. It's important to note that the overall commission rate, as well as the split paid to the buyer's brokerage, has always been negotiable and not set by any rule or law.

As I discussed in Part I, the Department of Justice (DOJ) has long frowned on this practice since it is essentially “fixing” the compensation that is being paid to the buyer's brokerage, and they have always felt that the cooperating compensation should be decided between the buyer and their brokerage, and not by the listing brokerage. In addition, the plaintiffs in the class-action lawsuit objected to the fact that amount of cooperating compensation should not be published in the Multiple Listing Service (MLS) because it would entice buyer's agents to “steer” their clients to the homes offering more compensation instead of the ones offering less.

As a result of the settlement, the standard listing agreement used by the California Association of Realtors (CAR) has removed any mention of the listing broker being able to compensate the buyer's brokerage from their fee. In Part I, I explained that this “decoupling” of compensation now means that the buyer is now primarily responsible for the compensation of their agent, not the seller — as it was in the past.

Now this is where things get a little fuzzy. Technically speaking, neither the class action settlement nor the DOJ actions have disallowed the traditional practice of the seller's brokerage sharing compensation directly with the buyer's brokerage (Broker-to-Broker Compensation). It was just removed from the standard listing agreement to avoid further litigation and, of course, the wrath of the DOJ. Most brokerages have created addenda that outline a variety of ways that the seller can still compensate the buyer's brokerage if they so choose. That's a very important point that I will elaborate on below.

What's Actually Happening.

As I mentioned above, when you sign a listing agreement today (post settlement) you'll only specify the compensation for the listing brokerage in that contract. But there are still numerous ways for you to compensate the buyer's broker if you wish:

• Broker-to-Broker Compensation: You can still agree in advance to allow your listing broker to share some portion of their compensation with the buyer's brokerage, but that amount cannot be communicated through the MLS as it was before. The transfer of funds in this situation goes from the listing brokerage to the buying brokerage, hence the name. And it's fair bet that the DOJ is going to eliminate this method in the near future.
• Seller Concession: In Part I, we introduced the concept of a “Seller Concession”, which means the seller agrees to “concede” an portion of the proceeds of the sale to the buyer's brokerage to fulfill the buyer's obligation of compensation to their brokerage. This option allows the listing agent to communicate that you are “open to concessions” without committing to an actual amount up front. As I mentioned in Part I, these funds go from the seller to the buyer's brokerage.
• Seller Credit: When you receive an offer to purchase your home, there may be line item requesting a simple credit back to the seller. This credit can technically be used for anything, but most often it will be used by the buyer to pay their broker. In this case, the funds go from the seller to the buyer.

The Bottom Line.

I know this looks hopelessly complicated, but an experienced agent who has been paying close attention to the rule changes can expertly guide you through the process (self-plug fully intended). But if you take away nothing else, remember this:

1. In the new CAR listing agreement, you'll only specify how much you will compensate the listing brokerage, not the buyer's brokerage.
2. However, when you receive a contract to purchase your home, you should anticipate that you may be asked to also compensate the buyer's brokerage as part of the deal, either via a concession or a credit. In the offers that I have received since the rules went into effect, these request for credits ranged all over the map, from a few thousand dollars all the way up to a full 2.5% of the sales price.
3. Any credit or concession that is requested from the buyer or their agent is fully negotiable, and should be handled like any other condition in the contract.

I hope you found this explanation useful. Feel free to reach out to me if you have any questions!