The NAR Settlement: A Tectonic Shift in Real Estate Commissions

The National Association of Realtors (NAR) recently reached a substantial legal settlement, agreeing to pay $418 million over a series of lawsuits related to real estate agent commission practices. This settlement marks a significant change in how real estate agents are compensated and has various implications for the industry.

Settlement Overview

The lawsuits claimed that homeowners were forced to pay artificially inflated agent commissions when selling their homes due to NAR's rules governing how commissions were structured and disclosed. As part of the settlement, NAR has agreed to pay $418 million and implement several rule changes:

1. Agents who list properties on a Multiple Listing Service (MLS) can no longer use the MLS to offer to pay a commission to agents representing potential homebuyers.
2. A new rule requires agents or other participants working with a homebuyer to enter into a written agreement detailing the charges for their services.

The settlement class includes all persons and entities within the United States that listed properties on one of NAR's Multiple Listing Services, purchased properties listed on a MLS, or paid a broker commission since April 29, 2015. The settlement provisions, which eliminate the previous NAR rule about listing agent offers of compensation and encourage more open negotiations between agents and clients, will apply in all 50 states.

This broad applicability means the transformative impacts of this settlement in terms of increasing transparency around commissions and potentially lowering real estate costs will be felt by industry participants nationwide. However, the largest brokerages by volume like Compass and Redfin are excluded from the settlement terms. But overall, this agreement drastically changes industry practices across the entire country.

Implications of the Settlement

The recent settlement has far-reaching implications for the real estate industry, particularly for homebuyers, sellers, and real estate agents, who may face significant changes in the way they navigate the housing market and conduct business.

Impact on Homebuyers and Sellers

The NAR settlement has the potential to reduce costs for both buyers and sellers by allowing for greater flexibility in commission negotiations. Sellers, in particular, could benefit from not being obligated to pay the buyer's agent commission, potentially saving billions of dollars annually. This could lead to lower home prices for buyers, as sellers may pass on the savings to attract buyers in a competitive market.

However, buyers may be at a significant disadvantage in the housing market without the guidance of a buyer's agent. Representing themselves may lead to costly mistakes due to a lack of expertise in identifying property defects and navigating the complexities of the transaction process. Buyers may also have difficulty finding homes that meet their needs, as they may not have access to the same MLS data and resources as agents.

Impact on Real Estate Agents

With the changes, agents may need to negotiate their commissions directly with their clients rather than relying on standard rates. This could result in lower average commission rates and affect agent earnings. Agents are the true victims of NAR's settlement, as they are required to maintain their licenses and pay associated fees, but they may not be allowed to access specific functions for engaging in real estate activities, such as showings, accessing MLS data, and writing contracts. This limitation can significantly hinder an agent's ability to serve their clients effectively and earn a living in the industry.

Additionally, agents themselves stand to suffer from changes like the elimination of commission offers through MLSs. While portrayed as an industry monopoly, individual agents have little control but now face impacts like:

• Less reliable compensation models
• Restricted MLS access critical for tasks like showings
• Inability to write contracts or complete key tasks
• Ongoing licensing/fee requirements without full functionality

It's important to recognize agents as victims in this process rather than collaborators. Their livelihoods depend on the rules and tools the industry provides. Though progress requires adaptations, we must ensure average agents can still viably serve clients and protect the value they provide.

Challenges for Real Estate Agents

Real estate agents stand as the most significantly impacted party in the wake of the NAR settlement. Despite being required to maintain licenses and pay associated fees, agents may face restrictions in accessing essential functions necessary for conducting real estate activities, such as showing properties, accessing MLS data, and drafting contracts. These limitations can severely hinder an agent's ability to provide effective client service and earn a living.

The elimination of commission offers through MLSs poses significant challenges for individual agents, who have little control over the rules and now face less reliable compensation models and restricted access to critical tools. This could lead to a decline in the number of real estate agents, as many may be forced to leave the industry due to financial constraints.

History of Buyer and Seller Agency

From a real estate agent's perspective, the industry has undergone significant changes in recent years, particularly in terms of agency engagement. The real estate agent industry has already become more competitive due to declining inventory and the emergence of third-party real estate website companies that exploited their NAR member-approved MLS access to the public.

It is important to note that there has never been a standard commission in the real estate industry. The NAR has training videos dating back nearly two decades that explicitly discourage price fixing, as it goes against the organization's code of ethics. This demonstrates that the industry has long recognized the importance of fair competition and the potential legal ramifications of engaging in anti-competitive practices.

Despite these efforts, the rise of third-party real estate websites has significantly impacted the industry. These companies, many of which are NAR members, have leveraged their access to MLS data to attract consumers and generate revenue through advertising and lead generation. This has put pressure on traditional real estate agents, who now face increased competition for clients and listings.

As a result, real estate agents have had to adapt their business models and strategies to remain competitive in the evolving market. This has included investing in technology, enhancing their marketing efforts, and focusing on providing exceptional service to differentiate themselves from both traditional competitors and new entrants like iBuyers.

Back in the day, when you wanted to buy a home, you would go to a real estate office, and a real estate agent would have a book similar to the MLS, containing all the homes listed for sale. As time went on, some third-party real estate websites, also members of NAR, put those listings online for the public. However, due to the code of ethics discouraging negative talk about its members, we cannot mention these websites by name.

Major Changes in The Real Estate Industry

The real estate industry has undergone significant changes in recent years, with the emergence of new players and technologies that have disrupted the traditional role of real estate agents and led to increased seller dissatisfaction with commission rates.

Shifting Landscape and Seller Dissatisfaction

The real estate industry has experienced significant changes in recent years, with the rise of third-party websites, iBuyers, and hedge funds. These developments have led to increased competition and a shift in the traditional role of real estate agents. As a result, some sellers have become dissatisfied with the commissions they pay to agents and the National Association of Realtors (NAR).

Perceived Value vs. Commission Rates

It is important to recognize that the real issue may not be the commission rates themselves, but rather the perceived value provided by some agents. The pandemic-driven real estate boom has attracted many newly licensed and inexperienced agents to the industry. These agents may lack the expertise and skills necessary to navigate the complex process of buying or selling a home, leading to a subpar experience for their clients.

Major Real Estate Companies and Exploitation

Impact of Third-Party Real Estate Websites

Third-party real estate websites gained popularity in the early 2000s by providing consumers with easy access to MLS data, attracting users and generating revenue through advertising and lead generation. These websites have made it easier for buyers and sellers to find properties and connect with agents, but they have also reduced the reliance on traditional agents.

Rise of iBuyers

iBuyers like Opendoor and Zillow Offers emerged in the mid-2010s, using algorithms and significant capital to quickly purchase homes, make minor repairs, and resell them for a profit. iBuyers offer convenience and speed to sellers, but they typically charge higher fees than traditional agents and may not offer the same level of personalized service.

Influence of Hedge Funds and Institutional Investors

Hedge funds and institutional investors began purchasing large portfolios of single-family homes following the 2008 financial crisis to rent out or hold as investments. These entities have intensified competition for traditional agents and contributed to housing prices outpacing inflation.

Addressing the Issue

The unusually high demand and rapidly appreciating home values during this period have created an environment where some agents may not feel compelled to provide exceptional service, as properties often sell quickly regardless of their efforts. While sellers' frustration with commission rates is understandable, the true problem lies in the failure of some agents, particularly those new to the industry, to deliver adequate value to their clients. To address this issue, the real estate industry must focus on improving agent education, training, and professional standards to ensure that clients receive the high-quality service they deserve, regardless of market conditions.

The Problem of Unethical Agents and Disgruntled Sellers

One of the industry's most pressing issues is the presence of unethical agents, particularly during the pandemic, who took on an excessive workload but ultimately failed to deliver satisfactory service, leaving many sellers dissatisfied with the process. Sellers who hire the wrong agent often face frustration and disappointment.

Unethical agents may engage in various practices that harm their clients, such as:

• Misrepresenting the condition of a property
• Failing to disclose material facts
• Steering clients towards properties that benefit the agent financially
• Charging excessive fees

It is crucial for sellers to conduct thorough due diligence when selecting an agent, carefully examining their experience, track record, and client reviews. Choosing a professional with a proven history of success and a commitment to ethical practices can make all the difference in ensuring a smooth and successful transaction.

Looking to the Future

As the real estate industry navigates this transformative period, it is essential to advocate for the dedicated real estate professionals who tirelessly serve buyers and sellers. The NAR settlement may bring about significant changes, but it is important to remember that the vast majority of agents are committed to providing exceptional service and upholding the highest ethical standards.

To the buyers and sellers out there, do not lose faith in the value of working with a skilled and dedicated real estate agent. We are here to guide you through the process, protect your interests, and help you achieve your homeownership goals. And to my fellow agents, remain steadfast and continue to do what you do best – serving your clients with integrity and expertise.

The path ahead may be challenging, but together, we can navigate this seismic shift in the industry and emerge stronger than ever. Let us demonstrate to the world what true professionalism and dedication look like in the face of adversity.