How the NAR Landmark Settlement Will Change the Way You Buy a Home

Buying or selling a home might look very different soon. In recent weeks and months there has been a great deal of press about the March 2024, National Association of Realtors (NAR) settlement for the $419 million antitrust lawsuit brought by home sellers. The NAR is an industry trade group that most realtors currently belong to and by being members, they agree to certain practices. This landmark settlement will impact around 50 million people who paid commissions on homes sold in recent years, potentially allowing them to receive a portion of the settlement. The NAR has also agreed to implement significant changes to longstanding practices related to real estate sales commissions moving forward. 

I felt that this is an important topic you should be aware of if you are in the market to purchase a new home – especially first-time buyers, as well as anyone planning to purchase real estate as an investment or preparing to retire and sell your home.

Background

For decades, many real estate agents were almost compelled to join NAR and adhere to its rules, particularly those regarding the local Multiple Listing Services (MLS). The MLS is a national database used by brokers to list property information. Traditionally, listing brokers would split the seller-paid commission with the buyer’s agent, with these amounts only visible to agents via the MLS.

Plaintiffs in the lawsuit argued that NAR’s practices artificially inflated commissions. They claimed that requiring sellers to pay commissions to brokers on both sides of a transaction upheld a national standard of five to six percent of the sales price.

Key Changes

Effective August 17, 2024, the NAR will introduce new policies on how real estate brokers are compensated – here are the key changes as we understand them:

1. No Advertising of Buyer’s Broker Commission:
   • Sellers can no longer advertise the commission for buyer’s agents.
   • Buyers’ agents will need to sign an agreement with buyers for a set fee or percentage, paid directly by buyers.
2. Shift in Payment Burden:
   • Previously, sellers paid the buyer’s broker from the sale proceeds. Often a 6% commission was split between buyer’s agent and seller’s agent.
   • Now, buyers must pay their brokers out of pocket, which current lending practices do not support. Or negotiate with the seller.
3. Impact on Buyer’s Brokers:
   • The settlement is likely to lower the income of buyers’ brokers, potentially by 25% to 75%.
   • This could lead to fewer brokers willing to show homes listed by NAR realtors.
4. NAR vs. non-NAR Agents:
   • Non-NAR agents can still advertise buyer’s broker commissions, giving them a competitive edge.
   • NAR can no longer exclude non-members from using the Multiple Listing Service (MLS).
5. Potential Consequences:
   • Higher membership costs may lead many agents to cancel their NAR memberships.
   • The possible dissolution of NAR could impact its educational programs, ethics standards, and the MLS platform.
   • The overall process of buying and selling property might revert to older, less efficient practices.
   • Buyers who are unwilling to pay a buyer’s broker directly might have to find homes themselves and work directly with the seller’s broker.

What Are the Implications for Buyers and Sellers?

The changes introduced by the NAR settlement aim to foster more negotiation room and competition, potentially lowering costs for sellers. Historically, commissions have been embedded in transaction prices, so reducing sellers’ costs might lead to lower home prices.

Economists predict that commissions could drop by as much as 30% if buyer’s agents face pressure to discount their fees. However, these savings aren’t guaranteed and will largely depend on market conditions and how all parties adapt to the new rules.

Real estate brokerages face various overhead costs, including rent, liability insurance, and marketing. Agents typically split their commissions with brokers (ratios vary) or pay fees to their company. Experienced buyer’s agents, who are used to receiving comparable commissions to listing agents, may resist working for lower fees, even with the need to regularly justify their value.

Buyers will now negotiate and pay their agents’ commissions, but the payment method might vary. Offers could be contingent on the seller covering the buyer’s commission share, or there could be requests for a credit toward closing costs to cover the agent’s fee. Current lending guidelines prevent most buyers from adding commission costs to mortgages, though there has been a temporary suspension of a VA loan rule prohibiting borrowers from paying agent commissions.

Some sellers might still choose to cover buyers’ commissions in order to make their property more attractive to sellers. This may be more common when there is a surplus of properties on the market, sometimes known as a buyer’s market.

Online real estate platforms have made it easier for buyers to shop without agents, potentially prompting more buyers to navigate the market independently. However, buying a home is a complex and significant financial transaction, where professional guidance can be invaluable, particularly for inexperienced buyers or those unfamiliar with the local market.

It will be a new world after the settlement takes effect August 17th, 2024. Sellers who sign a contract with a broker after that date can refuse to pay a buyer’s broker and negotiate lower commissions. Buyers might find agents who refuse to show them certain properties where the seller is not allowing commission splitting with the buyer’s agent. There might also be fewer properties listed in the MLS and more exclusive properties. This may make finding a home more difficult and even raise the buyer’s costs. 

All information has been obtained from sources believed to be reliable, including Broadridge Advisor Solutions, The Wall Street Journal, The New York Times, and National Association of Realtors, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such.