Real Estate Post $418M National Lawsuit Against NAR and Real Estate Brokers

As we approach August 17th, 2024, significant changes are on the horizon for the real estate industry, impacting Realtors and reshaping how business will be conducted. This article aims to provide insight into the industry's evolution, outline the upcoming changes, and equip Realtors with the knowledge to adapt effectively. Before delving into the intricacies at play, let's familiarize ourselves with key real estate terminology and understand the dynamics shaping the industry landscape.

Definitions:

What is NAR?

NAR is an acronym for the National Association of Realtors, the leading national trade organization for Realtors and Brokers. It is responsible for enforcing rules, policies, and practices adopted by 1,400 local associations that house approximately ~1.4M real estate agent members across the United States. NAR has often been called the largest lobbying group in this country, and all Realtors pay an annual fee to belong to it.

What is a local association?

Local associations are sub-boards of NAR based on location that are governed by the rules and regulations at the NAR level, e.g., BNAR—Buffalo Niagara Association of Realtors, and GRAR—Greater Rochester Association of Realtors. These associations are independent membership-based boards that function as self-governed organizations and provide various benefits to real estate board members. And you guessed it, Realtors pay annual fees to be members of these boards as well.

What is an MLS?

The United States has between 700 and 800 multiple listing services (MLSs). These joint ventures comprise competing Brokers that publish and share information about homes in a given geographical area. All realtors pay fees to belong to the local MLS. The homes for sale on Zillow are sourced directly from the MLS. 

Background: 

In 2019, a groundbreaking class action lawsuit was initiated by a home seller against NAR and four major real estate brokers, including Realogy, HomeServices of America (Berkshire Hathaway), RE/MAX, and Keller Williams Realty, alleging price-fixing of commission rates within the industry. This legal battle sparked a wave of similar lawsuits, totaling 27, challenging the status quo. Despite initial assurances from Brokers that the situation would remain unchanged, the reality unfolded differently. Following the lawsuit and subsequent appeals, settlements began to emerge. In September 2023, Re/MAX settled for $55 million, while Anywhere (Realogy) settled for $83.5 million. Subsequently, in October, a Kansas City jury found Keller Williams Realty and HomeServices of America guilty of conspiring to uphold inflated commission rates. By February 2024, Keller Williams had agreed to a $70 million settlement, and in March 2024, the National Association of Realtors reached a landmark $418 million settlement to address the commission disputes.  

How We Got Here:

Before the lawsuit, sellers and their listing agents would establish the total commission for selling the home, typically ranging from 5% to 7%. Within the listing documents, there was a predetermined agreement on how much commission the buyer's agent would receive upon a successful closing, typically between 2% and 3%. Due to these predetermined commission amounts set before the listing went live, the commission rates, which are always negotiable, were not subject to further negotiation. Additionally, real estate brokerages had internal policies dictating the minimum commission to the buyer's agent based on the gross commission income percentage per deal. Most realtors and brokers have yet to acknowledge this practice openly.

For example, in certain brokerages, if you listed a property at 5%, you were required to allocate a minimum of 2.5% of the commission to the buyer's agent. As a member of that brokerage, you were not permitted to retain 3% of the commission on the listing side and offer only 2% to the buyer's agent. Additionally, if you listed a property at less than 5% total commission, you still had to provide a minimum of 2.5% commission to the buyer's agent. If you represented a seller and listed a property at 4%, you would only receive 1.5%. Similarly, listing a property at 3.5% would result in a 1% commission for your efforts, a situation that most Realtors found challenging for business.

These internal policies ensured that most of the 1.4M Realtors affiliated with NAR consistently sold at least 5% of total commission packages to sellers. Because the compensation for the buyer's agent was predetermined before a listing went public, the commission amount paid to the buyer's agent was never subject to negotiation. These practices effectively insulated the industry, guaranteeing that all buyer's agents received a minimum of 2.5% commission. This ensured percentage applies regardless of their track record, skill level, or the quality of service they provide to their clients

Changes Resulting From the Lawsuit Settlement:

• The proposed settlement with NAR requires NAR to repeal, eliminate, or modify its rules, practices, and policies, which the Division alleges violate antitrust law. Under the terms of the settlement, memorialized in the proposed Final Judgment, NAR and its Member Boards must not adopt, maintain, or enforce any Rule or enter into or enforce any Agreement or practice that directly or indirectly: 
  • Prohibits, discourages, or recommends against an MLS or MLS Participant publishing or displaying to consumers any MLS database field specifying the compensation offered to other MLS Participants;
  • Permits or requires MLS Participants, including buyer brokers, to represent or suggest that their services are free or available to a client at no cost to the client;
  • Permits or enables MLS Participants to filter, suppress, hide, or not display or distribute MLS listings based on the level of compensation offered to the buyer broker or the name of the brokerage or agent. 
  • This act prohibits, discourages, or recommends against the eligibility of any licensed real estate agent or broker from accessing, with seller approval, the lockboxes of properties listed on an MLS.
  • If you are a buyer and your agent is using an MLS, you must sign a written agreement with your agent before touring a home so you understand precisely what services will be and for how much.

Tips For Realtors:

Below are tips to help you navigate these upcoming changes: 

Focus on transparency and start listening to your customers.

• Be proactive about discussing value propositions with buyers.

• Document your business with NDAs and commission agreements to protect your clients and your involvement in deals.
• Find software solutions that aren't owned by companies competing with you to help you manage the enormous amount of tasks that Realtors have to do to be successful and get paid.
• And as Stephen Covey says, "Never stop sharpening the saw." 

Documents to Help:

Template, Commission Agreement Buyer, One Property:

https://docs.google.com/document/d/1y3AnV7lZlCc3tvm5dHjfBDpqoto1K93v0JA98aOfiG0/edit

Template, Commission Agreement Buyer, Multiple Properties:

https://docs.google.com/document/d/1uu5iR7FMWaLABF0XWtlJnmDIBJbpWRybRtqf--MD9vw/edit

Template, Exclusive Right to Represent Buyer Agency Agreement:

https://docs.google.com/document/d/1cjFQ7aQD4jpQ7k6MtpIZ9CbBJSVn_RzjNrfFqlk45Tc/edit

Non-Disclosure Agreement:

https://docs.google.com/document/d/1DS19-jHJDzOwcbyiLn4T6qH0Z5X2LRm02qlC2d0p2kw/edit