N.A.R. Settlement: Understanding the Impact

On October 31, 2023, a jury reached a verdict in a class-action lawsuit brought by home sellers nationwide against the National Association of Realtors (N.A.R.) and several major real estate brokerages. The jury found these parties liable for over $5 billion in damages due to their involvement in a scheme to artificially inflate real estate commissions. Earlier in March, N.A.R. had already announced a settlement in this case, agreeing to pay more than $400 million to the plaintiffs and implement key changes to the commission structure.

While the financial aspects of the settlement grabbed headlines, after deducting attorney fees, the estimated payout per member of the plaintiff class of 21 million homeowners might be as low as $13. However, the more significant outcome for home sellers and buyers are the changes to how real estate agents will now be compensated.

The media’s initial coverage of the settlement led many to believe that real estate agent fees would be substantially reduced, resulting in significant savings for home sellers. However, these reports often oversimplified the situation and did not fully explain how the proposed changes would truly affect real estate transactions.

Upcoming Changes

Two major changes are set to take place. The first and most immediate change is the requirement for a buyer representation agreement. This agreement formalizes the relationship between a buyer and their real estate agent, outlining the agent's duties and how they will be compensated by the buyer. Starting August 17, buyers must sign this agreement before their agent can begin showing them properties.

The second significant change is that home sellers will no longer be allowed to advertise cooperating commissions for buyer’s agents through the Multiple Listing Service (MLS). If a seller chooses to offer a commission to a buyer’s agent, this must be communicated outside of the MLS, such as through a property website, digital ads, or direct communication between the buyer’s and seller’s representatives.

Impact on Buyers

So, how will these changes affect homebuyers? Moving forward, buyers will need to sign a contract with their real estate agent that specifies the fee for representation during a real estate transaction.

There are likely three ways this fee could be covered:

• Seller Compensation: To attract more offers, sellers may still offer compensation to the buyer’s agent. However, if the compensation is less than what the buyer agreed to pay their agent, the buyer must cover the difference. Conversely, if the seller offers more than the agreed-upon fee, the excess compensation would be retained by the seller.

• Direct Payment: Buyers might pay their agent directly at closing, along with other closing costs like loan origination fees, title, escrow fees, and transfer taxes. This scenario requires buyers to have extra cash available beyond their down payment and closing costs.

• Negotiating with Seller: Buyers can ask the seller to cover the agent’s fee as part of their purchase offer, similar to how things worked previously. The key difference now is that the buyer negotiates the fee with their agent, rather than the agent accepting the commission offered by the seller.

Impact on Sellers

For home sellers, the process will largely remain unchanged. Sellers will still negotiate the commission they pay their listing agent and have the option to offer a commission to the buyer’s agent. If they choose not to offer compensation to the buyer’s agent, they can expect that buyers may include a request for the seller to cover this fee as part of the purchase offer.

Paying Commission

How will homebuyers cover the cost of their agent’s representation? As mentioned, buyers can ask the seller to pay the fee as part of the purchase offer, but sellers are not obligated to accept this and may choose offers that don’t require them to pay the buyer’s agent fee.

Alternatively, buyers can finance the fee by rolling it into their mortgage. However, this approach has potential drawbacks. If the property appraises for less than the purchase price, the buyer may need additional cash to cover the difference. Moreover, most lenders require a loan-to-value ratio of 80% or less; going beyond that could necessitate Private Mortgage Insurance (PMI), which would increase monthly payments and possibly make the loan unaffordable for the buyer.

Given this new landscape, buyers have several options: they can represent themselves, hire a lawyer to navigate the transaction, or pay for the services of an experienced, licensed real estate agent. The value of a professional agent extends beyond the transaction itself; they can provide financial guidance, connect buyers with mortgage brokers, help target the home search to affordable properties, offer advice on home value improvements, and negotiate with the listing agent on behalf of the buyer.

Conclusion

The changes resulting from the N.A.R. settlement are likely to benefit both buyers and sellers. Buyer’s agents will need to clearly demonstrate their value to justify their commissions, which could lead to higher standards of professionalism and better representation in the industry. If you have any further questions about the settlement, real estate commissions, or other related topics, feel free to reach out to schedule a discussion.