Understanding the NAR Settlement

By Thomas Hayostek JD/Bar Candidate  

In April 2024, the NAR agreed to a $418 million settlement resolving nationwide antitrust litigation arising over claims from home sellers related to broker commissions. In Burnett, a jury found NAR and other nationwide brokerage firms guilty of colluding to artificially raise seller commissions. 

During the cooperative compensation era, seller-side brokers would list the property on their brokerage’s affiliated Multiple Listing Service (MLS). Within that listing, the seller’s agent would indicate what the buyer-side agent’s commission would be if an agent’s client purchased the home. Thus, in the old system, the buyer rarely paid any commissions directly to their agent. While commission amounts and the splits between agents have always been negotiable, the common practice was a commission equal to about 6% of the listing price, which would be split evenly between buyer and seller agents. All of this information would be provided directly in an MLS listing. Homebuyer brokers had the ability to sort relevant listings based on their expected commissions.    

In Burnett, the sellers successfully argued to a jury that these procedures incentivized homebuyer brokers to discriminate against listings that would pay a lower commission. The Burnett litigation was one of more than 20 similar cases filed against NAR and other major brokerages. The agreement will fundamentally change how broker commissions are earned and paid in the US residential real estate market.  

Starting August 17, 2024, seller agents are no longer permitted to make any reference to homebuyer agent commissions within an MLS listing. Now, prior to any physical or virtual house tour, homebuyers must enter into a written agreement with their real estate agent, outlining the compensation the buyer will pay to the homebuyer’s agent upon the sale. A seller also may no longer offer a bonus or other financial incentive to a buyer’s broker for completing the transaction, and the buyer’s agent is forbidden from receiving any additional compensation for brokerage services that exceed the amount agreed upon in their agreement with the buyer. 

To be clear, homebuyer agents may still negotiate a cooperative compensation agreement with a seller’s agent, but only if these discussions are not made utilizing an MLS platform. Thus, homebuyers will not necessarily be required to come up with their agent’s compensation out of pocket. Further, a homebuyer may still negotiate concessions with a seller to account for the additional expense that a buyer must now cover. However, these options have shifted from industry standards to mere bargaining chips. A seller (or seller’s agent) with a coveted listing can refuse such a request and likely find a buyer who will pay the seller’s full listing price while separately paying the homebuyer agent’s commission.  

Homebuyer’s Written Agreement Requirements 

The written agreement between the homebuyer and their agent must include the following information:  

1. A specific and conspicuous disclosure of the amount or rate of compensation the agent will receive. If the agent will receive compensation from other sources, the agreement must indicate how this amount will be determined. 
2. The amount of compensation must be objectively ascertainable. Open-ended compensation amounts, i.e. a range of potential compensation, are prohibited.  
3. A term which prohibits the agent’s compensation from exceeding the amount or rate agreed to by the buyer in the agreement  
4. A conspicuous statement that broker fees and commissions are fully negotiable and not set by law 

When is an Agreement Required? 

The new regulations are triggered when an MLS participant (agent) is working with a buyer and that buyer tours a home. The MLS participating agent is not “working with” a client if the agent is hosting an open house and the client attends. The agent is also not “working with” a client if the agent is working with the seller and, on behalf of the seller, provides an unrepresented buyer access to a home the agent has listed for sale.  

However, an agent is “working with” when the agent’s services are aimed at providing a direct benefit to the individual client. A non-exhaustive list includes tasks such as (1) identifying potential properties that fit the buyer’s goals, (2) arranging for a buyer to tour a property where the agent is not the listing agent, (3) negotiating on behalf of the buyer or (4) presenting seller’s offers and counter-offers to the buyer.  

The agreement should conspicuously specify what services the broker is providing to the buyer and how much the buyer will pay the broker for these services.  

Impact to Residential Real Estate  

The new regulations may create more obstacles for first-time or low-income buyers. Many buyers struggle to save up for their down payment, now they may be required to save more money to account for their agent’s commission. Sellers may be required to take less money than they may have previously gotten for the same property in the same market, or sellers may be able to simply pocket the commission that used to be paid to the buyer’s broker from the sale proceeds. 

 NAR claims there will be no change in the overall cost to buyers or sellers, this agreement will merely change the mechanisms in place for how an agent will be paid and who will pay the agent. There is some skepticism regarding NAR’ outlook, as others feel the regulations will likely lead to a reduction in commissions for agents. A recent study conducted by Keefe, Bruyette & Woods suggested the annual $100 billion in real estate commissions could face a reduction of up to 30%, resulting in as many as 1.6 million agents facing a loss of income.  

Overall, the impact of the new regulations on the residential real estate market will be proven in the coming years. 

Any Impact to Commercial Real Estate? 

The NAR settlement is focused mostly on residential real estate transactions and the commercial real estate transactions should not be affected. In many markets, commercial real estate listings are listed in a commercial information exchange (CIE) rather than an MLS. These CIE listings often do not include an offer of compensation. Further, commercial real estate transactions will not be subject to the written agreement requirement.  

The settlement awaits final court approval, with the hearing set in November 2024.

Curious about the NAR settlement and how this changes business practices for real estate professionals in California? Contact us for legal advice and guidance at 310-619-4941.