The NAR Lawsuit & What It Means To The Consumer

In recent times, the real estate industry has been shaken by significant class-action lawsuits alleging antitrust violations by the National Association of Realtors (NAR) and four major real estate brokerage franchisors. These lawsuits claim that NAR and the franchisors conspired to require home sellers to pay inflated commissions to buyer's brokers, violating federal and state antitrust laws. At the core of the allegations is an NAR rule mandating a non-negotiable offer of buyer broker commissions on Multiple Listing Service (MLS) platforms, effectively stifling competition and maintaining artificially high commission rates and home prices.

The National Association of Realtors (NAR) has agreed to pay $418 million in damages over four years to resolve claims against the organization, its members, state and local Realtor associations, and association-owned multiple listing services. The agreement, subject to judicial approval, also applies to brokerages with NAR as a principal member, whose 2022 residential transaction volume was $2 billion or below. NAR has opted to change some policies, including guidelines for broker compensation and MLS participation rules, effective July 2024. The organization denies wrongdoing, citing the introduction of these rules in the 1990s to enhance consumer protection. This settlement follows a Kansas City jury's ruling against NAR and major brokerages in the Sitzer/Burnett case, which included $1.8 billion in damages. Other defendants, including Anywhere Real Estate, RE/MAX, and Keller Williams, have also settled for significant amounts.

However, amidst the media frenzy surrounding these lawsuits, it's essential to debunk some false claims that do not apply to New Jersey and address additional considerations that may impact buyers, sellers, and agents alike.

First, contrary to popular belief, home sellers do not directly pay the buyer's broker/agent. Instead, commissions are paid to the listing agent upon closing, who may then offer a commission split to the buyer's broker. This amount is determined by the listing agent and seller prior to signing the listing agreement. For the past generation until now, it could be argued that the buyer was ultimately funding the transaction and indirectly paying all parties involved, including the listing agent and the buyer's agent, through the purchase price of the property. With the new proposed rules, the buyer will technically still be paying both the listing agent and the buyer’s agent, but in a more complicated way.

Second, contrary to the false claims in multiple articles, all commission rates are negotiable and have always been this way. Commission is decided and negotiated by the listing agent and seller through the initial listing agreement. In section 3 of the NJ Listing Agreement the wording is as follows, “AS SELLER/LANDLORD YOU HAVE THE RIGHT TO INDIVIDUALLY REACH AN AGREEMENT ON ANY FEE, COMMISSION OR OTHER VALUABLE CONSIDERATION WITH ANY BROKER. NO FEE, COMMISSION OR OTHER CONSIDERATION HAS BEEN FIXED BY ANY GOVERNMENTAL AUTHORITY OR BY ANY TRADE ASSOCIATION OR MULTIPLE LISTING SERVICE”.

Third, there is also no requirement to put in a commission split on the MLS. While it was “required” to put in nominal or percentage split, there was no set amount it needed to be, allowing you to put anything from $1 (no-split placeholder) or greater. After this ruling effective mid-July, there will no longer be an option advertised listing the commission split or any offering thereof.

Moreover, this ruling has broader implications beyond commission structures. It could lead to increased legal scrutiny within the real estate industry, potential market instability, and the need for consumer education on navigating the changes effectively. On the other hand, the ruling may spur innovation within the industry, prompting the development of new business models and services to adapt to evolving market dynamics. Regional differences in market practices and economic factors may also influence the implementation and impact of the ruling in different areas.

Finally, crucial service providers, such as attorneys, may need to reassess their fees in response to changes in agent commission structures. These changes may result in a possible increase in their encumbered workload if folks opt to forego hiring an agent, causing fees to increase. Long-term effects of the ruling remain to be seen.

Below I wanted to point out some of the pros and cons this ruling will have on both buyers and sellers.

 Pros for the Buyer:

1.     Potentially Lower Costs: Reduced commissions could lower overall home-buying costs for buyers.

2.     More Negotiating Power: Buyers may have more negotiating power as they could potentially negotiate lower commissions with their agents.

3.     Increased Access: Lower commissions might make homeownership more accessible to a wider range of buyers, particularly first-time buyers or those on a tighter budget. As you will read below, this may also back-fire.

4.     Market Flexibility: With agents setting their own commission rates based on offered services, buyers may have more options and flexibility in choosing an agent who offers competitive rates or additional services.

Cons for the Buyer:

1.     Quality of Service: Lower commissions might lead to reduced services or support from agents who may prioritize higher-paying clients.

2.     Limited Agent Selection: Buyers might face challenges in finding experienced or reputable agents if they opt for lower commission rates.

3.     Potential for Conflicts of Interest: Buyers may question the loyalty of agents who are incentivized to prioritize higher-paying sellers or transactions.

4.     Market Impact: A significant reduction in commissions could impact the number of agents available in the market, potentially affecting the quality of service and expertise available to buyers.

5.     First Home Buyers, FHA, VA, and Affordable Housing Clients: If FHA or VA homebuyers are unable to pay their agent upfront and agents are unwilling to work with alternative payment structures, they may have limited options when selecting an agent to represent them in the home buying process. Agents that do choose to work with them may offer less in terms of services, time, and assistance.

6.     Potentially Higher Costs: With commission no longer baked into the transaction, this extra cost could be devastating to a buyer. Even if prices drop to reflect the new commission structure as the DOJ says (yeah right!), this may lead to increased competition, overall bringing prices right back up. I personally do not foresee sellers dropping their price tags solely because they are no longer offering a higher commission to cover both the listing agent and buyer’s agent. Many sellers will see this as an opportunity to increase profit.

7.     Dual Agency Dilemma: Some buyers may choose not to hire a buyer’s agent at all. As a result, the buyer would go straight to the listing agent. Since the listing agent holds no fiduciary responsibilities towards the buyer and likely will not receive extra compensation for facilitating both sides, it is easy to see how many will be taken advantage of in this process.

Pros for the Seller:

1.     Reduced Costs: Sellers may benefit from lower commission rates, leading to reduced expenses associated with selling their homes.

2.     Greater Control: Sellers will feel they can negotiate commission rates more freely and direct with their agents, potentially resulting in more favorable terms and increased control over the selling process.

3.     Market Competitiveness: Lower commissions could make selling a home more competitive, attracting more potential buyers due to an “in theory” more competitive price as the plaintiffs argued.

4.     Increased Profit: With lower commission rates, sellers may retain a larger portion of the sale proceeds, resulting in higher net profits from the transaction.

Cons for the Seller:

1.     Quality of Service: Reduced commissions may lead to a decrease in the level of service provided by agents, potentially impacting the marketing and sale of the property.

2.     Limited Agent Interest & Exposure: Agents may be less inclined to invest time and resources into selling properties with lower commission rates, potentially leading to reduced attention and effort from agents.

3.     Market Perception: Buyers and agents may perceive properties with lower to no commission rate split as less desirable, of lower quality, or even signaling a difficult seller; potentially impacting the property's marketability.

4.     Potential for Limited Agent Pool: Sellers may have fewer options when selecting an agent, as some agents may choose not to work with sellers offering lower to zero commission rates/splits.

5.     Increased Negotiation Time: As consumers become more aware of their rights and options regarding commission negotiations, they may actively seek out agents and brokerages willing to negotiate terms that align with their preferences and financial goals. For example, a seller may find more potential buyers asking for negotiations regarding concessions, repairs, and commissions for their buyer agents. This heightened awareness could drive further negotiations in the real estate transaction process overall lengthening closing time.

In conclusion, while the antitrust lawsuits and subsequent ruling have significant implications for the real estate industry, it's essential to approach the changes with a detailed understanding of the complexities involved. By addressing false claims and considering additional factors, we can provide a more comprehensive analysis of the impact on buyers, sellers, agents, and the broader real estate market.