National Association of Realtors (NAR) Lawsuit: Key insights

Some major changes are coming to real estate. After a legal battle, the National Association of Realtors (NAR) has reached a settlement that restructures how realtors are paid commission fees.

At Lexawise, we want to update you about this NAR lawsuit and its possible impact. Keep reading to learn more. As a future real estate professional, this concerns you!

Understanding Real Estate Agent Commissions

Let’s start with the basics. If you’re going to work in this industry, you should know that commissions are the main way you earn money from your work.

As a licensed agent, when you help a client buy or sell a property, you get a commission fee, meaning a percentage of the property’s sale price. Of course, as in any other industry, there’s a “professional ladder,” which impacts how the earnings are divided. Brokers, who can even own their own real estate business (a brokerage firm), get a commission fee after the closing (finished deal). In contrast, agents (who work for brokers or brokerage firms) get a split from the broker’s winnings. The more experienced the agent, the better their split is.

So “the cake,” the percentage of the property’s sale price settled as a commission, is first divided between the buyer’s and seller’s brokers (The standard practice is 50/50). For example, if a house sells for $100,000 and the commission is 6%, the commission would be $6,000, $3000 for each broker. Then, they divide it among their agents, depending on their agreements.

NAR Commissions and why the problem with them

Before we dive into the lawsuit, let’s talk about how things used to be. The National Association of Realtors (NAR) doesn’t set commission rates. However, historically, the industry has operated with a commission structure ranging from 5% to 6%, with the before-mentioned commission split between the seller and buyer agents. For example, if you sell a house, you must also pay the buyer’s broker a commission. 

It also happens as a common practice in the Multiple Listing Services (MLS), databases of U.S. homes for sale that usually follow NAR’s rules. Seller brokers need to advertise a house with a commission for buyer brokers as an incentive for cooperation.

Now, here’s the problem and origin of the lawsuit: The sellers are not content with the commission fees, as they find they inflate real estate fees. From the buyer’s perspective, bigger fees mean more money added to the down payment (the first portion of the property’s price paid) and closing fees after the transaction is made.

NAR lawsuit update: the primary keys 

There’s been litigation against NAR for several years, including class-action suits from home sellers arguing that NAR’s policies inflated the commissions they paid. The lawsuit specifically targeted sellers’ 5-6% commissions and how NAR’s affiliate Multiple Listing Services operated, where buyer-seller commissions were negotiated.

After deliberation, a jury ruled that this industry practice violated antitrust laws. These laws protect buyers and sellers (and related parties) from harmful practices like monopolies, anticompetition, and price-fixing.

In response to the lawsuit, the NAR pledged they didn’t violate any antitrust laws, though they decided to settle the case. They’ve reached a proposed settlement of $418 million with groups of home sellers, changes in commission fees, and in Multiple Listing Services.

Implications of the real estate commissions lawsuit

The NAR settlement, which is subject to court approval, could have some significant implications for the real estate industry if it goes through:

1. New MLS rule: The buyer-seller commissions will be permitted only outside the MLSs through negotiations and consultation with real estate professionals. (These changes will go into effect in mid-July 2024)
2. New rule for MLS participants: Realtors working with buyers must enter into written agreements with their buyers. According to its statement, “NAR continues, as it has done for years, to encourage its members to use buyer brokerage agreements that help consumers understand exactly what services and value will be provided, and for how much”. (These changes will go into effect in mid-July 2024)
3. Increased Competition: With the NAR no longer deciding commission structures, agents might face more competition. Sellers could have more bargaining power, leading to flexible negotiations and lower commission rates.
4. Changes in Buyer and Seller Dynamics: With more information about commission structures at their fingertips, buyers and sellers may become more informed and engaged in negotiations. That could lead to better-informed decisions and impact how agents navigate these conversations.
5. Shift in Agent Compensation Models: Agents might have to rethink their business models and find new ways to justify their commissions. That could mean specializing in specific areas, offering value-added services, or adopting performance-based commission models.
6. Cheaper house prices: Though it is yet to be confirmed, the commission’s decrease could lower housing prices.

Now, it’s important to remember that the long-term impact of this settlement is still unfolding. However, the real estate commissions lawsuit represents a significant shift in the structure of real estate commissions. We might see more transparency, increased competition, and greater negotiation flexibility, empowering consumers to make more informed decisions.

Summarizing

There you have it! We’ll keep a close eye on the NAR lawsuit updates and keep you in the loop. Understanding the changes in this real estate agent commissions lawsuit is crucial, especially if you’re studying for the real estate exam. So stay tuned for more updates and prepare for an exciting and ever-evolving real estate industry.

Remember, these changes aren’t something to be alarmed about. Instead, they present an opportunity for positive transformation within the real estate market. Let’s embrace the winds of change and see where they take us!

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