My Thoughts on the NAR Lawsuit

NAR lawsuit

judge

As of Friday March 15th, NAR has reached a potential settlement that is subject to court approval. A lot of people may not be aware, but The DOJ is heavily involved in the background of the case so it will need to pass their smell test even after the judge signs off. 

The agreement would resolve claims against NAR, over one million NAR members, all state/territorial and local REALTOR® associations, all association-owned Multiple Listing Services (MLSs), and all brokerages with an NAR member as principal that had a residential transaction volume in 2022 of $2 billion or below.

The below is a breakdown of the agreement:

  • Release of any liability for virtually all NAR members, brokerages, associations, and MLS’s. 
  • No more compensation listed on MLS.
  • Compensation will be negotiated off MLS.
  • Mandatory written agreements for MLS participants taking the role of a buyer’s agent. 
  • Realtors no longer need to be associated with NAR.
  • Realtors will not be required to list properties on MLS.
  • 418M settlement payment over 4 years. 

The new rules will take effect in mid-July of 2024, which is much sooner than anyone had anticipated. I’ve thought a lot about this over the past year or so when I realized how much of an impact this could potentially have on the industry as a whole. So what will the industry look like after all this happens? In order to break this down properly, I will need to go back and explain a lot in order to get everyone on the same page. Eventually, I’ll go into detail on things that will most certainly be the new norm, and as I get towards the end I will talk about what I think will happen as time goes on. 

So how did we actually get here in the first place? 

Where to even begin… Think of NAR as the top of the pyramid. Under NAR, you have state associations (Illinois Realtors Association), and under state associations you have more local associations like CAR (Chicago Association of Realtors). All associations generally look to NAR when it comes to implementing guidelines, practices, ethics, standards, etc., so they are all very much intertwined with one another.

If you are not familiar with the MLS, it stands for Multiple Listing Services. This is where virtually all listings come from. Agents like myself will plug a listing in the MLS, and BAM it gets syndicated to all sorts of platforms consumers would be using when looking for properties, like Zillow, Homes.com, Realtor.com, etc. MLS’s vary by association. Some associations outright own their respective MLS, and other associations hire an outside company to provide an MLS. For example, CAR’s MLS is actually owned by a private company called MRED. 

The practice of posting listings in the MLS, generally owned by “chapters” of NAR, has been common practice since the 1920’s. This exclusivity has always been INCREDIBLY valuable to the industry incumbents since it was not accessible to consumers, effectively making real estate agents listing “gate-keepers”.

The internet more or less changed all of this. NAR saw the rise in popularity of the internet as a direct threat. They made various attempts to withhold listings from syndicating to other sites until they were sued in 2008 by the DOJ and reached a settlement. 

This is what allowed companies like Zillow and other listing aggregators to become so popular. Companies like Zillow actually pull all their listings from the MLS’s. Yes, you can list directly on Zillow, but 99% of their listings TO THIS DAY are syndicated directly from the MLS’s. It was at this moment when NAR was no longer the “information gatekeeper” of listings. 

With the rise of these listing aggregators came all sorts of business models. Zillow, for example, is probably the most popular home-searching platform in the US. But how do they make money? 

Zillow’s main source of revenue comes from their “Premier Agent Service''. In order to capitalize on all of the eyeballs searching on their platform, they sell these leads to agents like myself. We pay a monthly rate for a certain zip code, and in return we receive leads that we look to convert into clients. Some agents operate on what is called a “Flex Program”, where you receive these leads and pay a referral only if they end up transacting through you as a buyer’s agent. This program is reserved for only a select few agents who have a proven track record of converting leads at an incredibly high level.

When someone inquires about a property on Zillow, they get routed to an agent who is not affiliated with the property and assumes the role of a “buyer’s agent”. This might sound off-putting, but it’s actually not a bad deal for the consumer because it allows for them to receive outside representation. This is important because the listing agent has a fiduciary duty to the seller, not a potential buyer. 

This brings me to dual agency. Dual agency is when the seller’s agent represents both the buyer and the seller on the same property. Dual Agency is frowned upon in the industry and is outright banned in some states due to ethical violations. The problem with dual agency, in my opinion, is that you can’t have a fiduciary relationship with both a buyer and a seller while also offering quality services. The vast majority of lawsuits pertaining to real estate transactions stem from dual agency. Think about it this way… If you were to get divorced from your spouse, would you want to share the same attorney or would you rather have two separate attorneys? It just doesn’t make sense. Dual agency is something I personally will not practice. 

Side note: Prior to the 1980’s, buyer’s agents didn’t really exist. Consumers would basically have to go shop around at various brokerages and would have to pay just to see listings. If a consumer found a home they wanted to offer on, then they were assigned to a ‘sub-agent’, which was generally selected by the direction of the listing agent. Both the subagent and listing agent worked for the seller. Buyer’s had no actual representation throughout the process and were oftentimes taken advantage of. 

Now on the other hand, you have companies like Homes.com (owned by Costar, and I will talk more about them later on) who are famous for the mantra “your listing, your lead”. This is a complete opposite business model of Zillow. They are connecting potential buyers directly to the listing agent because they feel that the lead belongs to them as it is their listing.

So my point is that there is more than one way to skin a cat. This is why, for example, Costar stock was up 8.32% and Zillow stock was down 13.9% at the closing bell. The market is picking the winners and losers of the settlement based on their respective business models. 

Now back to NAR… It has always been NAR practice, and therefore local MLS’s practice, that in order to participate in the MLS, the seller’s agent had to list some kind of cooperative compensation to buyer’s agents. It could be as low as 1 penny, but there was never an option to not offer a buyer’s agent compensation. This was an obvious problem when some MLS’s allowed agents to filter listings based on compensation. Some agents would allegedly set filters for properties only advertising a minimum commission that was agreeable to them. As a result, these listings offering lower commissions would not receive the same level of interest. 

This rule was changed in 2020 by NAR through pressure from the DOJ. NAR agreed to allow seller’s agents to list on the MLS without offering buyer’s compensation. 

And this brings us to the Sitzer/Burnett case… Listing agents, like myself,  will now no longer be allowed to list any compensation whatsoever on the MLS as of mid-July of 2024. Big change. The plaintiffs main argument was that commissions should be split equally between buyers and sellers. 

With this change, buyer agreements will become commonplace (assuming this settlement is approved by the DOJ). In the past, I have never felt the need to have a client sign off on a buyer’s agreement. What is a buyer’s agreement? It’s an agreement between a buyer’s agent and a buyer where the buyer would pay a commission to the buyer’s agent in the situation that commission is not provided through a seller’s agent. Naturally, a lot of buyer’s will not be happy with this new change. 

Previously, buyer’s agents were generally compensated through the listing agent. The listing agent negotiates a commission percentage with the seller of a property, and then advertises a buyer’s agent commission to be paid out from the total compensation package when they put it on the MLS. From my experience, 2-4 unit properties, commercial properties, and foreclosure properties are generally where you might see lower commissions. 

Moving forward, agents, like myself, who are participating on the MLS will now be REQUIRED to sign agreements with buyers that specify a commission amount to be paid from the buyer to the buyer’s agent for their services. 

I am not sure exactly how this will play out. My initial thoughts are that residential RE will just be more like commercial RE. In commercial real estate, you generally submit an LOI (letter of intent) that covers a variety of items, including commission. Some agents will outline the requested commission directly in the LOI, but I have also seen some agents outline commission separately in a commission agreement. Regardless of whether not a listing agent for a commercial property is offering a commission, a buyer’s agent in most situations would still attempt to negotiate some kind of commission from the seller. From there, the two parties go back and forth until a deal is struck. Generally, the commission is negotiated separately from other items, but nonetheless it is still negotiated. 

There are not a ton of resi agents that have experience in both resi and commercial, and vice versa. The vast majority of resi agents do not touch commercial and have never put together an LOI. I happen to have experience in both, which is why I do not think that this change will not be as big much of an impact. 

For commercial RE, there isn’t really a centralized market platform where properties are listed like there is for residential. The three main platforms are the MLS, Costar Loopnet, and Crexi. Additionally, a lot of commercial real estate brokerages do not even list properties anywhere and instead keep them in-house for their agents to work internally. This is why navigating the commercial RE landscape is a lot more challenging and also why some investors don’t use representation on the buy-side. They’re experienced enough to represent themselves, but having access to the right properties is much more valuable in commercial RE versus residential… Rather, it was. 

My biggest concern is how this could create an uncompetitive playing field for smaller brokerages. I am a part owner of a small brokerage, and I have some serious concerns moving forward. I feel that a lot of agents in our industry could flock to the companies that have larger market shares in order to chase the inventory. What is to stop some of the larger shops from having their own internal MLS that is only accessible to agents within their company? Once one company does it, then another does it and we are back in the stone ages where no one is sharing listings with each other at all and it is the wild west. 

This would not only make it incredibly difficult for the consumer to navigate, but it would also make it incredibly difficult for the Realtor to navigate as well. This is why it is important to have some kind of centralized MLS. At the very least, I could see firms offering accessibility to their inventory from outside agents at a monthly fee. So agents would have to subscribe to a bunch of different companies' websites in order to have access to inventory for a monthly fee. This would not be an ideal solution for the consumer or an agent and will lead to increased overall costs.

Some agents could have buyer’s agreements that will require buyers to pay a commission for their services regardless of whether or not they receive compensation from the seller. I truly think that this could happen, and it will mean that the buyer’s agent could actually make more than they otherwise would have under the old model because they have the opportunity to receive compensation from both seller and buyer. However, I think the majority of agreements will state that the compensation will only kick in if they are unable to secure a specified amount from the seller’s agent. Or maybe the seller’s agent won’t offer any commission, and it all comes from the buyer? Who knows, but I think the immediate steps for a buyer’s agent will be to seek commission from the seller’s agent, and if that fails then they will fall back on the buyer’s agreement. 

Unfortunately, I think that this will actually hurt the consumer in the long run. Think about the first time home buyer who is planning to put down as low as 3.5% and has never transacted real estate before. Or what about the veteran putting 0% down on a VA loan? It’s ridiculous to have them pay a commission in my opinion. But what if instead of seeking representation, they decide to represent themselves in order to save money? And what if on the other side of the deal, there is a savvy Realtor they have to go up against? You can see how this is not ideal. This will hurt lower-income areas and will make home-buying more difficult for the average joe.

A lot of people think that this new rule could actually help lenders and attorneys. I can guarantee that attorneys will benefit from this new rule, but I am not so sure about lenders as a whole. Attorney fees have been suppressed for awhile new. More often than not, most of my clients are very surprised as to how inexpensive legal representation is considering the amount of work they do. The reality is that they make a good chunk of their money from title on the sales side. However, if there is a reduction in the amount of transactions with buyer representation, then it just makes the most sense for the attorney to pick up this slack. But attorneys do not work for free, so expect attorney fees to go up in some situations especially if it means additional paperwork and consultations that an agent would otherwise handle.

I am not convinced most lenders will necessarily be better off, but I think the online lenders could make a comeback. When buyer's consult with an agent, one of the first things an agent does is get them set up with a lender to get pre approved. A lot of these lenders are local. If more buyers are choosing to go unrepresented, then they will likely find lender resources online. 

We will see a large decline in real estate professionals. We saw a lot of people leave the business in 2023 as transactions shrinked, but this will likely have a much larger impact. With the herd thinning out, the general public should likely experience an elevated level of service and professionalism, generally speaking. The more seasoned professionals will be sticking around, and frankly will likely end up gobbling up even more market share. I think this will actually create a lot of opportunities for the brokers and teams who get this right from the start. 

I think this is for the better. There are too many part time agents out there who have no idea what they are doing, and this is making the industry look bad as a whole. We also have these ridiculous reality TV shows that are just terrible for our industry. It’s truly an embarrassment that these shows not only get aired but are popular to the general public. It makes our jobs look way too easy, and it’s just not an accurate depiction of what our day to day looks like. 

This will actually hurt the consumer in the long run. The seller might save some money, but it will be at the cost of the buyer and will create more market inefficiencies. It will also be harder to sell homes. I think the general public will see this, and I wouldn’t be surprised if we just end up going back to the old way we sold RE once people see how chaotic it has become. 

Sure, the old system we had wasn't perfect, but no system is perfect. The most important feature of our current system hands down was that there was one centralized MLS that all consumers and Realtors had access to. This promoted transparency and equal representation. This could very easily now go away.

One of the main arguments in this court case was that Realtor fees are unnaturally inflating prices. Once these new rules take effect, it’s not like people are just going to start reducing the price of their homes because they might pay less commission. They will price their homes the exact same as they otherwise would have because the comps are already there. The median commission on a home in the US is about 4.85%. Commissions have always been negotiable. The nonsense you see in the headlines stating "the 6% commission is gone" is complete BS. In fact, I almost never see an agent securing a 6% commission. Best case scenario, I could see US median commissions coming down to maybe 4%? So we are basically tearing down the most efficient model for buyer’s and seller’s in the entire world to save less than 1% in fees maybe? The other issue is that there will now be additional costs associated with the market disruption that will be shared by everyone involved in the transaction of RE, so maybe this actually turns into a net loss for everyone. 

These are just my initial thoughts. I embrace change and am looking forward to navigating a new landscape. Moving forward, things will be different as a buyer’s agent so best to start preparing now if you are planning to make a move soon. If you have any questions at all, feel free to give me a call. 


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