The NAR Settlement and You

Written By Anthony Birch

Background

In New York, the average broker’s commission ranges from 4% - 6% of the purchase price. These commissions are split between the listing agent (seller’s broker) and selling agent (buyer’s broker), so each agent receives 2% - 3% of the purchase price. Sellers often cover both the listing and selling agents’ commissions from the proceeds of the sale. Since this arrangement is not required of sellers, listing agents indicate whether their seller is willing to offer this via a Multiple Listing Service (MLS).

MLSs are databases in which listing agents can post information about properties they have for sale. Selling agents use these MLSs to search a wide array of available properties to find the best property for their buyer. It has been common practice for listing agents to state whether their seller is willing to pay the selling agent’s commission, and how much they are willing to pay. This arrangement is known as “cooperative compensation.”

What is the NAR settlement?

The National Association of Realtors (NAR) Settlement Agreement stems from the Sitzer-Burnett class action case in which the NAR and various realtor organizations were accused of artificially inflating real estate agent commission rates. Instead of continuing litigation, which likely would cost hundreds of millions (if not billions) of dollars, the NAR entered a settlement agreement with the Plaintiffs. The settlement has not yet been approved by the court, so the discussion here may be subject to change. This article will not address the merits of the claim asserted in Sitzer-Burnett, but should clarify the potential effects of the Agreement on homebuyers and sellers.

What are the terms of the settlement?

Under the Agreement, listing agents are prohibited from offering to compensate selling agents on MLSs. This is not, however, a blanket prohibition on offering to compensate selling agents. Listing and selling agents can still communicate a willingness for cooperative compensation outside of the MLS setting. It also does not prohibit other offers for seller’s concessions (i.e., covering closing costs) via an MLS. These concessions cannot be conditioned on using the funds to pay the selling agent or using a selling agent altogether.

Selling agents also will need to sign written agreements with their clients before beginning any work. They will be required to spell out their commission fee in this agreement.

How will this affect me as a seller?

Sellers now have two options when it comes to listing their properties. They can either (1) find creative ways to communicate to selling agents that they are willing to participate in cooperative compensation, or (2) decide they are not going to pay the selling broker out of the sales proceeds.

Again, the settlement agreement is not a blanket ban on cooperative compensation. It merely limits the ways in which sellers and listing agents can communicate that to selling agents. Listing agents can communicate directly with selling agents to offer this outside the MLS setting. Sellers also can offer concessions, such as covering closing costs, which can be used to pay the selling agent. Be careful with this second method because these concessions cannot be conditioned on either (1) the buyer using the funds to pay the broker or (2) the buyer using a broker altogether.

On the other hand, sellers now have an opportunity to refuse to cover the selling agent’s commission. Since their agents cannot offer cooperative compensation on MLS and selling agents need to sign agreements with their clients, sellers may shunt that responsibility onto the buyer. However, it is important to keep in mind that the selling and listing agent commissions often are baked into the purchase price. Sellers are not “losing” money with the traditional cooperative compensation model, but merely have an opportunity to keep more of the proceeds.

How will this affect me as a buyer?

There is a strong likelihood that some of the listings, especially in the Otsego County area, will remain on the cooperative compensation model. However, many sellers probably will take advantage of this opportunity to make more money from the transaction. In the second case, there are two main outcomes for buyers: (1) the buyer will negotiate a fixed, contingent, or hourly fee for their agent or (2) will work with the listing agent directly.

It may seem like a perfect solution for selling agents to simply filter out listings in which the seller is not willing to pay the selling agent. Selling agents are not allowed to sift through listings unless it is in their client’s best interest. If you would like to work with a selling agent, but you are worried you cannot afford to pay them, have a candid conversation. You may be able to give written permission to your buyer's agent to find only listings with offers of cooperating compensation.

On the flip side, buyers may communicate directly with listing agents, bypassing selling agents altogether. This may seem like a good way to save money, but it is likely that listing agents will simply increase their fees to accommodate the extra work. After speaking with a local listing agent, they are unwilling to perform both listing and selling agent responsibilities without a boost in pay. This extra compensation will either be paid by the buyer or seller.

Who is covered by this settlement?

NAR members are subject to the prohibition from this settlement, apart from several agencies:

  • At World Properties, LLC

  • Compass, Inc.

  • Douglas Elliman, Inc.

  • Douglas Elliman Realty, LLC

  • eXp Realty, LLC

  • eXp World Holdings, Inc.

  • Hanna Holdings, Inc.

  • HomeSmart International, LLC

  • Howard Hanna Real Estate Services

  • Keller Williams Realty, Inc.

  • Real Broker, LLC

  • The Real Brokerage, Inc.

  • Realogy Holdings Corp.

  • Realty ONE Group, Inc.

  • Redfin Corporation

  • RE/MAX, LLC

  • United Real Estate

  • Weichert, Realtors®

  • Those associated with HomeServices of America or one of its affiliates

Key takeaways

  1. Cooperative compensation is not prohibited.

  2. Listing agents cannot offer cooperative compensation on multiple listing services.

  3. Listing agents can offer other concessions, such as covering closing costs, but cannot condition those concessions on:

    • The funds being used to pay the selling agent; or

    • The buyer using a selling agent.

  4. Sellers can either:

    • Continue the cooperative compensation model, just not on an MLS; or

    • Decide not to offer cooperative compensation.

  5. Buyers will need to:

    • Allow their agent to search for sellers who are willing to offer cooperative compensation;

    • Find another payment method that works for them; or

    • Contact the listing agent direct

Disclaimer

This blog is for general informational purposes only and does not constitute specific legal advice from Robert W. Birch, Esq. This information is not meant to act as a substitute for competent legal advice from an attorney, and the use of this information does not create an attorney-client relationship.

Anthony Birch