What the NAR Settlement Means for Real Estate Agents

The recent NAR settlement has raised important questions about the future of real estate commissions. As a real estate agent, it's important to stay informed about the implications of this landmark case.

In this blog post, we'll explore the key terms of the settlement, how it may affect your business practices, and what steps you can take to adapt to the changing landscape.

NAR Lawsuit: Explained

The National Association of Realtors (NAR) was sued in a major antitrust lawsuit over claims that it, along with some of its members, engaged in practices that artificially inflated real estate commissions, violating U.S. antitrust laws. The core issue was that NAR’s policies, particularly those related to the Multiple Listing Service (MLS), allegedly limited competition and resulted in home buyers paying higher commission fees than they should have.

Here are the key reasons why NAR was being sued:

1. Inflated Commission Rates: The lawsuit alleged that NAR's rules, specifically related to the MLS, created a system where home sellers were required to offer a commission to the buyer’s agent, which was then bundled into the overall home sale price. This allegedly led to inflated commission rates, as home buyers had little room to negotiate lower rates.
2. Anti-Competitive Practices: The plaintiffs argued that NAR’s commission structure discouraged competition by standardizing commissions. The lawsuit claimed this practice violated antitrust laws because it prevented market forces from determining fair and competitive commission rates, keeping them higher than they would be in a competitive environment.
3. Lack of Transparency: The lawsuit highlighted that the way commissions were structured under NAR's policies made it difficult for buyers and sellers to understand how much they were actually paying. This lack of transparency allegedly contributed to inflated fees and left consumers unaware of their ability to negotiate commissions.
4. Collusion Between Brokers: It was claimed that NAR and its member brokers colluded to maintain high commissions, in violation of antitrust laws. By enforcing these rules, NAR and its members allegedly created a "cartel-like" environment, limiting consumers’ ability to seek out lower commissions or negotiate terms that might reduce costs.

How Did These Practices Allegedly Hurt Buyers and Sellers?

The practices at the center of the lawsuit against the NAR allegedly hurt both home buyers and sellers by inflating costs and limiting transparency in real estate transactions. Here’s how these practices specifically impacted buyers and sellers:

1. Increased Costs for Buyers

• Bundled Commission Fees: Under NAR’s rules, home sellers were required to offer a commission to the buyer’s agent, which was typically built into the overall price of the home. This meant that home buyers, even though they didn’t directly pay the buyer’s agent, were effectively financing this commission through a higher mortgage, increasing the total cost of purchasing a home.
• Lack of Negotiation: Buyers often didn’t realize they could negotiate the commission paid to their agents, as these fees were bundled into the home price. This lack of transparency left many buyers paying more than they might have if commissions were more openly negotiated.

2. Higher Expenses for Sellers

• Mandatory Buyer’s Agent Commission: Sellers were required to offer a commission to the buyer’s agent, which increased the cost of selling a home. The lawsuit claimed that this practice limited sellers’ ability to negotiate lower commissions, forcing them to pay a higher percentage even when they might not see equal value in the buyer’s agent’s services.
• Reduced Flexibility: Sellers had little control over the total commission paid out to both the listing agent and buyer’s agent, leaving them with less flexibility to reduce costs and maximize their profit. They were essentially locked into a standardized commission rate, even in markets where lower rates might have been more appropriate.

3. Suppressed Competition

• Standardized Commissions: The lawsuit alleged that NAR’s rules kept commission rates artificially high by creating an industry standard, effectively suppressing competition. This lack of competition made it harder for buyers and sellers to find agents willing to offer lower commissions or negotiate on fees, limiting their choices and driving up costs.
• Cartel-like Environment: The lawsuit argued that NAR and its members created an environment where real estate brokers colluded to maintain high commissions, further restricting competition. Buyers and sellers were harmed by the lack of options and the inability to benefit from market forces driving down prices in a competitive environment.

4. Lack of Transparency

• Confusing Commission Structures: The complex way commissions were structured, with sellers paying for the buyer’s agent, often left both buyers and sellers in the dark about how much they were actually paying in commissions. Buyers didn’t realize they were financing their agent’s commission through the home price, while sellers weren’t always aware of how much they could negotiate on these fees.
• Misaligned Incentives: The lawsuit claimed that the bundled commission system discouraged buyers’ agents from negotiating lower prices for their clients, as higher home prices meant higher commissions. This created a potential conflict of interest, where agents may not have been fully incentivized to act in their clients' best financial interest.

5. Limited Consumer Choice

• Barrier to Lower-Cost Agents: By enforcing standardized commission rates, NAR’s practices allegedly made it difficult for consumers to seek out lower-cost agents or alternatives like discount brokers. This limited sellers’ ability to reduce transaction costs and buyers’ ability to find more affordable options.
• Fewer Negotiation Opportunities: With commission structures set by industry norms, both buyers and sellers missed out on opportunities to negotiate lower fees. This reduced consumer power and flexibility, hurting their ability to save money on real estate transactions.

NAR Settlement Terms

As part of the settlement, the NAR agreed to pay $418 million over approximately four years, though without any admission of wrongdoing by the NAR. The settlement also includes important changes to the rules governing real estate commissions and MLS practices, which could lead to more transparent and negotiable commission rates. Ultimately, this could reshape the way real estate transactions are conducted, with both buyers and sellers benefiting from increased competition and lower fees.

For example, with the unbundling of buyer’s agent commissions, home buyers may find themselves empowered to negotiate their agent’s fees directly, allowing them to seek out more cost-effective representation. This could encourage buyers to shop around for agents who offer competitive rates or innovative services, leading to a more dynamic market.

Additionally, sellers might feel less pressured to inflate their home prices to cover standard commission fees, creating a more balanced pricing environment. As commission structures become more transparent, sellers could also provide incentives to buyers in other ways, such as offering credits for closing costs, further enhancing the attractiveness of their listings.

Stay Ahead With AgentCampus

To thrive in this changing landscape, real estate professionals must stay updated on new developments and adapt their strategies accordingly. We encourage both new and experienced agents to enhance their knowledge and skills by enrolling in our online real estate courses. Our pre-licensing and continuing education courses are designed to help you navigate this evolving market, ensuring you remain competitive and well-informed in your practice. Explore our offerings today to invest in your success!