The Impacts of the NAR Settlement

Attorney Kenneth E. Taylor recently gave a presentation to 85 Realtors in the New Milford, CT area after the National Association of Realtors reached a settlement that impacts the compensation model of the industry. Many of the realtors reached out directly to Kenneth E. Taylor at McCarthy and Taylor, LLP due to his expertise and experience in real estate law. Kenneth E. Taylor was proud to host a presentation to this group to explain how the settlement will impact the way they do business and how they can best serve their clients.

In October 2023, a federal jury ruled that the NAR and several large brokerages had conspired to artificially inflate the commissions paid to real estate agents. The NAR and brokerages were ordered to pay damages of nearly $1.8 billion. Because the suit included accusations of antitrust violations, plaintiffs could have been eligible for triple damages of up to $5.4 billion. The NAR and brokerages appealed, but recently they agreed to settle the litigation by paying $418 million in damages and by eliminating its rules on commissions. In exchange for the reduction in damages, the association gave up its right to appeal.

For decades, when you sell your home through a real estate agent, you pay both a seller’s agent commission and a buyer’s agent commission. Often, the total compensation that sellers must pay their Realtor is 6%, with about half going to the buyer’s agent. That means sellers are paying for their real estate agent and the buyer’s real estate agent. This puts a higher financial burden on sellers than most would like. However, there is a new settlement with the National Association of Realtors (NAR) that is now not allowing brokers who list their homes for sale on any of the databases associated with the NAR to list compensation offers for buyer’s agents.

What does this mean? Well, it means that people who are selling their homes will get to keep more of the money from the sale. This is great news for sellers all over the United States. On the other side of the transaction, this means that buyer’s agents will now have to have a contract signed by homebuyers that lists out what the buyer must pay their agent. This will ensure that they know how much they are expected to pay their real estate agent from the beginning. Sellers can still help buyers pay for their Realtor’s commission through seller’s concessions if they choose to. These changes will go into effect in mid-July 2024

Impacts to Buyers

Before the settlement was reached, the way that the compensation was determined for agents working with buyers was through the seller side of the transaction. The seller and their agent would discuss how much total compensation would be for both parties and decide how it would be split between both Realtors, which was generally 50/50. This meant that buyers would often not have to pay their agent anything for compensation when they bought a home. However, starting in mid-July of 2024 buyers will now be able to negotiate with their Realtor what their compensation will be and pay it themselves.

Impact to Sellers

The settlement is exceptional news for sellers across the country. In the past, sellers were on the hook for paying both their agent’s and the buyer’s agent’s compensation. Now, sellers will only be responsible for paying for their agent’s agreed-upon compensation. This means more money in your pocket as a seller after the sale of your home.

Practical Concerns

• Many buyers may not have the ability to pay a buyer broker commission, especially in the new home buyer’s market.

• Brokers will not have to comply with existing NAR compensation-sharing rules.

• Commission arrangements will not be on the MLS.

• Brokers need to develop compensation models if they are going to represent a buyer. Ethically a buyer broker should not be steering clients to a sale where there will be a commission-sharing arrangement, but that will be hard to enforce.

• It is expected that the NAR and local real estate groups will develop buyer contracts and guidelines for cooperation between Seller and buyer agents…..whose guidelines will be non-binding.

• A buyer who has agreed to a percentage commission for his agent will have to figure that expense in the offer that is conveyed to the Seller.

Mortgage Lender Concerns

Seller concessions for VA borrowers are also capped at 4% of the home’s purchase price or appraised value and can also cover some closing costs, including the VA funding fee and prepaid taxes. And under existing FHA rules, sellers can contribute up to 6% in concessions to FHA borrowers to cover closing costs, prepaid expenses and discount points.

This could be a key part of the equation for borrowers with VA or FHA loans, as they’re typically using discount points to lower their mortgage rate, paid by sellers.

“Agent commissions have never been a closing cost from a buyer perspective,” Ryan Grant, co-founder and division president of Neo Home Loans, told HousingWire in November. “We don’t even know if the buyer’s agent fee would be an allowable closing cost because they might not even be a material necessity to the transaction.”

If FHA borrowers, for instance, used all 6% of seller concessions towards paying their agent’s commission, “you’re taking away either temporary or permanent interest rate buy-down opportunities,” Brian Covey, EVP of Revolution Mortgage, said in November.

In a December letter to federal housing agencies, the Community Home Lenders of America, which represents small lenders, wrote that “traditionally,lenders financed buyer’s agent commissions as part of the mortgage financingprocess, reflecting the fact that 100% of brokerage commissions were incorporatedinto the sale price.”

But its members noticed “many real estate agents are already writing sales contracts that require the buyer to pay the buyer’s real estate commission.” CHLA said the new model could potentially leave buyers to cover the commission out of pocket or forego representation.

Recently, the trade group said that the NAR settlement will impose challenges mainly to underserved, veteran, and minority borrowers with low down payment capabilities “who must be protected with respect to underwriting rules, so they are not disadvantaged by changes to commission structures.”

Next Steps

• Develop new Seller commission contracts.

• Develop new Buyer commission contracts. Give Buyers compensation options.

• Local and State Realtor groups cannot require commission structures that must be complied with.

• Determine method for informing prospective purchasers and agents as to the commission structure for each deal.

Learn More from Our Real Estate Attorney Today!

The settlement that the National Association of Realtors will have profound impacts on the real estate market for years to come. It will provide more freedom for people to negotiate compensation with their Realtor. The impact may even result in home prices coming down, making it more affordable for Americans to buy a home. If you live in the New Milford, CT area, McCarthy and Taylor LLP is a realtor estate attorney that you can rely on to help you through the legal process involved in the sale of a home. Our attorney has extensive experience in assisting both buyers and sellers in their real estate transactions. We can review contracts, ensure laws and regulations are followed, and provide legal advice. If you are buying or selling a home, you will need the legal services of a real estate lawyer to ensure the accuracy of documents and the legitimacy of the sale. If you live in the New Milford, CT area, you can always rely on the legal services of McCarthy and Taylor LLP. Contact us today to learn more about our real estate legal services!