The NAR Lawsuit Settlement: An Introduction For Sellers & Buyers

This refers to the widespread practice of cooperative commission in which sellers of residential real estate pay a negotiated total commission to listing brokers who offer the seller's property for sale to the public. Listing brokers then share part of that commission with the broker and licensee who bring the eventual buyer to a deal. It has been alleged that within co-op commission, some individual licensees and their brokers encouraged "standard" commission rates and other practices which reduced consumer choice.

Here is a direct link to the NAR's webpage in which they publicly address the settlement: https://www.nar.realtor/the-facts

It has been suggested that listing brokers and their licensees were not giving sellers a choice of how much commission they would be paying to the buyer's broker, saying that the cooperative commission and a specific % of the sale price was standard or usual. There are even anecdotal accounts of listing brokers telling sellers that unless they were offering at least X% buyer-side commission, very few Sales Associates would waste their time showing the property to prospective buyers. (Yes, really)

Quite a few buyers have long suspected that since sellers were told they had to pay both sides' commission, residential asking prices were inflated to include those costs. Maybe so, maybe not. We will have to wait and see what effect (if any) these practice changes have on real estate asking prices in different parts of the country.

Up until August 17, 2024, MLS (Multiple Listing Service) listings included the co-op commission rate or amount offered to licensees who may want to bring a potential buyer into the deal. Many (most?) MLS platforms are owned by the local Board of Realtors® (NAR affiliates), so the MLS became the mechanism by which offers of shared compensation were communicated to other brokers and their licensed Sales Associates.

Even though sellers have historically paid the entire commission to both sellers' and buyers' brokers under the NAR's cooperative commission arrangement, it is important to understand that NAR has never set commission rates, commission splits between brokers, or the business relationships between brokers/licensees and sellers. These details have always been separately negotiated between a local real estate broker and a seller.

So how did the NAR end up in a lawsuit over member broker and licensee behavior and business practices? Possibly because the majority of US residential real estate brokers and offices are members of the NAR and require their individual Sales Associate licensees to be members. For background on State real estate licensees and NAR membership, take a few minutes to look through this article from May 2024: https://thefloridarealestateblog.com/f/in-florida-are-realtors%C2%AE-real-estate-agents?

The opinion has been presented that the NAR passively enabled individual members to engage in questionable behavior and business practices. While the NAR may not have actively promoted members' questionable business practices, neither did they try to prevent some of those practices from occurring through increased member training and more focused professional standards.

State and local Boards of Realtors®, along with member real estate offices, brokers, and licensees agree to follow NAR's published rules, procedures, and standards which include the cooperative commission arrangement. However, local interpretation and application of rules, standards, and ethical behavior can vary widely between brokerage offices and the individual licensees attached to them.

The NAR is a national organization, yet the practice of offering real estate services to consumers (sellers and buyers) is always hyper-local.

The alleged violations that led to landmark lawsuits and subsequent real estate practice changes were committed by individual licensees interacting with individual sellers and buyers.

Now that we have some background, what has changed? Two of the main changes intended to increase transparency to consumers and promote seller / buyer choice when using an NAR-affiliated broker, licensee, and MLS include:

• Any mention of compensation (broker/licensee cooperative commission) is expressly prohibited in MLS listings and/or any platform drawing information from the MLS (syndicated sites). Previously, this information was required when entering a property's details into the local MLS.

• Licensees must now have buyers sign Buyer Broker Agreements before providing real estate services to them. BBAs must include the terms, services, and compensation to which broker and buyer have agreed.

Sellers can still pay a commission to buyer-side licensees if they would like, though the offer cannot be shown anywhere on an NAR-affiliated MLS platform.

Seller-paid commission to the buyer broker can be accomplished in a few ways:

• In signed Listing Agreements, sellers can agree to pay buyer broker compensation, the amount offered, or not to pay any at all. Keep in mind that this decision is made well before the property has been offered for sale to the public.

• Listing brokers can share part of their negotiated commission from the seller with the buyer-side broker (this is traditional cooperative commission). Remember - no mention of compensation in the property's MLS listing. Offers and amounts of shared commission must occur through separate communication between brokers and licensees outside the MLS.

• In the written offer that becomes the sales contract once accepted, buyers can ask sellers to pay some compensation to their buyer broker as part of closing. This can be done through a co-op commission or a seller payment at closing directly to the buyer-side broker. As we have discussed in previous articles, payment for real estate services goes to the office's broker who then distributes it to the individual licensee who interacted with the seller or buyer.

So far, much of this sounds very similar to the old way real estate commissions were handled, except for how and where offers of buyer-side commission are made, right?

The second major change is the requirement that buyer-side licensees must have potential buyers sign Buyer Broker Agreements before any real estate services are provided. In some areas of the US, BBAs have been used for some time. In others it is a recent development and new business practice with which NAR members must comply.

In keeping with NAR settlement-related changes, all BBAs must include the compensation amount or % buyers agree to pay the licensees who will be showing them properties and handling some of the transaction details after an offer is accepted. As with Listing Agreements and sellers, Buyer Broker Agreements are signed (and commission amounts established) well before an offer is made or a sales contract exists.

In BBAs, buyer-side licensees decide how much commission they want to receive if/when their buyer purchases a property. If no seller-paid commission is offered to the buyer broker (or sellers cannot be convinced to pay some when asked), the buyer is responsible for paying the entire amount shown in the signed BBA. According to the new rules, buyer-side brokers cannot receive more commission than is pre-determined in the BBA.

Until the recent practice changes, most residential buyers were not directly responsible for paying their real estate brokers commission. New language in required Buyer Broker Agreements changes that.

Remember - sellers can offer (or not offer) buyer-side commission when entering into a Listing Agreement with a local real estate broker, before the property is available for purchase. On the other side, buyers agree to pay their brokers a predetermined commission if/when they buy a property through them, before a purchase offer or sales contract exists.

One of the most confusing aspects of all this is that neither one knows what the other side's written compensation agreement contains.

Sellers may be asked to pay part (or all) of a commission negotiated and agreed to by other parties. (I am not making this up.)

Buyer-side brokers can only receive the commission amount or % agreed to in the BBA. If there is no seller-paid cooperative commission offered to the buyer-side, then the buyer has to pay what is shown in the BBA. If a seller is not offering the full amount agreed to in the BBA, the buyer has to make up the difference.

That's probably enough of an introduction for now. There is a lot for consumers to absorb and apply to both hypothetical and real-world situations. Looks like I will be writing a few more articles on this topic trying to help principals to a residential real estate deal better understand how to navigate the changes while protecting their interests. Read today's article a couple of times for better understanding, this can be very confusing. The new practices will take some time to work efficiently, and there is a distinct possibility that may never happen. Though these are the new rules that MLS participants must follow until further notice.

BTW - There have already been multiple suggestions by some local licensees on how to sidestep the new settlement-related practices through some eyebrow-raising maneuvers. More on them in a future article.

For now, the best advice I can give you is:

Don't sign anything you don't fully understand. When interviewing real estate licensees to handle your side of an upcoming transaction, have her or him completely explain (with examples) your choices, rights, and responsibilities under the new broker compensation rules.

Editor's Note: Christopher Carter is NOT an attorney. He does not give legal advice. For interpretation and application to specific circumstances of anything you read in this article, you must speak with a Florida-Licensed attorney.

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