The real estate industry is undergoing significant changes this summer due to a recent settlement involving the National Association of Realtors (NAR). This settlement, resulting from a class action lawsuit filed by anti-trust companies, aims to bring more transparency to the home buying and selling process, particularly regarding how real estate agents are compensated.

Here's a breakdown of what this means for you and why working with a qualified agent is more important than ever.

Key Changes from the NAR Settlement

1. Negotiable Real Estate Commissions: While real estate commissions have always been negotiable, this settlement is designed to emphasize the transparency of real estate commissions. Traditionally, sellers would pay a 3% commission to the buyer’s agent for bringing them a buyer for their home; however, it may have been more or less. There really is no change here other than the emphasis that the 3% is negotiable.

2. Transparency in Compensation: One of the major shifts is that the compensation for buyer’s agents can no longer be advertised on the Multiple Listing Services (MLS). Instead, the details of the broker commission agreement will be included with each offer. This change is designed to prevent misleading information about agent compensation and ensure that buyers and sellers are fully informed

3. Impact on Buyer’s Costs: With the transparency about who pays the agent’s commission, buyers will now be more directly involved in these negotiations. Traditionally, sellers have paid for the buyer’s agent fees in a system called cooperative compensation. Moving forward, buyers may or may not need to cover their agent’s fees. There is uncertainty about whether this fee can be covered in the mortgage loan. This could affect how much buyers need to budget for their home purchase.

What Home Buyers Need to Know

1. Importance of a Skilled Agent: In this shifting market, having a highly trained and skilled agent is crucial. The settlement is expected to increase the level of professionalism among agents, but it also means that buyers should be more diligent in selecting their representation.

2. Home Showings Will Change. To view a property, you'll need a signed agreement with an agent outlining their compensation. This agreement may be for just one home or a specific time duration ranging from a few weeks to a few months.

3. Potential Cost Implications: The settlement could increase the overall costs for buyers. If sellers are unwilling to pay the buyer’s agent’s commission as they have done traditionally, buyers will now have to calculate agent fees into the cost of purchasing a home.

4. Interviewing Agents: Given the new emphasis on transparency and negotiation, buyers should interview multiple agents to ensure they find one who will effectively protect their interests. This step is vital to avoid long-term commitments with agents who may not fully align with your needs.

What Home Sellers Can Expect

Sellers will still be able to offer a buyer’s agent commission for bringing a buyer, but it cannot be on the listing in the MLS.  The seller also has the right to not offer a buyer’s agent commission at all.  Again, this has always been the case, but the settlement emphasizes this fact.  Here are a few things the seller may consider:

1. Negotiate Commissions At a Different Time: Sellers will likely continue to pay commissions to a buyer’s agent for bringing a buyer to purchase their home. However, these commissions may be negotiated when the offer is made if they weren’t set at the time of listing.

2. Potential Impact on Home Prices: Since buyers may now be responsible for paying their agent's commission, sellers might feel pressure to adjust their home prices to accommodate this shift. Ultimately, the response of Realtors and consumers to the settlement will determine the impact on home prices.

3. The Need for Skilled Agents: Just as buyers need skilled agents to navigate the new landscape, sellers also benefit from working with experienced agents who can effectively market their properties and negotiate favorable terms. Ensuring your agent is well-versed in the latest rules and market conditions is essential for a successful sale.

The Genesis of the Lawsuit

Like any industry, the norms of compensation have shifted to meet the needs of the market.

Over the past few years, as competition to buy homes has soared with low interest rates, some home sellers claimed that NAR's policies, including those in its MLS Handbook and Code of Ethics, inflated commission rates.

The Sitzer-Burnett case, a class-action lawsuit filed in Missouri, challenged the real estate industry's commission structures. Despite NAR's defense highlighting the benefits of cooperative compensation, the jury sided with the plaintiffs, prompting NAR to appeal the verdict and sparking broader scrutiny and similar lawsuits nationwide.

While there is no perfect outcome of this agreement, it could be an opportunity for the industry to evolve. Experienced agents have always valued transparency. They will now need to help their clients understand how to create a fair offer of compensation in addition to the other aspects of negotiating the purchase of a home.

Most of these cases are still pending court approval, so the true effects won’t be known until this goes into effect later this summer.

The Bottom Line

The proposed settlement aims to clarify and streamline how commissions are handled in real estate transactions, which is a positive step towards transparency. This will most likely impact all transactions, not only NAR members. However, the actual impact on the market and individual buyers and sellers is still evolving.

Whether you are buying or selling, the key takeaway is the importance of working with a qualified and trustworthy agent who can navigate these new rules and ensure that your interests are taken care of.