NAR Settlement: Meaning And Industry Impact

I have been asked several times on podcast interviews what I think about the NAR settlement, how it will impact me personally, and how it will impact the industry.  Although widely known, it is not well understood.  Here is a brief overview of the settlement, the potential impact, and some questions.  The impact and questions are from me personally.  These are questions that I am curious about and will be keeping an eye on and the impact is obviously an opinion because well … we really don’t know.  

Unfair Real Estate Practices?

Most of us have heard by now that there was a large class action lawsuit the included the National Association of Realtors (NAR) as a defendant, along with several other large brokerages.  The grounds of the claims were that the current customary way real estate commissions are handled is unfair to buyers and sellers.  Almost like price fixing, which would cause homeowners to overpay for the services received.  There was also a concern about whether agents were incentivized to act in their client’s best interest.  For example, if a seller’s agent or seller refused to pay a buyer agent commission, which has always been allowed, would the buyer’s agent steer their client away from a particular property? 

According to NAR, they felt it was in their and their members’ best interest to settle the case and make some changes to how commissions are advertised and paid.

Key Aspects Of The NAR Settlement

For the most part, the settlement just brings clarity to how NAR expects Realtors to currently act and, in most states, how they are required to act.  There are a relatively small number of actual changes in the 108-page settlement to the industry worth mentioning: 

  • Real estate commissions can no longer be advertised in the MLS.  This means that buyer’s agents will not see in the MLS if or how much a selling agent or seller is willing to pay them to represent the buyer.  This is the largest of the changes. I want to be clear that the agreement is that commission will not be advertised in the MLS, but it does not dictate how much or how the commission will ultimately be paid.  There is some confusion here so let’s be clear.  The seller can still pay the buyer commission. 
  • The Buyer Agreement needs to clearly state what the commission to be paid will be or how it will be calculated.  Some examples include but are not limited to a percentage of the purchase price, a flat fee, or an hourly fee.  Any of these are fine but it cannot state “to be determined” or “greater or lesser of multiple options.”  For example, it cannot state “Buyer will pay 2.5% of the purchase price or whatever the seller is willing to pay on Buyer’s behalf, whichever is greater.” 
  • A buyer’s agent needs to have a signed agreement with the buyer before they can tour a house.  I don’t see this as a big issue, but it could slow the process as agents will need to negotiate all the terms of their compensation before they can open a door.  

For the most part, the rest of the settlement is obvious or clarification of what is already in place or standard practice.  

The Impact Of The NAR Settlement

  • Home values – This has to be the biggest concern I hear from real estate investors.  Obviously, time will tell but I do not see this having an impact on home values.  That could change if we see a drastic decline in buyers because they cannot afford a commission or are nervous about the market or being unrepresented.  I don’t think that will be the case as I describe below but that is one possibility that would impact values.  Outside of that, I cannot see what could drive pressure with home values. 
  • Buyers – This is my biggest concern.  My fear is that buyers will be concerned about paying their agent and either not hire one or decide not to buy a house.  According to a recent survey that I heard from a webinar (not verified), 43% of buyers rely on seller concessions to close on a home.  That numbers shoots to over 60% when you look at first time home buyers.  If they need a concession to qualify for a loan, what happens if a seller refuses to participate in their agent’s commission? The good news is that lenders are adjusting.  FHA has announced that it will not consider buyer commissions in their 6% threshold for seller contributions.  This basically means FHA will allow buyers to finance the commission by offering more on a house and having the buyer kick back a commission to the agents.  It is important that Realtors understand financing options, negotiation strategies, and be able to sell their value to stay competitive as a Buyer agent.  If something was to backfire in this settlement, I believe it is unrepresented buyers being taken advantage of.  
  • Sellers – The biggest impact here is that brokers will not feel the pressure of being forced to pay for a buyer’s agent commission.  I know some sellers that will flat out refuse.  That would likely be a big mistake and over time we will probably see that not much has changed for sellers.  Many buyers will offer a little more and ask the seller to pay the commission.  As long as the seller is ok with the net price, why would they not accept? 
  • Agents – Obviously the biggest potential negative impact is with Buyer brokers.  With that said, their responsibility to help their buyer could drastically reduce, saving them time.  I could see some brokers turn this into more of an office role helping with negotiations and contracts and not MLS searches and driving buyers around.  I do not see a big change to listing agents, but they may find creative ways to advertising commission splits without using the MLS.  Probably a lot more networking, calling brokers, and sales meeting participation.  I could also see a website designed specifically for listing agents to advertise coop commissions.  

Questions Regarding The Nar Settlement

There are many questions regarding this settlement but here are some of the more impactful ones that I am thinking about. 

VA Loans

The Department of Veterans specifically prohibits the buyer from paying their agent’s commission.   Unless something changes with VA loans, all VA buyers will be forced to ask the seller to pay their buyer commission. 

Is A Seller Paid Commission Considered A Seller Contribution?

We know that this is not the case currently with FHA, but I am curious if banks and conventional lenders will follow suit.  If not, this could be a larger problem making it so buyers don’t qualify for a loan. 

Is This The Final Settlement?

We know that this has not been fully approved by the court, but we also know the changes will take effect prior to any final approval.  The actual deadline to implement these changes is August 17, 2024, but NAR has committed to making it happen in July of this year. 

Seven-year Term

The settlement specially states a seven-year term.  I wonder what, if anything, changes after it expires. 

$418 Million Payment Due From NAR

They have approximately four years to pay this, but my question is where is this money going to come from? 

Does The NAR Settlement Disrupt The Industry?

With the exception of buyer agents, there is not much in this settlement that will disrupt the industry in my opinion.  Smart and motivated agents may actually benefit while others may experience a negative impact.  My guess is that the number of agents will shrink because that is common any time there is change.  As this plays out and some time passes, we probably will get back to some traditions such as sellers paying both commissions as a standard practice.   

One cautionary warning that I have been hearing is that you as a real estate investor 100% should budget for a buyer agent commission.  I have heard and seen investors removing a buyer commission from their projected numbers.  If you refuse to pay the buyer commission, which was always an option by the way, then you will shrink your buyer pool significantly.  That could extend your hold time and potentially reduce your value.  I do not believe it is worth it to take a hard stance here.  Focus on your net number when reviewing offers.   

Shoot me an email and let me know what you think and how you feel this could impact the housing market or you personally.