Real Estate in the News: NAR Settlement and How It Will Affect Real Estate Transactions

Ryan Haley is back with a new episode of the Running Real Estate Podcast. This week, he deep dives into a hot topic in the real estate community right now to help provide some clarification to some of the headlines that we are seeing across the United States. 

Some of the calls that we’ve received from some clients are about the National Association of Realtors and their settlement for a class-action lawsuit that was announced here just about 10 days ago. 

What Is the Root of the Problem?

So, what is the root of this? What is going on with the National Association of Realtors? 

Let’s take a step back here to kind of show you and tell you the landscape of really what has been going on. 

About two years ago, there were some rumblings of a class-action lawsuit that named the National Association of Realtors and a number of the largest real estate brokers and brokerages in the United States. In that class-action lawsuit, a group of home sellers brought up this claim that the National Association of Realtors, along with these large brokerages, have been fixing real estate commissions or fixing prices. 

Price fixing was going on by setting real estate commissions, and the other part of this was that there were some complaints as to how real estate agents were paid. And what I mean by that is that with your typical Real Estate Commission, a seller would negotiate with their listing broker a total Real Estate Commission. It could be an X number of percent, and from that real estate commission, the listing broker would keep a portion of it to be able to market the property to the best of their abilities and represent the seller, while at the same time, they offered a co-op commission or cooperating commission to a buyer's agent to entice them to bring their buyers to the property. 

The root of the problem goes back to the 1990s when for some of you who've bought and sold properties for years and were in real estate—you may recall a time before buyer agency—there was a time when we only had single agency, and a real estate agent would represent just the seller. The term "buyer beware" came about because if you were going to buy a property and you went to the agent who was the listing agent, that agent would represent the seller, and there was no buyer agency in place. The buyer was unrepresented, so they would say "buyer beware" when you buy real estate. 

Well, in the 1990s, a movement came into place that was monumental and is the way it should be done in real estate, which was to have all parties in the transaction represented. Sellers have a sellers' agent and buyers could now have a buyer agent. So when you buy real estate in most states, in most parts of the country, there's somebody representing the seller. And if you're the buyer, you're working with an agent, and you're represented by the buyer. That makes sense. Both sides can negotiate with each other, they're represented, and those agents are looking out for the best interest of their client, whether it be the seller or the buyer. 

The problem here and the root of this commission lawsuit / class-action lawsuit is the seller who was paying the bulk of the commission and negotiated with that listing broker was paying the listing broker to represent them while at the same time, a portion of that commission was being paid to the buyer's broker, right? And those funds were coming from the seller, thus the seller was paying their agent plus a buyer's agent, and that buyer's agent was coming in to negotiate against them.

So, the idea is, was there true representation there, right? And then with that, they also claimed that the seller was not able to negotiate what the listing broker gave to the buyer broker and the buyer agent, and their buyer was not able to negotiate what the fee was. This gets a little sticky and there's a lot to it, and we'd be happy to go into it in depth with anybody who would like to discuss it more. 

But that was the root of the claim here, the root of the class-action lawsuit, and ultimately, a number of those big brokerages that did settle this class-action lawsuit prior to going to trial. That was last fall. 

Then, the National Association of Realtors and one or two other brokerages did go to trial, and the jury sided with the plaintiffs. They sided with the sellers. So, they felt that the sellers and this class-action lawsuit was valid, and they sided with the plaintiffs—they won. Ultimately, there was a settlement that came about, and the National Association of Realtors decided to settle this lawsuit and what the National Association of Realtors agreed to was that they were going to pay $418 million in damages to the plaintiffs, albeit most of that goes to an attorney in this case here, but pay that out, and then they also agreed to make some changes to the way the real estate practices would be done by its members moving forward. 

And now, keep in mind, the National Association of Realtors is a trade organization that anybody who is a realtor is a member of. They pay dues to the National Association of Realtors, and what has changed, that's the biggest question that I'm getting from people, and there's so much misinformation out there. 

Changes in Real Estate Transactions

Interestingly enough, a lot of changes are really not changes, especially in the state of Maryland, because a number of the required changes have been in place for years. 

Number one, all buyer agency um, relationships need to be in writing, so if an agent is representing a buyer, they need to have a buyer agency agreement in place. In Maryland, that has been a requirement since 2016. So, anytime an agent is representing a buyer, we have had a requirement by the Maryland Real Estate Commission to have the buyer agency agreement signed, so that's already been here. 

Also, in our buyer agency agreement in Maryland, it does state what the compensation to be paid by buyer to buyer broker shall be. That's been there since 2016 as well. Another change that was required of its member members was that no longer will a seller be able to offer a cooperating commission to a buyer's agent in the multiple listing service. 

So, the MLS where most real estate agents go to look for properties, there will no longer be a publication that states what the cooperating commission is or what the commission is that a seller is willing to pay to a buyer, that's the spot it will not be. 

But the interesting thing is, and this is where there's not a whole lot of change, is part of this agreement does not stop or not allow a seller to compensate a buyer broker, that is still allowed, it just cannot be in the multiple listing. So, we've heard all kinds of things that has said that you know Buyer Agents will not make commission or that buyers themselves will 100% have to pay for their representation, pay for their agency which, per the agreement, is true, but how does that money get split up, where does that money come from is the big question, and who does this benefit? 

So, what will probably still be the case is most sellers will opt to continue to offer a concession to a buyer to allow them to help pay for their buyer agent, and the reason they will do that is because the more Buyer Agents that are working on behalf to help bring a buyer to their listing that they are selling, the more people that see it, the more people that bring buyers through, the greater chance they have to sell their property, and not just sell their property for a number, but sell it for top dollar and for the greatest terms. 

Most sellers will take advantage of the opportunity that they have where they can continue to pay a buyer agent commission, some may opt not to, and per the agreement, they are not required to offer compensation to a buyer agent, and in some cases, we're going to see where the buyer ultimately pays the entire buyer agent commission to the buyer's agent.

In recap, in the state of Maryland, the requirements contractually to have a buyer agency agreement in place remain the same. That has been a requirement since 2016. Also, a requirement was that the buyer agent compensation needed to be outlined in that document. That has also been in place since 2016, so that is staying the same. 

Another interesting thing, and one of the claims from this class-action lawsuit was that sellers were not able to choose the commission and or negotiate what the commission was that was being paid to a buyer agent. In Maryland, that's not true. Our listing agreement clearly states what the total compensation would be and also what percentage or amount of compensation would be offered to a buyer's agent. 

So once again, there's not a change here in Maryland. Now, I understand why this is a hot topic in many parts of the country because there are currently only 16 states in our entire nation that require buyer agency documents or that have a buyer agency agreement. So, we're fortunate here in Maryland. Delaware also has the buyer agency agreement where we're ahead of the game and we're not going to see many changes. 

The way things were done for years is going to change a bit, but ultimately at the end of the day, we're going to get to the same place. Fpr example, if I'm here in my Berlin, Maryland office and I want to get to Rehoboth Beach from here, I can plug that into the GPS and it's going to give me two, maybe three options. One would be where I go into Ocean City over Route 90 and I take Route One all the way up to Rehoboth Beach. Another option would be to get on 113, go north up to Millsboro, then cut across to Rehoboth Beach. And I can guess without really looking at it that the difference might be, say, 10 minutes maximum, right? But the end result is exactly the same. I'm still going to end up at the beach whether I take the 113 way or I take Route One. And that's ultimately what we're seeing here. 

The way it was done, the route we had taken for years is no longer going to be the exact way every time, but ultimately, we have another route that's going to be the new way of doing business in real estate. But at the end of the day, it's going to get us to the same spot. So, hopefully, that does help to explain what we've seen with the National Association of Realtors class-action lawsuit. Once again, this has very many moving parts, and this is yet to be approved by the courts. This is just a proposed settlement that still has to go through the courts, and we could see this change as things move forward. So, this is kind of like version 1.0, and we might see some changes as time goes on. 

But what we would encourage you to do is if you have any questions when it comes to agency, whether it be Maryland, Delaware, how the real estate process works, what are the fees involved with it, and how can you appropriately be able to buy and sell real estate, we'd be happy to discuss that further with you. 

 

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