Are You Ready for New Norms in Real Estate?
The Lawsuit that May Upend How Homes Are Sold and Bought
In the case of Burnett v. NAR, the National Association of Realtors (NAR) and others were accused of conspiring to inflate real estate agent commissions. The lawsuit, seeking $2 billion in damages and changes to commission practices, alleged that sellers were required to pay non-negotiable commissions to both listing and buying agents. On October 31, 2023, a federal jury in Kansas City, MO, reached a verdict and sided with the plaintiff’s claims. The defendants initially planned to appeal, which would extend the resolution of the lawsuit.
However, six months later, all defendants opted to settle. NAR, as the primary defendant, proposed a monetary settlement of $481 million and policy changes, including revising the commission-sharing rule. Together, the defendants’ collective payments neared $1 billion in damages, and other brokerages not named in the lawsuit could also join the settlement and pay damages according to a predefined formula
How Will The NAR Policy Changes Impact Buyers and Sellers?
The NAR approved a set of policy and system changes that is set to take effect on Aug 17, 2024. It is difficult to predict how brokerage firms will adapt to the new policy or if any potential loopholes are uncovered. As written, the policy changes eliminates commission sharing between listing and buying real estate agents. It also prohibits using third party platforms to facilitate compensation between real estate agents, such as agents’ own websites.
Besides the specific system changes that each brokerage must make to their Multiple Listing Service (MLS), respective brokerages are open to how they will implement the policy changes. Will buyers need to negotiate fees and sign an agreement before they can tour a home with an agent? What would be the duration or restrictions of the agreements? In response, Zillow has introduced a consumer friendly touring agreement that does not require compensation or exclusivity for touring homes and expires after seven days. However, any further activities would necessitate a different agreement covering exclusivity and compensation.
Here are potential outcomes resulting from the policy changes:
- Lower Fees: Homeowners selling their homes will likely pay lower commissions than before, as they are no longer required to cover the higher commissions shared between two agents. This change could lead to significant savings for homeowners. Overall, it is projected that the US could save up to $30 billion in fees if the total commission rate drops from the current 5 to 6 percent to 3 to 4 percent.
- Increased Competition from Innovative Services: With the elimination of commission sharing between agents, buyers will likely seek out real estate agents who offer the most value for their services. This could lead to a rise in white glove services or shift to a la carte or low-cost services, such as fixed fees for writing and submitting offers. Additionally, For Sale By Owner (FSBO) listings may become more visible and abundant, as the previous commission-sharing model often marginalized these listings, reducing their visibility and awareness on the MLS.
- Higher Closing Cost: With buyers expected to shoulder their own real estate agent fees, they will need to have adequate funds or financing available to cover these costs. This may pose challenges for prospective homeowners, as they will require additional funds to complete their home purchase. The question arises whether mortgage companies will offer flexibility to roll sales commissions into the loan or introduce new financing options to accommodate this change.
What Are The Next Steps for Burnett v. NAR?
A hearing has been scheduled for November 26, 2024, to finalize the approval of the settlements. During this interim period, objections to the settlement may be filed. Of particular interest is how the Department of Justice (DOJ) will proceed now that restrictions on their investigation of anticompetitive conduct by the NAR have been lifted as of April 2024. Assistant Attorney General Jonathan Kanter wrote, “Real estate commissions in the United States greatly exceed those in any other developed economy, and this decision restores the Antitrust Division’s ability to investigate potentially unlawful conduct by NAR that may be contributing to this problem.” If the DOJ finds considerable loopholes or deems the changes insufficient, they may choose to intervene, which could prolong the outcome.
If the settlement receives approval, the landscape of buying and selling homes in the United States will undergo a fundamental transformation. Additionally, the resolution of the Moehrl v. NAR lawsuit, which is larger and separate, but partially settled out of court by defendants in the Burnett suit, will bring further clarity to the real estate industry. This approval will not only provide guidance on how to proceed with the Moehrl suit but also establish a precedent for future legal actions within the sector.
These proposed changes are not expected to significantly affect how Upwardly assists our customers in realizing their dream of homeownership. In fact, they may even enhance affordability for our customers, as Upwardly will have the opportunity to negotiate lower fees on their behalf.
