By now you must have heard about the proposed settlement regarding the lawsuit against the National Association of Realtors (NAR) and most of the large real estate brokerages.

You may be wondering what the proposed settlement contains, and what it will mean to you when you are ready to buy or sell a home.

Questions may include:
Why was this lawsuit needed?
Why now?
What are the terms of the settlement agreement?
What is a Buyer Representation Agreement?
What are the likely outcomes once the settlement is approved and in practice?
Will commissions to sell a home go down?
Will home prices go down?
Who is and who should be paying the buyer’s agent commission?

What is an MLS?

Before answering the above questions, it will be helpful to know what an MLS is (you probably already know), and 2 things you may not know. A Multiple Listing Service is a platform that allows agents representing sellers to promote homes for sale to other agents. Once a listing is “uploaded” into an MLS system, it gets syndicated to well over 300 websites.

You may not know that geographic regions throughout the US have a Board of Realtors. Each Board of Realtors has their own MLS software (between Camarillo and Calabasas we have 3 different Boards of Realtors and 3 separate MLSs), just so you know there isn’t 1 MLS for the entire country. You also may not know that an MLS typically contains a field that offers legally binding compensation from the agent listing the home for sale to the agent who represents the buyer (“cooperative compensation”) that successfully buys the home. This compensation is paid from the listing agent’s brokerage, via commission earned from the seller, and goes directly to the buyer’s agent’s brokerage.

Why was this lawsuit needed?

The need for the lawsuit has some legitimacy. Non-discount brokerages typically required their agents to compensate a minimum amount to the buyer’s agent. Keller Williams, where I’ve been the last 9 years, while not in writing, didn’t want me to compensate less than 2 ½% to buyer’s agent. Certainly smells like price-fixing, from my brokerage to me. Though…it wasn’t a rule 100% of the time. Some agents, whose only value is a reduced fee, never followed this.

Why now?

Timing more than anything else. I’ve heard the attorney who started this lawsuit has been suing the real estate industry for roughly 40 years…

What are the terms of the proposed settlement agreement?
The proposed settlement agreement (a judge is scheduled to approve the settlement, if I’m saying that correctly, in July) basically contains the following:

MLSs are prohibited from publishing compensation offers to buyer’s agents.

MLSs must eliminate all broker compensation fields (so it’s not a searchable field).

Agents working with buyers must sign a Buyer Representation Agreement before the agent can show a home listed in the MLS.

What is a Buyer Representation Agreement?

Currently 16 states (California is not one of them) require a buyer and agent to enter into a Representation Agreement before they start working together. After the settlement is in place, the requirement will be nationwide.

A Buyer Representation Agreement essentially addresses 3 things.

It establishes a fiduciary duty from the agent to the buyer. This is the highest level of care. Always putting the buyer’s interests first, ahead of anything else.

It establishes a relationship of exclusivity. While not requiring a buyer to buy a home, if the buyer buys a home, they will buy with that agent, regardless of who found the property.

It establishes how the buyer’s agent is compensated. Historically, this fee has been 2 ½% of the sale price. Also historically, this compensation has come from the seller’s commission paid to and split by their listing agent.

An MLS historically would not allow $0 compensation, and with the settlement, this is required. So, the seller MUST transparently be told how much they offer to compensate the buyer’s agent is their decision, and can range from $0 to whatever they want.

What are the likely outcomes once the settlement is approved and in place?

The biggest question is who will compensate the buyer’s agent and how much. There are implications (some likely unintended) from the settlement.

If a seller is not offering to compensate the buyer’s agent:

How does a first time buyer compensate their agent if all of their available funds are going to the down payment? Are they forced to go unrepresented and not have an agent looking out for their best interests in the largest purchase of their life?

What about a Veteran of our armed services? They have the opportunity to buy with no money down. Though, they can’t receive any cash from a purchase, and there is a restriction on the amount of seller credits they can receive. Paying their agent is not allowed. Are they forced to go unrepresented?

Will fewer buyers visit and consider the home since they don’t want to come out of pocket to compensate their agent?

If less buyers see the home, will the seller receive less interest, fewer offers and potentially a lower price?

Will buyers offer less for the home so they can compensate their agent?

Potential outcomes are wide in scope and will be unknown for quite some time.

Will commissions to sell a home go down?

This seems to be a 100% guarantee. How much and when? Since some sellers will choose to compensate buyer’s agents less than the historical 2 ½%, seller side commissions as a whole will go down.

Will home prices go down?

Some headlines and articles predict this. Perhaps for the headline and to generate your click? Economics 101 says a market’s price is determined by supply and demand, not costs. So… prices should not be impacted where the seller offers the historical commission of 2 ½% to the buyer’s agent. Though, for the sellers that offer less than 2 ½% commission to the buyer’s agent, what happens to those prices will need to be seen.

Some make the argument that buyer’s have always been paying their agent’s commission through the sale price. I don’t see it that way, though others do.

Each principal paying their own agent certainly is logical, and is done that way in other countries. How it plays out will likely take years to see. Some agents representing buyers will stick firmly to charging their client 2 ½%. Some have raised their fee to 3%. And there will always be discounters.

Does this raise some questions? Please reach out if so!