Our breakdown of the massive NAR settlement

New era in real estate

Like you, we are still taking in the enormity of the massive news this week. The NAR settlement signals a new era in real estate. 

While we usually discuss various news items from around our industry, we have decided to dedicate this edition to unpacking everything that just unfolded. We are going to break down the different angles behind this enormous moment for our industry, and how it will affect our roles as agents. Also, we are going to start helping you prepare for all the changes headed our way.

While there is still a lot to digest, and so much still to unfold, we can tell you that we will do our best to guide you through this sea change for our business. As we learn and understand more, we will make sure to share those insights with you.

- James and David

All about the NAR settlement

On Friday, the National Association of Realtors entered into a $418-million settlement agreement that, if approved by the courts, will bring an end to all litigation brought by home sellers. Here is a breakdown of the terms:

• NAR will pay $418 million over the next four years, with a $197 million payment due within 90 days of final settlement approval, followed by $72 million a year later, and another $72 million within two years. In year three, the final balance, along with interest, is due.

• The settlement resolves all claims against the following entities:

  • NAR 

  • All state and local Realtor associations

  • All association-owned MLSs

  • Brokerage firms that have an NAR member as a principal and had sales volume below $2 billion in 2022

  • More than a million NAR members, including agents and brokers

• This settlement doesn’t cover the lawsuits brought by homebuyers known as Batton 1 and Batton 2. They will continue.

• The settlement leaves HomeServices of America as the sole defendant in the Sitzer/Burnett case.

Our take

This is a huge win for NAR as an organization. Even with the $418 million settlement, they remain solvent and avoid going bankrupt. It’s a whole lot less than the $1.78 billion they were initially ordered to pay after losing Sitzer in the first round. Not only was NAR able to retain the ability to control policy of (most) MLSs, it was also able to avoid the biggest problem it potentially faced–the loss of membership due to MLS access being made optional. What remains unanswered is the DOJ's response to this settlement. We still don’t know what is going to happen to the total number of licensees nationwide, which could cause NAR some bigger financial problems down the road.

Brokerages and MLSs left out of NAR settlement

Larger brokerages and certain MLSs are not included in the NAR settlement and are still facing legal liability, according to Housingwire. Here’s what the settlement documents indicate:

• Brokerages that averaged more than $2 billion in residential transaction volume over the past four years are not included in the NAR agreement

• There are 94 brokerages which meet this criteria. For example: Compass (which had $227.98 billion in sales volume in 2022), eXp ($159.1 billion), and Redfin ($39.8 billion).

• Brokerages that choose to settle have two options:

  • Option 1: Deposit funds into a settlement escrow account opened by the plaintiffs within the next 120 days in the amount equal to .0025 multiplied by the average annual total transaction volume over the most recent four calendar years. 

    OR

  • Option 2: Go into non-binding mediation within 110 days following preliminary approval of the settlement agreement IF they can’t pay the amount in option 1.

• MLSs that choose to settle have two options as well:

  • Option 1: Pay 100 times the number of subscribers the MLS had in 2023 within 120 days into an escrow account. 

    OR

  • Option 2: Go into non-binding mediation within 110 days following preliminary approval of the settlement agreement IF they can’t pay the amount in option 1

Our take

When we first saw the terms of the settlement agreement, we wondered why the plaintiffs settled. They were getting substantially less than the initial verdict in Sitzer. But it’s clear now that the big brokerages are on the hook for a lot. For example, a brokerage the size of Compass could be on the hook for more than $500 million. Now we better understand why the plaintiffs felt this was the right decision.

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How the NAR settlement affects agents

NAR’s pending settlement agreement includes important changes to agent and broker business practices. Here are the three main takeaways agents need to know:

• The 'offer of compensation' field is going away

  • Listing agents will no longer be allowed to include offers of compensation on the MLS. This rule will go into effect in mid-July.

• Buyer agreements will be mandatory

  • Starting in July, all buyer agents are required to enter into a written agreement with their buyers before touring a home.

• Buyer agents will no longer automatically be paid by listing brokers

  • All forms of compensation have to be negotiated between agents and their clients directly. However, these are the typical ways buyer agents will still get paid.

  • Buyer clients can pay their agents directly

  • Sellers can offer compensation in the form of a concession

  • The listing broker can offer a portion of their compensation to the buyer agent

Our take

The terms of the settlement still need to be ironed out, but from what we know so far, it’s not the end of cooperation between the listing and procuring sides of brokerage. Although the official “offer of compensation” field is gone, the proposed settlement could still let the seller offer money for a buyer to allocate to the buyer’s agent. It doesn’t prevent that offer from being included in general-purpose listing-database fields. Still, the requirement to have buyer agreements, even before you tour, along with the decoupled commissions environment is new and significant.

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Schematics

The news that just missed the cut

• Roundup of reactions, including Wall Street’s, to NAR settlement

• Here’s how to take a break from social media without ghosting your followers

• Developers are struggling to scale these kinds of homes

• Guess what Steve Wynn’s Beverly Hills mansion, once listed at $125M, is going for now

• How to double your real estate business this year

Foundation Plans

Advice from James and David to win the day

We know there is a lot to digest from the NAR settlement news, and a lot that still needs to unfold. But we want to help you get ahead of these changes. Whatever happens next, it’s absolutely clear that buyer agents need to prepare for a decoupled commission environment. If they don’t, it’s going to be extremely difficult to build a profitable real estate business. Inspired and adapted from an excellent piece from our friends at BAM, here are some initial tips:

Clearly identify the value you are adding – Your buyer/seller presentation must clearly demonstrate the value you provide as a real estate professional. Clients need to know what they're getting for your commission rate. Show how you stand out and can help them navigate the market. The days of entitlement to commission and order-taking are over. Your presentation must be crystal clear.

Practice your buyer presentation as much as you can – Agents will need to be accustomed to presenting themselves differently from the get-go. This will require practice. We recommend rehearsing your presentation weekly and having a handout ready for after the meeting. Standing out will require extra effort in this new environment, making a strong initial presentation more crucial than ever.

Be prepared to discuss compensation options – Especially on the buyer side, you must be prepared to discuss options about how you’re going to be compensated. Obviously, we may see some law changes or rule changes with the MLS and financing, which would change some of the options. That contingency aside, assuming the seller isn’t willing to pay a buyer agent commission, here are some payment options you should discuss with your client:

• You can ask the buyer to pay your commission as part of the offer you write up.

• You can negotiate a seller’s assist or a credit.

• You can have the buyer pay you in one lump sum at the settlement. 

Protect yourself - Contact a local real estate attorney to discuss state-specific regulations. Also, consult lending partners to clarify compensation terms on the settlement sheet. Ensure you're well-informed about available options to clearly communicate what you can and cannot do for buyers, setting proper expectations in contracts.

As we said up top, these are some initial thoughts. We will say more as the dust settles.

To learn more about Estate Media, visit their website.

Just in Case

Keep the latest industry data in your back pocket with today’s mortgage rates:

There’s a lot to chew on in this edition of the Blueprint. We’d love to hear your thoughts on the settlement. Drop us a line!

That’s a wrap for today. We’ll see you on Friday!

- James and David