April 8, 2024 — By Ian Johnston (Broker/Owner of NoCo Flex Real Estate)

 

The recent National Association of Realtors (NAR) settlement has been a topic of widespread discussion which will impact everyone with even a passing involvement in real estate. This settlement, stemming from a class-action lawsuit against NAR brought by consumers in Missouri and elsewhere, is set to bring about transformative changes for the industry. We believe these are changes that are largely positive for consumers and could represent a watershed moment reshaping not just the way that brokers are compensated and clients are represented but also the price of real estate more generally.

 Below is an overview of the coming changes and their likely impact.

 Less Transparency in Commission Structures Might Still Save Consumers Money?

 A pivotal change, effective from July 2024, is the change in how broker commissions are advertised. The status quo for several decades has been for listing brokers to negotiate compensation with their seller clients not only for themselves, but also for any cooperating broker that brings the successful buyer. This has been one of the great quirks of the industry. If you are a broker representing a buyer, in 99.9% of cases you don’t charge that client for your services at all. Instead, you get paid based on whatever the listing broker negotiated to be offered to you by the seller. You have no say in the amount of this commission and your pay is totally disconnected from your performance for your client. This has always presented a bit of a strange situation where the seller is put in the position of essentially being forced to pay both sides (including the broker whose entire job is to negotiate against them and for their buyer client!) This was essentially the basis of the class-action lawsuit that precipitated this settlement. Consumers said that the way NAR has set up the MLS databases makes offering this ‘co-op commission’ essentially a requirement and it is an unfair one that can drive up costs for consumers. The courts agreed and here we are.

The important change to this situation from the settlement agreement is that starting in July 2024, listing brokers will be prohibited from advertising the specific co-op commission rate that is being offered for a listing directly on the MLS. This seems like a strange change on the face of it, since it will most likely mean less transparency on broker compensation for brokers and consumers. So, why was NAR forced to agree to it then? The argument seems to be that not having a set co-op commission advertised to all brokers on the MLS will foster an environment where commission rates are more openly discussed and negotiated, rather than being predetermined. Whether this actually happens remains to be seen, but our take is that there remains some potential here to put more competitive price pressure on these co-op commissions for sellers and potentially save sellers money. It also may open the door for some truly innovative developments, like variable co-op commission arrangements (a situation which gets a bit complicated as discussed in our earlier blog post linked above).

 Written Agreements Required for Buyer Representation

Another result of the NAR settlement which will come info effect in mid-July 2024 is the requirement for written buyer representation agreements. This change is another which could have several effects. First, let’s talk about the status quo. Right now, at least in the northern Colorado real estate industry, many brokers represent buyers as ‘transaction brokers’. This type of representation is in contrast to ‘buyer agency’ and there are significant differences which we discuss here. Long story short: A lot of consumers (and even brokers) use the terms ‘broker’ and ‘agent’ interchangeably, but they are not the same. The most significant difference is the fact that agency implies a fiduciary responsibility for the broker – in other words, a broker who is the client’s agent must legally put their clients financial interest ahead of their own. This seems like it is great for consumers, right? Well, it is in most situations. Before these proposed changes, there was a trade-off though. If you wanted your broker to represent you as a transaction broker without the extra duties of a fiduciary etc., you could do it without signing a contract with that broker. That means pre-July 2024 if you were a buyer and wanted to part ways with your broker due to being dissatisfied with the service provided you could do it with a simple text message or phone call and have no further commitment. With the new change, brokers will need to negotiate a contract with their buyer clients in order to represent them. This could mean a few things: 

1. It could become more difficult to fire your broker without them having specifically failed in the duties outlined in their contract
2. More brokers will be forced to explain the difference between transaction broker and the agency representation as part of negotiating a contract which may mean more clients opting to be represented as an agent to access that fiduciary responsibility and other additional duties required under the buyer agency relationship.
3. The door could be opened to alternative compensation models for buyer agents by the combination of the contract requirement and the need for buyer representatives to negotiate their co-op commission agreement for each transaction

 

Only time will tell the degree to which each of these come to pass, but this seems to us to be the most likely outcomes at the moment.

 

Wider Impact on the Real Estate Industry and Market

The overall impact on the real estate industry and the wider market is still to be determined. The real estate market in the US is massive and complicated so the future is certainly unwritten, but regardless we can foresee some likely outcomes based on this landmark settlement. Here’s what we expect:

 

1. Downward pressure on commissions – some level of downward price movement on the commissions charged by brokers is likely to be the result of this settlement. That said, it may not be a massive change but a more incremental and smaller one.

2. An exodus of brokers from the industry / reduced Realtor membership for brokers – This one is likely due to the first expected outcome. We’d expect not just an ‘exodus’ of brokers leaving the industry entirely, but also a corresponding reduction in the number of brokers who opt to stay (or become) Realtors / members of NAR due to the fact that the organization could be seen to have failed to protect their commissions and will likely need to increase the dues charged of members in the light of this settlement which will see them pay nearly half a billion dollars over the next 4 years.

3. More potential for consumers to negotiate with their brokers – This one may be the most beneficial in the end. Through all of these changes, if consumers start to realize that they have the power to negotiate (and should be negotiating) their broker’s compensation the industry could become much more competitive and we could see more innovative compensation models that put clients first become more commonplace.

Overall, the NAR settlement marks a significant new chapter in the real estate industry – one that could bring more competition, more consumer choice and potentially more robust client empowerment. But the good news is that you don’t have to wait years to see that play out. Here at NoCo Flex Real Estate we’re already showing the market what that looks like with our innovative compensation options that give clients unprecedented value and flexibility. And we promise to continue to champion the empowerment of our clients and keep you informed in the future of any new developments. If you have any concerns or questions about how these changes may affect your real estate decisions, please feel free to reach out or call us at 970-237-4749. We’re here to guide you through these evolving times with our advice and support.