NAR Lawsuit

[Vēritās]

I never realized how many people were truly ignorant of how real estate transactions happen until I started seeing these news stories completely misrepresent it all with their take on the recent lawsuit.

I'm curious how much of this story Res has kept up with. Virtually everyone at our brokerage is shell shocked. None of us can understand why NAR didn't appeal like they said they would. It just doesn't make any sense and we all feel like they left us out to dry.

[Res Ipsa]

I never realized how many people were truly ignorant of how real estate transactions happen until I started seeing these news stories completely misrepresent it all with their take on the recent lawsuit.

I'm curious how much of this story Res has kept up with. Virtually everyone at our brokerage is shell shocked. None of us can understand why NAR didn't appeal like they said they would. It just doesn't make any sense and we all feel like they left us out to dry.

Brand new to me. I’ll take a look.

[Doctor CamNC4Me]

Veritas, would you mind explaining to the layperson why this is bad for realtors?

- Doc

[Res Ipsa]

I've never been involved in an anti-trust case. Regarding the merits of the cases, all I can say is that sometimes long-established business customs and practices are vulnerable to legal challenges that have not been brought before because they represent the way things have always been done. This looks to me like a good example. The potential anti-trust issues became visible once the internet became viable competition to the traditional Multiple Listing Services as a means of selling homes.

Compensating the buyer's agent for their services is a practical problem. The seller can pay their commission out of the sale proceeds. But the buyer doesn't have sale proceeds. That was being addressed by having the selling agent split their commission with the buying agent. The articles I looked at weren't exactly clear, but it sounds like the NAR required the selling agent to include a non-negotiable split in the MLS database, but which was not disclosed to the buyer. I'm not clear on whether it was disclosed to the seller.

So, the buyer ends up with an agent whose services will be included in the price of house, but the buyer is never told how much their own agent is being paid. And there is no opportunity for the buyer to negotiate a price for the buying agent's services. I can see how a jury would find this arrangement between buyer and seller agent to be anti-competitive.

What makes the most sense to me, in the abstract, is for the seller to compensate their agent out of the proceeds and for the buyer to be able to finance the cost of their agent as part of the home loan. From the articles I read, this is prohibited by regulations that the NAR has supported.

As to why the NAR settled: it was, as a practical matter, forced to by the number of major real estate brokerage companies that had settled and, as I understand it, had to withdraw from the MLS service unless the terms of the service were changed. It is very common for the losing party at a trial to immediately declare that it will appeal. Often, after a review by appellate lawyers on the costs and merits of an appeal, the case gets settled.

[Dr. Shades]

None of us can understand why NAR didn't appeal like they said they would.

Whom did the Naval Air Reserve sue in the first place, and what was its motive for doing so?

[Vēritās]

Veritas, would you mind explaining to the layperson why this is bad for realtors?

- Doc

The 6% commission was never a "standard" or a "rule" like the media is purporting it to be. This is why so many of us are pissed off because we've been doing this for years and it blows our minds how this is being perceived by the media, which in turns brainwashes the masses into thinking commissions are a thing of the past and they're already telling us they want to list for zero commission because that's what they heard on the news . The fact is commission is, was and always has been negotiable. The recent settlement requires us to do what we've already been doing which is to make commissions negotiable. The 6% figure is talked about because it is the average asking and it is set by the market, but its all depending on what state you're in and what kind of market you're in. For example, I had a couple of my sellers over the years insist they're not paying more than 1% to the buyer's agent so that's a total of 4% since we'd still ask for 3%. If that's what they insist on, then that's what I'll advertise in the MLS, which is what a buyer's agent sees when searching for properties for his client. The problem is that buyer's agents tend to ignore those properties paying lower commissions, and so the house sits on the market longer or doesn't sell at all. I mean, makes sense right? Nobody wants to work for free. Imagine showing your buyer 10 houses and they're torn trying to choose between two of them. One is offering the usual 3% commission to the buyer and the other is only offering 1%. Well, on a $500,000 home, a 2% swing is a $10,000 difference in the two potential paychecks for doing the same amount of work. If you've been showing these clients 30 homes over the last 6 months wondering if you're ever going to be paid for your time, a $5,000 paycheck probably doesn't even cover all of your expenses through that time period.

So with lower commissions offered, the sellers can't sell their homes so they raise the advertised commission to 2.5% or 3% just to stay competitive with other properties offering the same. When we had our crazy seller's market over the past couple for years due to low inventory, we were seeing more and more listings offer only 2% or 2.5% with some rare cases of 1%. This happened because the low inventory and a large pool of buyers resulted in sellers having more leverage, so they were cutting commissions for the other side. But with crazy buyer's markets we see listings offer 4% (especially with new construction) or "broker bonuses."

But wait, isn't this about sellers and the commission of a whopping 6%? Yes, that's because the buyer's broker is paid by the selling broker. So the seller's commission paid to the listing broker is eventually divided up at closing (3% + 3% = 6%) . So technically, on paper the seller is paying 6% to sell that house and the listing broker takes some of that money to pay the buyer's agent as part of the marketing costs. There is nothing illegal or unethical about this and it has been this way for God knows how long in Real Estate. But this is interpreted by the plaintiffs as the seller paying for the buyer's agent to negotiate against them. But the reason they are paid at all is because they are the ones who bring a "ready and willing buyer". In fact, if a buyer brings a ready and willing buyer and the seller chooses to no longer sell, legally they can sue for performance and demand their 3%. This happens very rarely, but it does happen because according to the brokerage agreements, the buyer's agent did his part. The same is true for listing agents who can sue the seller if he brings a buyer who is able and willing to purchase the property at asking price, and the seller suddenly changes his mind about selling. I don't know of anyone who has actually sued a client for doing this, but sellers and buyers do this all the time and screw over the agents who end up working for free, but the general rule among brokerages is that it isn't worth risking your reputation from a marketing perspective, so don't even consider suing your clients for a commission.

At the end of the day, the plaintiffs are looking at it all wrong by saying the sellers are paying the buyer's commission, because it is the buyer who brings all the money to the table and that money is divvied out at the attorney's office during closing. When a seller of mine tells me he needs to clear $400k, I tell him we need to sell the house for at least what it will appraise for. But if he needs to clear that exact amount, he needs to make sure we list it for at least $435k to cover commissions and provide some wiggle room during negotiations. So in essence, the commissions are already "baked in" to the purchase price of the home. This is what some people don't seem to understand. Now, the plaintiff's attorney is also saying this is what's driving up the costs of housing, but that's really a stretch isn't it? If a buyer's commission is reduced to zero, does anyone in their right mind really think the seller is going to list the home for 3% less than what it would already sell for based on market/appraised value? Of course not. But that's their attorney's narrative that paints us as the boogeyman and a reason for high housing costs, which apparently resonated well with the jurors.

As a side note, my wife and I are in the habit of doing discounts for friends, neighbors and family. So we'll list their home for only 5%, but we will keep 2% and give the other 3% to whatever agents brings a buyer. If we find the buyer and end up representing both sides, we end up doing the listing for only 4%. Very rarely does a real estate agent average a 3% commission. Every year we add up our total revenues and divide it by the number of transactions and our average commission per transaction is usually between 1.8% and 2.5% because like I said, everything is negotiable.

When sellers tell us they'd rather offer less to the buyer's agent we explain to them that they can do that, but that might cause the house to sit on the market longer. And it always does from our experience. For sellers who need to sell quickly, they need to offer the full 3% and sometimes they'll offer even more. In fact we regularly do transactions that offer us a "broker bonus" (mentioned above) which isn't an actual increase in percentage of the sale (though I suppose it could be), but rather a flat fee that can be any amount; though it is usually around $2,000-3,000 I've seen them as high as $8,000 which is on top of the 3%. This is usually in situations when people are in a desperate situation and need to sell their house ASAP.

During our listing appointments we are always very transparent about the costs to list a home and how commissions are paid. In fact, it is explicit in the listing brokerage agreement that the seller signs. But in Missouri, what happened is two neighbors, one of whom is a trial attorney, decided they were going to sue over some agent's failure to disclose how commissions were paid and they were upset that they ended up "paying the buyer's agent who negotiated against them." Again, they're looking at it all wrong but that was how they framed and pushed it to the judge. They also got a bunch of other people to say they were also confused by the process and they all signed a petition for a class action lawsuit. I mean, hey, why not? Who cares if you signed an agreement explicitly laying out how commissions were paid. All they had to do apparently was say they it lacked clarity or even worse, they felt tricked or pressured. Where evidence for that lacked in court, sympathy for that view was plenty.

So last November we were all told about this lawsuit decision and we didn't fully grasp how this would affect the industry until now because NAR told us they would appeal it because it was without merit, and that the appeal would last a couple of years. But then this month we were all blindsided when NAR decided to settle. They said they did this because it prevents the rest of us from being sued. But why would we be sued? We're not doing anything illegal. In fact the practices they demanded in Missouri are already standard in Georgia where buyer brokerage agreements are required by (GREC) Georgia Real Estate Commission. The result of this settlement could have a major impact on the real estate industry because of this crucial stipulation in the settlement:

The selling agent is NO LONGER ALLOWED to advertise the rate of commission for the buyer's agent on the MLS.

But why?

We all have been scratching our heads over this because to us it doesn't make any damned sense at all but it has real potential of totally ruining the financial lives of all buyer's agents.

In what way?

Well, because now they don't even know if they're getting paid. In order to guarantee they get paid they now have modify the buyer's brokerage agreement so it says that if the seller decides not to offer a commission, the buyer agrees to cover it.

Well, buyers have never paid a commission to see houses or to write their contracts or to negotiate on their behalf, and the fact that they've been getting that service without any upfront costs to them is a huge reason why they use agents to begin with. The fear now is that buyers will just say, screw that man, I can use Zillow to find listings myself and call up the selling agents directly and do my own negotiating. This benefits the selling agent because he is likely getting 5-6% from the seller to list the house and now he gets to keep the entirety of it because there is no agent representing the buyer. Of course the seller is now doing twice the work by himself, but that's beside the point...

So buyer's agents, beginning in mid-July, will no longer be able to see from an MLS listing how much the selling brokerage is willing to compensate them for bringing an able and willing buyer. ("able" meaning buyer has received a preapproval from a lender) Instead, they have to call up each listing agent individually to ask them how much they're offering, if they're offering anything at all. And then they need to cover their own asses and get an agreement on commission signed before showing the house to their client. My buyers typically see 15-30 houses before deciding on what to buy. So the process for us is soon going to be one of monotony and uncertainty. Typically I make a list of houses to show the night before, and I can access the MLS, see available times for showing, use the SHOWING TIME service which sets up the appointments for each agent electronically. But now I can't do any of this without first calling the selling agent to find out if I'm going to get paid, which means I can't set up the schedule until the next day because nobody is answering the phone that late at night.

So I'll need to make a list of houses my buyer wants to see, and hope they're all offering commissions. If they insist on seeing a house that offers zero commission, it would be unethical for me and a violation of existing brokerage agreement to refuse to show them the property.

So why do buyers need an agent to begin with? Well, great question. At first, before I got into real estate I thought the same thing, but quickly learned of horror stories of buyers who were totally taken advantage of by sellers because they didn't have representation and someone to guide them through the process. I can't tell you how many times I've wanted to strangle a buyer of mine because they went to talk to the seller or the seller's agent without me present. They basically end up giving the game away by saying things that give all leverage to the other side.

Just last year a friend of mine sold his house up the street from us and before going under contract they decided to let a potential buyer walk through the house without me present. I wasn't aware of this but was livid after finding out (Buyers and Sellers should NEVER interact before negotiations and a contract is binding). I was upset because they knew better, because they've known us 16 years and we've told them of the horror stories that come from situations like this, and this instance was no exception because the wife was constantly telling the potential buyers that they were pretty desperate, and that they'd include the hot tub and all the basement furniture if they buy the house. So what happened is the next day their agent wrote an offer which wrote into the stipulations that the sellers leave all furniture and the brand new $12,000 hot tub. Oh, and they offered only $940,000 on the house which was listed at $975,000 and they asked for the sellers to pay $15,000 of their closing costs.

[Vēritās]

I've never been involved in an anti-trust case. Regarding the merits of the cases, all I can say is that sometimes long-established business customs and practices are vulnerable to legal challenges that have not been brought before because they represent the way things have always been done. This looks to me like a good example. The potential anti-trust issues became visible once the internet became viable competition to the traditional Multiple Listing Services as a means of selling homes.

Compensating the buyer's agent for their services is a practical problem. The seller can pay their commission out of the sale proceeds. But the buyer doesn't have sale proceeds. That was being addressed by having the selling agent split their commission with the buying agent. The articles I looked at weren't exactly clear, but it sounds like the NAR required the selling agent to include a non-negotiable split in the MLS database, but which was not disclosed to the buyer. I'm not clear on whether it was disclosed to the seller.

So, the buyer ends up with an agent whose services will be included in the price of house, but the buyer is never told how much their own agent is being paid. And there is no opportunity for the buyer to negotiate a price for the buying agent's services. I can see how a jury would find this arrangement between buyer and seller agent to be anti-competitive.

What makes the most sense to me, in the abstract, is for the seller to compensate their agent out of the proceeds and for the buyer to be able to finance the cost of their agent as part of the home loan. From the articles I read, this is prohibited by regulations that the NAR has supported.

As to why the NAR settled: it was, as a practical matter, forced to by the number of major real estate brokerage companies that had settled and, as I understand it, had to withdraw from the MLS service unless the terms of the service were changed. It is very common for the losing party at a trial to immediately declare that it will appeal. Often, after a review by appellate lawyers on the costs and merits of an appeal, the case gets settled.

Thanks for taking the time to wade through this Res. I think you might be interested in listening to this guy's take on the situation, he apparently has a lot of background information that's informative about the plaintiffs about how this all started. The audio clip is free to listen to if you have an Amazon account.

https://www.amazon.com/Lawsuits-Missing ... nqNMG9L7hI

[Res Ipsa]

I've never been involved in an anti-trust case. Regarding the merits of the cases, all I can say is that sometimes long-established business customs and practices are vulnerable to legal challenges that have not been brought before because they represent the way things have always been done. This looks to me like a good example. The potential anti-trust issues became visible once the internet became viable competition to the traditional Multiple Listing Services as a means of selling homes.

Compensating the buyer's agent for their services is a practical problem. The seller can pay their commission out of the sale proceeds. But the buyer doesn't have sale proceeds. That was being addressed by having the selling agent split their commission with the buying agent. The articles I looked at weren't exactly clear, but it sounds like the NAR required the selling agent to include a non-negotiable split in the MLS database, but which was not disclosed to the buyer. I'm not clear on whether it was disclosed to the seller.

So, the buyer ends up with an agent whose services will be included in the price of house, but the buyer is never told how much their own agent is being paid. And there is no opportunity for the buyer to negotiate a price for the buying agent's services. I can see how a jury would find this arrangement between buyer and seller agent to be anti-competitive.

What makes the most sense to me, in the abstract, is for the seller to compensate their agent out of the proceeds and for the buyer to be able to finance the cost of their agent as part of the home loan. From the articles I read, this is prohibited by regulations that the NAR has supported.

As to why the NAR settled: it was, as a practical matter, forced to by the number of major real estate brokerage companies that had settled and, as I understand it, had to withdraw from the MLS service unless the terms of the service were changed. It is very common for the losing party at a trial to immediately declare that it will appeal. Often, after a review by appellate lawyers on the costs and merits of an appeal, the case gets settled.

Thanks for taking the time to wade through this Res. I think you might be interested in listening to this guy's take on the situation, he apparently has a lot of background information that's informative about the plaintiffs about how this all started. The audio clip is free to listen to if you have an Amazon account.

https://www.amazon.com/Lawsuits-Missing ... nqNMG9L7hI

Thanks. I'll give it a listen.

Short of permitting buyers to finance the buying agent's commission, I think it's going to be a mess for a while.

[Vēritās]

it sounds like the NAR required the selling agent to include a non-negotiable split in the MLS database, but which was not disclosed to the buyer. I'm not clear on whether it was disclosed to the seller.

No, the selling agent never had to pay a commission. In fact, in one crazy example last year during the wild seller's market, we looked up a property that had a blank in the commission section so we called the agent and she told us zero commission. We literally started laughing, and asked why they think we'd be working for free, and she said that the buyers can offer to pay our commissions by offering 3% over asking price to purchase the home.

The way the commission is paid is explicit in the listing agreement between the brokerage and the seller. Here is a screenshot I just took, page three of a typical brokerage agreement I deal with every week. As you can see, it explicitly states the seller pays 6% to the listing brokerage, and the listing brokerage will then pay 3% to the buyer's agent. The way the contract is written clearly shows how this figure can be anything, depending of what's been negotiated.

So, the buyer ends up with an agent whose services will be included in the price of house, but the buyer is never told how much their own agent is being paid.

Here is page two of the typical buyer brokerage agreement:

And there is no opportunity for the buyer to negotiate a price for the buying agent's services. I can see how a jury would find this arrangement between buyer and seller agent to be anti-competitive.

Yes, I suppose if it is framed in that way. But we bend over backwards for transparency on all of these points. I've only had one buyer ask me how much I charge for my services, and I told him the commission comes out of the proceeds of the sale paid for by the listing brokerage. Which is 100% accurate. But one can easily make the argument that it is the buyer who is paying for all commissions because without the buyer, there isn't any money to talk about. He's the one bringing the funds to the table.

[Res Ipsa]

it sounds like the NAR required the selling agent to include a non-negotiable split in the MLS database, but which was not disclosed to the buyer. I'm not clear on whether it was disclosed to the seller.

No, the selling agent never had to pay a commission. In fact, in one crazy example last year during the wild seller's market, we looked up a property that had a blank in the commission section so we called the agent and she told us zero commission. We literally started laughing, and asked why they think we'd be working for free, and she said that the buyers can offer to pay our commissions by offering 3% over asking price to purchase the home.

Sorry, I should have specified that the split could be 100-0 or 0-100. But am I correct that, once the listing agreement is signed, the buyer's agent cannot negotiate the split stated in the form?

The way the commission is paid is explicit in the listing agreement between the brokerage and the seller. Here is a screenshot I just took, page three of a typical brokerage agreement I deal with every week. As you can see, it explicitly states the seller pays 6% to the listing brokerage, and the listing brokerage will then pay 3% to the buyer's agent. The way the contract is written clearly shows how this figure can be anything, depending of what's been negotiated.

Thanks! Seeing the document really helps. I know enough about real estate to know that the seller has always been able to negotiate with the listing agent over the percentage of the commission. I really didn't understand that part of the plaintiffs' argument.

So, the buyer ends up with an agent whose services will be included in the price of house, but the buyer is never told how much their own agent is being paid.

Here is page two of the typical buyer brokerage agreement:

Again, thanks for the document. If use of that form is uniform, I'm not seeing the problem. In practice, is it common to actually put a percentage in the form other than 0%? In your experience, how often does the buyer pay his agent over and above the amount his agent receives from the seller's agent?

And there is no opportunity for the buyer to negotiate a price for the buying agent's services. I can see how a jury would find this arrangement between buyer and seller agent to be anti-competitive.

Yes, I suppose if it is framed in that way. But we bend over backwards for transparency on all of these points. I've only had one buyer ask me how much I charge for my services, and I told him the commission comes out of the proceeds of the sale paid for by the listing brokerage. Which is 100% accurate. But one can easily make the argument that it is the buyer who is paying for all commissions because without the buyer, there isn't any money to talk about. He's the one bringing the funds to the table.

I've bought exactly one house using a buyer's agent. I knew going in that there was a commission included in the listing agreement and that my agent would be paid out of that. And I had zero problem with that arrangement. I understood why the commission is handled the way it is. In my opinion, it didn't matter because the only funds from which a commission was going to paid was mine, and the seller and I were more interested in the bottom line number than the mechanics of how the agents got paid.

If you've only had one person ask you how you get paid when acting as a buyer's agent, is it standard practice to just put 0% in the written agreement?

I can see how a jury could be persuaded that the customary practice was non-competitive, but, like you said, the buyer should understand that they are in fact paying for everything because they are the only party bringing money to the transaction. I am skeptical about the claims that these changes will have any substantial effect on housing prices.

Thanks for taking the time to bring me up to speed. I had a hard time figuring out exactly what was going on from press articles, and even reviewing of th complaints wasn't that helpful.