The NAR Settlement & Its Impact on Real Estate Transactions

The NAR Settlement & Its Impact on Real Estate Transactions

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You might’ve heard the buzz about the National Association of Realtors’ (NAR) recent settlement agreement, but what does it really mean for real estate transactions? The NAR managed to secure the release of most of its members from liability through this groundbreaking settlement, which involves a hefty payment of $418 million over the next four years. This landmark agreement addresses the contentious practice of tying commissions, a focal point in a series of lawsuits.

So, what exactly is tying commissions? Why was it such a big deal? And how will the NAR settlement agreement impact the real estate industry and the US economy?

“Tying and Steering”: What Do They Mean for Buying & Selling Real Estate?

The issue of tying and steering in the real estate industry was at the center of the lawsuits that ultimately led to the NAR settlement agreement.  

Tying commissions refers to a scenario where the seller’s agent has already predetermined the compensation for the buyer’s agent. This predetermined tie to commissions creates a troubling lack of transparency and competition in the market, ultimately leading to increased fees on both ends of the transaction. One of the attorneys representing the plaintiffs even stated that this matter is resulting in Americans paying approximately $60 billion in additional real estate commissions

Steering goes hand in hand with tying commissions. Some buyers’ agents might subtly lean towards showing properties that offer higher commissions, consciously or unconsciously influencing their clients’ decisions. This practice effectively sidelines homes that don’t meet the standard commission criteria, resulting in reduced chances of sale and potentially longer time on the market. 

Here are some of the consequences of tying and steering affecting buyers, sellers, and the industry as a whole:

• Restricts Buyers

Buyers’ lack of freedom to evaluate the services rendered by their agent before commission terms are set restricts their ability to make informed choices. This lack of transparency can lead to dissatisfaction and potentially unsatisfactory buyer outcomes. 

• Creates Barriers to Competition

By predetermining compensation before a buyer has had a chance to weigh the value of the services received, agents are limited in their ability to differentiate themselves based on their expertise, skills, and track record. This lack of competition can stagnate industry standards and hinder professional development. 

• Diminished Affordability & Reduced Profitability

Equally significant is the impact on fees for both buyers and sellers. When compensation is predetermined, it eliminates the opportunity for negotiation and alternative fee structures. As a result, fees can be driven up, potentially diminishing affordability for buyers and reducing profitability for sellers. 

Key Points of the NAR Settlement Agreement

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Analyzing the agreement’s key points sheds light on its transformative nature. Let’s dive into the essential elements that encapsulate the essence of the NAR settlement agreement: 

The NAR’s Firm Stance

The NAR asserts its stance, refuting any culpability regarding the MLS cooperative compensation model rule. According to it, the cooperative compensation system and its current policies benefit both buyers and sellers, and the settlement aims to safeguard consumer choice and prioritize the protection of NAR members. 

Financial Settlement: $418 Million Payment

As stated earlier, the NAR has committed to paying a total of $418 million over a four-year period. The agreement grants release from liability to the NAR and the following: 

  • Over one million NAR members, 
  • All state/territorial and local REALTOR® associations,
  • All association-owned MLSs, and
  • All brokerages with a NAR member as the principal party, as long as their residential transaction volume in 2022 did not exceed $2 billion.

Still, despite the efforts, the settlement doesn’t cover realtors and brokers associated with HomeServices of America or one of its affiliates and the employees of these companies. The companies being the remaining defendants litigating their case. 

Preservation of Cooperative Compensation Options – but off of MLS

While preserving the concept of cooperative compensation, the agreement emphasizes that it should no longer be tied to the Multiple Listing Service (MLS). This move creates an opportunity for buyers and sellers to negotiate compensation independently, thus enabling more flexibility and autonomy in determining commission structures. 

Requirement for Written Agreements with MLS Participants Representing Buyers

Effective mid-July 2024, MLS participants and buyers they represent will be required to execute written agreements. These written agreements provide a clear framework for the relationship, outlining expectations, responsibilities, and compensation terms. 

Impact on Real Estate Transactions

The NAR settlement agreement is poised to significantly impact real estate transactions, offering potential benefits and ushering in transformative changes. Here are key areas where this agreement is expected to influence real estate dealings: 

1. Elimination of Tying and Steering Practices 

The agreement emphasizes the separation of cooperative compensation from the Multiple Listing Service (MLS), curtailing tying and steering practices. This move promotes fair competition and ensures buyers and sellers can negotiate compensation independently without being bound by restrictive practices. By eliminating these practices, the real estate market is poised to become more transparent and consumer-centric. 

2. Reduction in Housing Transaction Costs 

The detachment of cooperative compensation from the MLS could reduce housing transaction costs. By allowing buyers and sellers to negotiate compensation directly, there is a potential for cost savings, as parties have greater flexibility to adjust commission structures to their specific needs. This reduction in transaction costs could make homeownership more accessible and affordable for a broader range of individuals. 

3. Enhanced Geographic Mobility 

The NAR settlement agreement may enhance geographic mobility for buyers and sellers by fostering a more competitive and transparent real estate market. The freedom to negotiate compensation independently could empower individuals to explore various housing options in different locations. This increased mobility has the potential to facilitate job relocations, lifestyle changes, and better pairing of housing needs with individual preferences. 

4. Wealth Accumulation Opportunities 

A more transparent and competitive real estate market allows individuals to make informed decisions that lead to value appreciation in their property investments. This could result in greater wealth accumulation over time, contributing to long-term financial stability and growth. 

You can discover additional resources to boost your wealth accumulation through MBE Wealth

Reshaping the Real Estate Landscape

House with a sold sign

The NAR settlement agreement is poised to transform real estate transactions by promoting fairness, transparency, and consumer empowerment. By addressing critical issues and fostering a more competitive landscape, this agreement has the potential to create a more vibrant and accessible real estate market for buyers and sellers alike. 

Being relatively new, the agreement is bound to undergo more developments. Stay tuned and explore our resources on the real estate market, or get instant notifications for timely news and updates! 

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