Last Halloween, a jury verdict in Kansas City, Missouri sent shockwaves through the residential real estate community. In the class action case, Burnett vs National Association of Realtors, et al, the plaintiffs—sellers of homes in Missouri and a few bordering communities—asserted that there was a conspiracy by the National Association of Realtors (“NAR”) and the named brokerage houses to use the NAR rules, the local realtor association rules, and multiple listing service (“MLS”) rules to keep commissions for real estate agents artificially high, in violation of the antitrust laws. At the heart of the lawsuit is a long-term practice, mandated by NAR and MLS rules, to require, as a condition to listing a home on the local MLS, that the seller make a unilateral offer to compensate the buyer’s real estate agent. Although the rules did not specify any particular percentage or dollar amount of compensation, the common practice in Missouri was to provide for an overall 6% commission, split evenly between the seller’s agent and the buyer’s agent. This practice, which is known as the “cooperative broker arrangement,” is common throughout the country, although local commissions in some areas may have been slightly higher or lower than the 6%, which was fairly standard in Missouri.
After a more than two-week trial, the jury took barely two hours of deliberation to award the Missouri class action plaintiffs a judgment in the amount of $1.78 BILLION, which under the antitrust laws, could be trebled to $5.34 BILLION. Before the trial began, two of the larger national brokerage houses who were also defendants in the class action agreed to settle for $138 million dollars. Importantly, the settlement agreement for these two brokerages expanded the class for settlement purposes to all plaintiffs nationwide.
Immediately after this judgment was rendered, copycat cases were filed throughout the country, many times by the same plaintiffs’ attorneys. Since this jury verdict, the other named defendants, including NAR, have all settled the class action claims on a nationwide basis and the settlement fund is now approximately one billion dollars. A class action notice regarding the nationwide settlement of the lawsuit (which has been consolidated with the copycat cases) is scheduled to be sent later this month.
In addition to the monetary relief in the settlement, NAR and the other defendants have agreed to several material practices changes, including changes to rules that the plaintiffs considered necessary to the anti-competitive effect of the cooperative broker arrangement. Those practice changes are set to go into effect no later than August 17, 2024. We wanted to highlight the most important changes here.
Practice Change Number 1:
ELIMINATES AND PROHIBITS ANY REQUIREMENT BY NAR OR MEMBER BOARDS THAT LISTING BROKERS OR SELLERS MUST MAKE OFFERS OF COMPENSATION TO BUYER BROKERS OR OTHER BUYER REPRESENTATIVES (EITHER DIRECTLY OR THROUGH BUYERS), AND ELIMINATES AND PROHIBITS ANY REQUIREMENT THAT SUCH OFFERS, IF MADE, MUST BE BLANKET, UNCONDITIONAL, OR UNILATERAL.
Prior to this change, NAR and local boards adopted rules that mandated that, as a condition to membership or as a condition to using the MLS, listing brokers had to make a blanket, unilateral, unconditional offer of compensation to the buyer’s agent, although the amount of such compensation was not specified or required. With this change, those rules will be withdrawn and a listing broker will no longer be required to have a cooperative broker arrangement as a condition to listing the property on the MLS. However, there is NOTHING in the settlement that prevents a listing broker from voluntarily agreeing to a cooperative broker arrangement the same as they have in the past. The cooperative broker arrangement will simply no longer be imbedded in the rules of the NAR, local realty boards, or the MLS.
Practice Change Number 2:
PROHIBITS REALTOR MLS PARTICIPANTS, SUBSCRIBERS, OTHER REAL ESTATE BROKERS, OTHER REAL ESTATE AGENTS, AND THEIR SELLERS FROM (A) MAKING OFFERS OF COMPENSATION ON THE MLS TO BUYER BROKERS OR OTHER BUYER REPRESENTATIVES (EITHER DIRECTLY OR THROUGH BUYERS) OR (B) DISCLOSING ON THE MLS LISTING BROKER COMPENSATION OR TOTAL BROKER COMPENSATION (I.E. THE COMBINED COMPENSATION TO BOTH LISTING BROKERS AND COOPERATING BROKERS).
The key phrase is “on the MLS” in this rule change. There is NOTHING in the settlement that prohibits realtors from making offers of compensation for cooperating brokers, it just can’t be accomplished on the MLS.
Practice Change Number 3:
REQUIRES REALTOR MLS’s TO (A) ELIMINATE ALL BROKER COMPENSATION FIELDS ON THE MLS AND (B) PROHIBIT THE SHARING OF THE OFFERS OF COMPENSATION TO BUYER BROKERS OR OTHER BUYER REPRESENTATIVES…VIA ANY OTHER REALTOR MLS FIELD.
The key phrase is “on the MLS” in this rule change. Prior to the change going into effect, the MLS had fields that specified the compensation offered to the buyer’s agent and those fields are being eliminated for this purpose. However, there is nothing in the settlement that prohibits the offers of compensation for the buyer’s agent being memorialized in a non-MLS environment, such as on the individual realtor’s website.
Practice Change Number 4:
ELIMINATES AND PROHIBITS ANY REQUIREMENTS CONDITIONING PARTICIPATION OR MEMBERSHIP IN A REALTOR MLS ON OFFERING OR ACCEPTING OFFERS OF COMPENSATION TO BUYER BROKERS OR OTHER BUYER REPRESENTATIVES.
As a result of this change, Realtors can still be members of the MLS, and don’t risk disciplinary action, if the seller chooses not to offer cooperative compensation to the buyer’s agent and the property is listed on the MLS.
Practice Change Number 5:
UNLESS LEGALLY PROHIBITED, REQUIRES THAT ALL REALTOR MLS PARTICIPANTS WORKING WITH A BUYER TO ENTER INTO A WRITTEN AGREEMENT BEFORE THE BUYER TOURS ANY HOME WITH A DISCLOSURE OF THE AMOUNT OR RATE (IN AN OBJECTIVELY ASCERTAINABLE AND NOT OPEN-ENDED WAY) OF COMPENSATION IT WILL RECEIVE OR HOW THIS AMOUNT WILL BE DETERMINED. REALTOR MAY NOT RECEIVE COMPENSATION FROM ANY SOURCE THAT EXCEEDS THE AMOUNT OR RATE AGREED TO IN THE AGREEMENT.
Realtors have pointed out the difficulty of this practice change in that the agreement regarding buyer’s agent compensation is contemplated before the buyer and the agent may have established sufficient rapport to determine that they are a good match. Zillow and others have adopted a short term (one week) showing agreement to comply with this requirement, with the idea that an additional contract would be entered into at the offer stage when the representation role for the realtor would be expanded.
Practice Change Number 6:
REQUIRES REALTORS TO DISCLOSE TO PROSPECTIVE SELLERS AND BUYERS IN CONSPICUOUS LANGUAGE THAT BROKER COMMISSIONS ARE NOT SET BY LAW AND ARE FULLY NEGOTIABLE (A) IN THEIR LISTING AGREEMENT IF IT IS NOT A GOVERNMENT-SPECIFIED FORM, (B) IN THEIR AGREEMENT WITH BUYERS IF IT IS NOT A GOVERNMENT-SPECIFIED FORM, AND (C) IN PRE-CLOSING DISCLOSURE DOCUMENTS IF THERE ARE ANY AND THEY ARE NOT GOVERNMENT-SPECIFIED FORMS.
Even prior to these proposed changes, realtor commissions were always negotiable. However, the plaintiffs in the lawsuit argued that consumers were often presented with information that suggested the commissions were “standard” and not subject to negotiation. This practice change will make clear to buyers and sellers that these commissions are not set by law and are negotiable.
Practice Change Number 7:
REQUIRES THAT REALTORS AND MLS SUBSCRIBERS MUST NOT FILTER OUT OR RESTRICT MLS LISTINGS COMMUNICATED TO THEIR CUSTOMERS OR CLIENTS BASED ON THE EXISTANCE OR LEVEL OF COMPENSATION OFFERED TO THE BUYER BROKER OR OTHER BUYER REPRESENTATIVE ASSISTING THE BUYER.
This rule change is designed to insure that consumers receive all listings within their search parameters, including those that do NOT offer cooperative compensation to buyer’s agent. The difficulty we see with this rule is how it can be enforced. Moreover, since a large percentage of buyers actually find homes for purchase online before engaging a realtor, this rule change may not be as significant.
Conclusion.
The overarching question is what the aggregate effect of these changes will be on the residential real estate market. While it is possible that, over time, these changes could have the effect of reducing real estate commissions as a whole, we anticipate that in the immediate future, the impact will be modest. The biggest change, in our view, is that sellers will now be able to list their home on the MLS without having to offer cooperative compensation to the buyer’s agent, and buyer’s agents will no longer be able to use the MLS to filter out those listings. If the market shifts toward more of a seller’s market, we can envision more sellers (particularly builders) opting not to pay the buyer’s agent. In that environment, we would also anticipate that more buyers (particularly those who have self-sourced a new home) will forego any requirement that the seller pay the buyer’s agent as a way to improve their offer.
It is still uncertain how these changes may create issues under various mortgage underwriting guides. Historically, the seller’s payment of the buyer’s agent has been permissible and has NOT been considered an interested party contribution for financing purposes, because it was common practice in every market for the seller to pay the buyer’s agent. For now, Fannie Mae, Freddie Mac, FHA and VA have all indicated that they will continue to consider the seller’s payment of the buyer’s agent the same way, even if it becomes less common in the future for the seller to pay both agents. But the GSEs and government agencies have each also made clear that, if the buyer chooses to pay the buyer’s own agent, this amount cannot be financed in the loan amount. VA has also gone the additional step to make the buyer’s payment of the buyer’s agent an allowable VA fee. While well intentioned, that accommodation by VA may be more symbolic than practical, since most VA buyers lack sufficient resources to pay the buyer’s agent themselves. One other point of note is that the Department of Justice recently won a court decision allowing the DOJ to withdraw from a settlement previously reached with NAR regarding the NAR’s practices. We anticipate the DOJ taking a more active role in analyzing how these rules changes are implemented and their impact on the marketplace.