What the NAR Settlement Means for Real Estate Investors, According to Sources in the Industry

Key Takeaways:

– The National Association of Realtors (NAR) settled a lawsuit that will eliminate rules on sales commissions, potentially decreasing housing prices
– NAR will pay $418 million in damages and implement new rules by July, changing how real estate brokers are compensated
– The end of the standard 6% commission rate for brokers could lead to alternative selling models, such as flat fees and discount brokerages
– The settlement could lead to more transparency in the real estate industry and benefit investors by leveling up education and client service
– The Department of Justice (DOJ) is continuing its investigation into NAR, advocating for an end to cooperative compensation
– Changes may bring down costs of financing and overall home prices, potentially allowing buyers to negotiate commission fees with brokers
– The NAR settlement could lead to an increase in the volume of real estate deals and be a win for the real estate market in the long run.

BiggerPockets:

The National Association of Realtors (NAR) agreed to a settlement last week that will eliminate its rules on sales commissions. The deal, if approved by the federal court, is likely to shake up the real estate market and could potentially decrease housing prices across the country.

Anthony Panebianco, a real estate attorney at Davis Malm Attorneys, told BiggerPockets that the settlement is unsurprising, as a judgment would have likely led to the NAR’s bankruptcy.

“The elimination of the mandatory cooperative compensation model was predicted before this settlement and now is guaranteed,” he added.

The NAR agreed to pay $418 million in damages and implement new rules by July that will change how real estate brokers are compensated. One rule would prohibit brokers from offering compensation on the multiple listing service (MLS), which critics say led to brokers pushing more expensive properties on buyers. Another rule would require buyer-brokers to enter into a written agreement with their buyers.

“It has always been our goal to preserve consumer choice and protect our members to the greatest extent possible. This settlement achieves both of those goals,” Nykia Wright, interim CEO of NAR, said in a statement

An End to the Traditional Commission Model? 

The change to NAR rules essentially means the end of the standard 6% commission rate for brokers, and commissions are expected to be cut by as much as half.

In turn, this could open opportunities for alternative selling models. These could include an increase in models that already exist, such as flat fees and discount brokerages, or even completely new models, Nick Narodny, founder and CEO at real estate startup Aalto, told BiggerPockets. 

“They could be everything from subscription to flat just giving consumers more of a power of choice and the representation of buying,” he said.

With all the current issues facing the NAR, Panebianco said there would be traction if other groups were to try to step in and offer other models. 

“Now would be a good time if an entity was so inclined to come up and say we’re different than the NAR, and we will lobby on your behalf and be able to better predict what the future holds,” he explained.

Some brokers feel the news could improve the industry, as less experienced brokers are likely to leave. And the decoupling will also mean more transparency in an often complicated commission system.

“Real estate investors will benefit from only the savviest agents remaining in the industry,” Michael Martirena, founder of the Ivan and Mike Team with Compass in Miami, told BiggerPockets. 

Martirena said this will lead to a “collective leveling-up in terms of education, information, and client service,” as agents can help clients with no hidden costs. “The transparency will benefit investors as much as consumers,” he added. 

What This All Means for Real Estate Investors 

The NAR’s settlement isn’t the end of the compensation debate. While the NAR rules apply to just agency members, not all databases require membership. Other real estate companies, such as RE/MAX and Redfin, have gotten rid of requirements for agents to be part of the NAR in response to numerous lawsuits.

The Department of Justice (DOJ) is still continuing its investigation into the NAR, including its MLS, which it has questioned for stifling competition and potentially going against antitrust laws. In a statement of interest related to the commission lawsuit, the DOJ advocated for an end to cooperative compensation.

Narodny said he doesn’t see the DOJ allowing the settlement to stand. “They want commissions to be decoupled, not have the rules be changed,” he said. “I think we’ll see true change by this summer, and I think commission will be decoupled. This means buyers have to pay their own way, and potentially investors have to pay fees out-of-pocket.”

It’s widely believed that the changes will also help bring down the costs of financing or even overall home prices, which could be welcome news, as the market has been beset by record-high prices over the last few years. Some buyers may even opt to forgo an agent completely. 

Brokers are likely to get paid somehow, even if the price structure changes. While the elimination of buyer’s broker fees should be seen in the purchase price, “I’m skeptical of that being a reality,” said Panebianco. “The market sets the price, rather than the machinations of how the industry conducts a deal.”

Final Thoughts 

Still, industry experts are hopeful that in the long run, the NAR settlement will ultimately be a win for the real estate market.

“With the ability for buyers and investors to now favorably negotiate with their broker on commission fees as a result of the NAR settlement, we are likely to see an increase in the volume of deals, which has been generally on a decline for the past few years,” said Panebianco.

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

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Property Chomp’s Take:

Last week, the National Association of Realtors (NAR) agreed to a groundbreaking settlement that will eliminate its rules on sales commissions. This move is expected to have a significant impact on the real estate market, potentially leading to a decrease in housing prices nationwide.

According to Anthony Panebianco, a real estate attorney at Davis Malm Attorneys, the settlement was not surprising, as a judgment against the NAR could have resulted in bankruptcy. The removal of the mandatory cooperative compensation model has long been anticipated, and now it is a reality.

As part of the settlement, the NAR will pay $418 million in damages and implement new rules by July that will change how real estate brokers are compensated. One of the rules will prohibit brokers from offering compensation on the multiple listing service (MLS), a practice that critics argue has led to brokers pushing more expensive properties on buyers. Another rule will require buyer-brokers to enter into a written agreement with their buyers.

Nykia Wright, interim CEO of NAR, stated that the goal of the settlement is to preserve consumer choice and protect its members to the greatest extent possible.

The change in NAR rules effectively puts an end to the traditional 6% commission rate for brokers, with commissions expected to be cut by as much as half. This opens up opportunities for alternative selling models, such as flat fees and discount brokerages, or even entirely new models, according to Nick Narodny, founder and CEO at real estate startup Aalto.

Many in the industry believe that the settlement could lead to improvements, as less experienced brokers are likely to leave, resulting in more transparency in the commission system. Michael Martirena, founder of the Ivan and Mike Team with Compass in Miami, believes that the changes will lead to a collective leveling-up in terms of education, information, and client service.

The NAR settlement is not the end of the compensation debate, as the Department of Justice (DOJ) is still investigating the NAR, including its MLS, for potentially stifling competition and violating antitrust laws. The DOJ has advocated for an end to cooperative compensation, and it is likely that true change will come soon.

Overall, industry experts are optimistic that the NAR settlement will ultimately benefit the real estate market by increasing the volume of deals and potentially bringing down costs for buyers and investors. While the market sets the price, the changes in commission structure could have a positive impact in the long run.

In conclusion, the NAR settlement marks a significant shift in the real estate industry, with the potential to bring about positive changes for buyers, investors, and brokers alike.