The exciting world of the US real estate market has often shocked us with unexpected twists and turns. Homeownership often goes hand-in-hand with (and sometimes against) fierce market dynamics, such as recession, inflation, high mortgage rates, and legal battles. This article will reveal how the National Association of Realtors (NAR), a vital component of the American housing market, was affected by the Sitzer/Burnett trial and its verdict.
Will this long-standing, reputable, and highly influential lobbying national establishment re-evaluate its business practices due to the charges brought against it? What are the short-and long-term ramifications of the NAR verdict on the commission lawsuit? Join us as we explore the background and aftermath of the NAR lawsuit inside out!
What is NAR, and what is its scope of action?
The National Association of Realtors is a Chicago-based trade organization functioning as a center for (almost) everyone involved in the real estate industry. To this day, the self-regulatory Association (founded in 1908) has 1,578,077 members, including professional local real estate agents, brokerages, counselors, appraisers, various institutions connected to residential and commercial real estate, etc.
NAR, the largest US trade institution, has pledged to its guiding principles structured in the Code of Ethics, which outlines the most professional client representation under any circumstances. If you consider joining NAR, the 2024 membership dues are $156 per individual.
NAR is in charge of Multiple Listings Services (MLS)
The Association manages numerous local MLSs (approximately 540 in 2023), which are complex databases created by cooperating brokers to supply all concerned parties with information about homes for sale. The database links buyers, investors, sellers, and (licensed) realtors. Here’s how it works: the listing agent introduces the property information into the system and shares the commission with a brokerage that gets hold of a buyer.
However, since an MLS is private, only real estate agents and NAR members can access it for a fee. One region can have more than one MLS. Besides MLS, other platforms, such as Trulia or Zillow, post property listings, albeit these aren’t highly comprehensive.
In July 2018, NAR voted to eliminate forced MLS membership so agents won’t have to be members of one particular Service but must choose at least one.
Who pays for whom at a real estate transaction?
A frequent question is: who pays the agent’s commission(s)? Generally speaking, sellers pay both real estate agents. On rare occasions, parties can negotiate and agree on other terms in a written contract. In other words, the homebuyer doesn’t have to pay for their own agent. The agent’s recommendations and guidelines on whom to contact for home inspection, surveys, and legal advice don’t cost any money. However, buyers must settle other expenses, such as a substantial down payment, escrow account, origination fee, title company, appraisal, etc.
Are sellers financially overburdened?
This leaves homeowners selling their assets to pay for the buyer and their own agents in the form of a commission. The commission can vary between 5 and 6 percent (usually, six percent of the property’s actual selling price). The buyer’s and the seller’s agent split the commission. This practice of a collective compensation system is part of the listing agreement. And this is what ultimately triggered plaintiffs’ anger in the infamous NAR class-action lawsuit. In their eyes, NAR keeps agents’ commissions artificially boosted, and all expenses pour on their shoulders.
How did NAR end up in a tricky corner?
On October 31, 2023, headlines exploded! A Kansas City, Missouri, federal jury found NAR and other residential real estate brokerages liable to pay $1.78 billion in damages for plotting to keep commissions for home sales artificially inflated. In addition, their commission-sharing rule can be interpreted as going against antitrust laws. How come, you may wonder. This practice (labeled as obscure by the plaintiffs) can diminish competition and increase commission to such an exaggerated degree that no agent services warrant them anymore.
What do the charges against the Association imply?
The verdict put a new spin on decade-old practices on how real estate commissions are perceived. Plaintiffs had questioned the so-called cooperative compensation system that enabled agents to increase commissions, a reprehensible act in light of surging home prices and mortgage rates.
More explicitly, to list a property for sale on an MLS, the seller’s agent (or the listing agent) must offer a commission to the buyer’s agent, who convinces a potential buyer to sign the contract. However, the seller must ultimately pay this expense as an integral part of their closing costs.
In other words, NAR was incriminated for enabling more expensive housing expenses. The first reasonable reaction on NAR’s behalf was filing an appeal. NAR president Tracy Kasper stated publicly: “This matter is not close to being final as we will appeal the jury’s verdict, and we remain confident we will ultimately prevail.” (source: US News)
Therefore, the final say is far from over, and according to experts, the case could go on for at least two more years or even end up at the Supreme Court. Nonetheless, the Kansas City class-action lawsuit created a dangerous legal precedence.
How does NAR defend against charges?
NAR spokesperson Mantill Williams, in an official statement, reacted by saying that they will stand by the fact that NAR’s policy and guidance for local MLS broker marketplaces ensure that consumers receive exhaustive, equitable, translucent, and accurate housing information and that any brokerages have a fair chance to compete. They will continue to push for facilitating homeownership as part of their final objective.
The National Association of Realtors has always underlined that contracts and commissions were open for negotiation. Thus, the 6 percent commission fee is not something set in stone.
Secondly, the cooperative compensation system serves the greater good. After all, homeowners can only benefit from the dedication and services of buyers’ agents because they bring in the final client buying their property. Without financial compensation, no one can expect buyers’ agents to give 100 percent of their market knowledge.
Thirdly, the compensation system is present in other parts of the world, albeit it appears more structured and transparent. For this reason, the Association has published a revised guidance stating that member realtors and agents were cautioned not to advertise their buy-side services as free. Besides, the shared commission must be revealed without controversy.
Solutions to a real estate puzzle
Buyers’ and sellers’ agents working side-by-side and offering them fair commissions will only benefit real estate transactions because everybody is (financially) motivated to close a deal as soon as possible. As a solution, listing and buyers’ agents can outline explicit contracts to get full transparency so clients will understand the implied costs on both sides.
Conclusion
Has NAR been put in a tough corner? Yes, by all means. Is all hope lost for them? Not by far! NAR is a well-oiled machine that maintains order in a chaotic real estate landscape. Based on their Code of Ethics, they keep customers’ best interests at heart. Moreover, they have the means and commitment to unwind the judgment or considerably reduce it. Also, they are determined to keep the status quo intact with minor but essential amendments, such as introducing a more explicit and layered compensation system.
Therefore, we can’t fathom the end of an era for NAR involving sweeping changes or a genuine revolution in the industry, at least not in the short run.
