What's the Deal with the NAR Lawsuit?

No doubt, you've heard about the lawsuit that has "rocked" the real estate industry.  I've been amazed to hear, from different sources, how this will mark the end of all real estate agents, and possibly life itself!

Yet here I am sipping coffee, making light of it.  What gives?

I'm no lawyer, but I am a member of NAR (National Association of Realtors).  NAR has helpfully provided us with, if not a satisfactory result, at least a list of practices that will keep us on the right side of the law going forward.

That sounds like an admission of guilt, but quite honestly, the changes proposed are not all that groundbreaking.  Let me explain.

The main thrust of the lawsuit was that various real estate companies have colluded to force sellers to pay the commission of both seller's agents and buyer's agents.

I can't speak for other agents, because I have not colluded with anyone.  I can say that, in my listing consultations, I always explain how commission works based on our standard listing agreement.

X% is the total commission.  Because we work on a cooperative basis with the agents in our MLS, approximately 1/2 of X% will be offered to the buyer's agent.  My company will keep 1/2 X% - that's all there is to it.

The seller, of course, is free to negotiate the commission, and it does vary based on many factors.  That being said, each agent has a business to run, and like any service professional, they know where their rates need to be in order to keep the doors open.

Still, the plaintiffs felt that they didn't have a choice, so the DOJ and NAR worked out a settlement to allay future concerns about collusion, forced payment of commissions, and so forth.  Two major changes are:

1. The seller's agent may still offer a cooperative commission to a buyer's agent, but the commission will no longer be published in the MLS.  
2. Buyer's agents will be required to explain agency and have buyers sign an exclusive agency agreement prior to showing any homes to the buyer.

The idea here is that buyers will become principally responsible for the commission of the buyer's agent.  The Buyer's Agency Agreement lists the agent's responsibilities to the buyer, and includes the fee for said services.

Then the onus is no longer on the seller/seller's agent to cover the buyer's agent's commission.  (It would, however, still be a strong incentive to help sell the house!)

My Analysis

This will help standardize the industry a bit.  Many buyer's agents don't use buyer's agency agreements - which, honestly, I think works fine most of the time.

If everyone is obligated to do it, then it will help distinguish which buyers are committed to which agents, and how those agents will be paid.

That being said, if many or most sellers/seller's agents cease to offer a cooperative commission, this will harm a few key groups of buyers:  First time home buyers, VA buyers, and any other buyers who would be qualified to buy, but not if they also have to pay an agent out of pocket.

The common denominator here is that these groups of buyers tend not to have a ton of money saved up.  They can afford a modest down payment, and they can afford the monthly payments.  In all likelihood, since they have a lot of life in front of them, their income will grow and their fixed payment will become a lot more affordable over time (this is what the lender is counting on).

But the longer they have to wait to buy a house, the longer (and slower) their wealth-building journey will take.  

Tough bones, you might think.

Keep in mind that real estate is one of the best and only avenues for building wealth in our economy.  If your opinion is that you want to restrict or subdue hundreds of thousands of buyers every year from building wealth, I just can't go along with that.

I want that opportunity open to as many people as possible.  I think it helps our whole society to have prosperous, stable households across the country.

Does it really come down to buyer's agent's commissions?  No, there are certainly other factors involved as well.

But let me ask you this:  If you're on the DOJ's side of this, you don't think highly of most agents.  In fact, you expect them to be a little unethical, a little collusionary, perhaps in it for themselves more than for the public.

Now imagine one of those agents is the seller's agent, and along comes a buyer who doesn't have an agent.  Here's the question:  Do you trust that seller's agent to be fair, honest, and conscientious toward that unrepresented buyer?

Do you think that agent might take advantage of the buyer?  (You already assume they are willing to take advantage of their own client).  Do you think maybe they'll get them to overpay for the house?  Will this unscrupulous agent make sure the buyer always knows their options and their rights?  Will the buyer get the best deal possible on that house?

Don't be silly.   Wolves and lambs.  The buyer, as a rule, has no one protecting their interests.

This is the real risk of breaking the cooperative system in real estate.  Fortunately, I don't think the proposed changes will break that system, but threats like this make it imperative for every agent, seller, and buyer to be aware of how that system actually works, and what the short and long term benefits are. 

Ed Pluchar
The Pluchar Group