An Anticipated Settlement Still Shocks the Real Estate Industry

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The real estate industry was shocked on Friday by news that the National Association of Realtors had reached an agreement to make sweeping changes to the way homes are bought and sold in the United States in a proposed settlement of lawsuits challenging the industry.

The changes are widely expected to add transparency and complexity to the way buyer agents are paid, with several industry experts saying commissions, and possibly even home prices, will fall as a result.

NAR said it worked with the plaintiffs in multiple lawsuits mounting across the country to come up with a list of reforms and pay a $418 million penalty in an effort to protect the organization, and two-thirds of its members, from lawsuits moving forward.

“Commissions will become more transparent as a result of all this and that will also put downward pressure on commissions,” said Stephen Brobeck, senior fellow at the Consumer Federation of America, which has long called for changes similar to those agreed to in the settlement.

Steve Brobeck | Consumer Federation of America

“It’s going to ultimately bring down consumer costs,” Brobeck said. “In fact, it even ought to lower housing costs.”

As part of the proposed settlement, which still needs to be approved in court and will likely be scrutinized by the Department of Justice, NAR agreed to create a rule by July that would remove offers of compensation from the multiple listing services. 

MLS participants will be required to work with buyers to enter into written buyer representation agreements before touring homes, according to a framework of the settlement, which has yet to be released publicly or filed in court.

It’s not yet clear which cases were included in the proposed settlement. NAR noted that some litigation is still ongoing, suggesting that Friday’s settlement wouldn’t absolve brokerages and franchisers from the threat of litigation in all of the nearly two dozen cases filed across the country in recent months.

Representatives from NAR, as well as their legal team, didn’t respond to requests for comment on Friday. However, many welcomed the news as a positive change that could clear the lingering dark clouds that had been gathering over the industry.

Toby Schifsky | Vice President of Kaplan

“On a scale of one to 10, the National Association of Realtors’ decision to shift the buyer side commission burden from sellers to buyers is a 10 and represents nothing short of a sea change,” said Toby Schifsky, vice president of real estate education at Kaplan. “This new landscape means a steeper climb for all agents who are going to have to prove their value to potential clients.”

1M Realtors protected

In the outline, NAR shared a framework of the upcoming rule changes that could be made as soon as mid-July. The group also made clear who was covered and, notably, who wasn’t.

Over 1 million members — about two-thirds of the organization’s total membership — received blanket protection from plaintiffs in the cases. It included all state and local Realtor organizations and all multiple listing services that are wholly owned by Realtor organizations.

All brokerages that conducted less than $2 billion in residential transaction volume in 2022, and who had an NAR member as principal, were also covered. 

Marty Green | Principal at Polunsky Beitel Green

Notably absent from the proposed settlement is HomeServices of America, which has also been resolute in its determination to fight in court. Some believe that a settlement is likely on its way.

“I would anticipate you’ll see a settlement that includes them as well fairly quickly,” said Marty Green, principal at mortgage law firm Polunsky Beitel Green. “Going this alone doesn’t make any sense at all for them.”

A representative from HomeServices declined to comment, saying that the firm hadn’t seen a copy of the proposed settlement.

The settlement was a fraction of the damages NAR and HomeServices were ordered to pay as part of the verdict in the landmark commission-setting case known as Sitzer | Burnett. The jury ordered the defendants, who at the time included NAR, HomeServices of America and Keller Williams, to pay $1.8 billion in damages, an amount that would automatically triple to $5.3 billion.

It’s not clear just which of the nearly two dozen similar cases would be settled by the proposal. NAR referred only to “copycat” lawsuits and noted that litigation would continue in at least one case, known as Batton I, filed by homebuyers in Illinois. 

Lawsuits filed by buyers “are not resolved with this,” said Edward Zorn, chief counsel for the California Regional Multiple Listing Service. “But those are very weak cases compared to what has been happening on the seller side. That is still to be determined.”

Still, news of the settlement was shared across major news outlets nationwide. Industry insiders said they expected consumers to take note that change is coming and would begin asking questions immediately.

Clelia Peters | Era Ventures

“This is a really significant move,” said Clelia Peters, managing partner of Era Ventures. “It’s going to impact consumer perception. Within that context, I suspect it will make it materially harder for the status quo to be maintained.”

News spreads like wildfire

While many industry insiders expected NAR to eventually reach a settlement, the news still came as a surprise and shows how quickly things changed after being kept under wraps before Friday.

Just Wednesday, NAR Chief Legal Officer Katie Johnson planned to tell CEOs of state and local Realtor organizations at an NAR event in San Diego that the verdict was “flawed” and that NAR had made motions asking for a favorable ruling from the judge overseeing the Sitzer case.

Fewer than 48 hours later, on the final day of the event, The New York Times first reported that NAR’s legal team had agreed to terms of a proposed settlement and that the real estate industry would enact sweeping changes to the way homes are bought and sold in the U.S. 

“I think this shocked everyone,” said Andrea Geller, a broker with Berkshire Hathaway HomeServices Chicago. 

After the story was published and the news was spreading like wildfire through a dry field, NAR President Kevin Sears sent an email to members with a framework of the proposed settlement.

Karen Stone | Engel & Volkers

Others said this was yet one more instance of NAR botching the rollout of an important update.

“My mom broke the news to me this morning,” said Karen Stone, an agent with Engel & Volkers in Park City, Utah. “My mom should not have broken this to me. The more I think about that the more annoyed I am.”

Ultimately, news of the proposed settlement caught many within the industry off guard.

“I really expected this to drag out for a while,” said Kevin Kauffman, a team leader with eXp. “In some sense I’m surprised, but in other ways I’m not. We knew something was going to happen.”

As the industry grasped the fact that a settlement was reached, experts quickly worked to understand what would soon change.

“Leading agents … go read your favorite book on negotiation,” said Keith Robinson, NextHome Strategic Officer, during a livestream on Inman Friday. “There’s a whole level of negotiation that is coming soon that you are going to have to get good at.”

Still, there is much left to unravel.

Uncertainties ahead

While the proposed agreement provides some clarity around the future of real estate transactions, there are many unknowns.

NAR said the proposal would allow sellers and their listing agents to continue offering compensation for buyer broker services, but that those offers won’t appear in the MLS.

What’s not clear is what happens when sellers offer a commission that’s lower than the amount a buyer and their agent have agreed to in their buyer representation agreement.

Jason Haber | Compass

Compass broker Jason Haber — who led the calls for reform of NAR as an institution and recently co-launched a competing trade group with The Agency founder Mauricio Umansky — on Friday called for changes to mortgage rules to allow for buyers to be able to finance their agents’ compensation.

“The American Real Estate Association is calling on Fannie Mae to immediately raise the interested party contribution limits so that buyers have the ability to finance their agent commission,” Haber said.

Also unknown is how quickly the conversations with consumers and other promised reforms will lead to broader changes in the industry, if at all.

Still, analysts at the investment banking firm Keefe, Bruyette & Woods said they expected changes to happen quickly.

“We still think the ultimate timing of changes will prove much sooner than what many market participants and investors were expecting,” the analysts wrote.

In the weeks leading up to the Sitzer trial, KBW released a report that said analysts expected the total commission pool in the U.S. would fall by as much as 60 percent if commission sharing was banned. 

“We believe disruption to the industry’s commission structure,” KBW analysts said at the time, “is all but guaranteed.”

But many industry insiders said they don’t expect fewer agents would necessarily be a bad thing for top producers who remain in position to scoop up market share in a world with fewer competing agents.

“The industry and NAR were very wise to settle this litigation right now, to get it behind them as quickly as possible,” Brobeck said. “As interest rates go down and housing inventories increase, real estate professionals, not just salespeople, real estate professionals will face a very bright future. Lower commissions, but many more sales. Because the number of agents, most of whom have little experience, will decline dramatically.”

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