NAR settlement will bring more transparency to home sales

Shake ups with the National Association of Realtors (NAR) are spilling over into the real estate market on a national level, potentially changing the way realtors work with home buyers and sellers.

Lawsuits against the NAR allege the powerful realtor group has not been forthcoming about commission rates, allowing buyer brokers to mislead buyers into thinking that their services are free, and has enabled them to filter listings on the Multiple Listing Service (MLS) in order to steer buyers toward pricier homes and profit from higher commissions.

In addition, the lawsuits allege “conspiracy in restraint of trade,” and are seeking damages under various states’ antitrust and consumer protection statutes and common law.

“Restricting MLS access only to home sellers who make a set commission offer to the successful buyer-broker is anticompetitive and results in artificially inflated, supracompetitive commission rates being incorporated into purchase prices for homes,” a February lawsuit stated.

In March, the NAR announced an agreement to settle litigation for $418 million, and proposed a new rule prohibiting offers of broker compensation on the MLS, as well as a requirement that MLS participants working with buyers enter into written agreements with their buyer.

This would mean broker compensation offers cannot be shared on the MLS, but people can still discuss them with real estate agents outside of MLS through negotiation.

“Offers of compensation help make professional representation more accessible, decrease costs for home buyers to secure these services, increase fair housing opportunities, and increase the potential buyer pool for sellers,” the NAR stated on its website, following the announcement.

The actual terms of the proposed settlement will make few changes to the transaction for real estate agents, said Megan Flewellyn, CEO of the Iowa City Area Association of Realtors (ICAAR).

“We’re hoping that it will increase transparency,” she said. “It will benefit home buyers and sellers as a whole.”

David Cooper, University of Iowa professor, department executive officer of economics and Tippie-Rollins Chair in economics, said the immediate and obvious outcome of the ruling will be more competition in the industry.

“There’s a very strict restraint on trade that keeps commissions artificially high,” he said. “My expectation will be that you will see the commissions drop because that constraint won’t be there anymore.”

This is good for buyers and sellers, he said, because the current commission structure gives strong financial incentive for agents to act in their best interest rather than the consumers’ – the temptation to nudge clients toward a more expensive house because it means a larger commission, for example.

“I still feel good real estate agents are going to provide high effort for you because that’s going to be their competitive advantage,” he said.

Misconceptions

Initial reports stated that the ruling will eradicate the standard 6% commission. According to a March 2024 study by the U.S. Census Bureau, the average price of a home in the U.S. is $430,700, and the average cost in Iowa was $229,000. Factor in a 6% commission rate, and an agent is looking at a $26,000/$14,000 gain per home.

However, those initial reports were not accurate and commissions were always negotiable, the NAR said, and they have never set a 6% standard rate.

“The rule that has been the subject of litigation requires only that listing brokers communicate an offer of compensation. That offer can be any amount, including zero,” the NAR stated on its website.

According to an excerpt from the NAR’s handbook on multiple listing policy – commission/cooperative compensation offers, the broker listing the property can choose how much to pay subagents, buyer agents, or other brokers, and the amount can be the same or different.

“As professional realtors, each brokerage has the ability to set their brokerage’s commission rates as they see fit,” said Alicia Porter, broker and realtor with RE/MAX Concepts, in an email to the CBJ. “Agents also have the ability to set up their unique marketing plans for sellers as well, to attract as many buyers as possible. This obviously leads to better sale prices and a shorter time on the market. Like the old rule indicates, ‘You get what you pay for.’”

A push for lower commissions could lead to reduced marketing efforts, Ms. Porter added, ultimately impacting selling outcomes. Historically, part of the listing commission served as an incentive for buyer’s agents, and removing this incentive may deter potential buyers who can’t cover their agent’s fees or who prefer not to work with a seller offering reduced commissions.

Impact on first-time homebuyers

Seller-paid buyer broker commissions were created with equitable rights to good representation in mind – specifically, so that first-time buyers could afford to have a fair negotiation. Consumers who are listing their home for sale may still choose to include an offer of compensation for both their agent and for their agents to offer to a buyer broker, said Ms. Flewellyn.

“But that listing agent also may say, ‘No, I would only like to offer compensation to my listing agent.’ And if that’s the case, then that’s up to the listing agent to talk with their consumer,” she said.

“I think that it provides a really great opportunity to have a conversation, and really explain and clarify a service that (the agent) is performing for (buyer),” she added.

Over the past year, 30-year mortgage rates rose from 6.09% to 7.63%, causing monthly payments to become much pricier for prospective homebuyers. Additionally, the increase in rates is also leading to fewer property listings because individuals with lower rates are hesitant to relocate and secure a new mortgage at a higher rate, according to a Forbes report.

Ms. Porter said the new rule may negatively impact first time home buyers and the financially disadvantaged.

“In the past, sellers offered a percentage of the listing commission to the buyers agent in order to incentivize as many buyers, to increase the sellers’ sale price and reduce the time on the market. When sellers do not offer those incentives, it puts buyers at a disadvantage. Financially disadvantaged, first time home buyers, veterans and those wanting to start generational wealth, who are saving money for a down payment, closing costs, appraisal fees and inspections in order to purchase a home will all struggle with the new rules,” she said.

Down payments, closing costs, appraisal fees and inspections are all additional costs buyers must keep in mind when considering home price, and it can quickly add up.

Impact on home prices

Some have wondered how or if the new rule will impact the cost of real estate.

“It’s kind of too early to tell if it’s going to impact the price of homes yet – the housing market is cyclical,” said Ms. Flewellyn. “But we’re having a lot of conversations, and you may see different results in different markets, even throughout the state. So I think it’ll be a few years before we’re able to see this settlement result in any price changes.”

The real estate market is “business as usual” in Iowa City, she said, and it’s looking to be even busier than it has been the last couple years.

“I don’t think (the ruling is) going to be a game changer,” said Mr. Cooper.