[co-author: Jessica Sohn]*

In 2019, home sellers brought a series of class-action lawsuits against the National Association of Realtors (NAR) and several national real estate brokerages, alleging that the defendants conspired in anticompetitive practices to inflate broker commissions in violation of the Sherman Antitrust Act. On October 31, 2023, a federal jury in Western District of Missouri found NAR and brokerages liable for $1.8 billion in damages, which had the potential to rise to $5.4 billion with punitive damages. Rather than appealing the judgement, NAR agreed in March 2024 to settle and pay approximately $418 million over four years and implement policy changes regarding broker commissions (NAR Settlement). While the NAR Settlement remains pending court approval (currently scheduled for hearing on November 26, 2024), the policy changes are set to take effect this week on August 17, 2024. All Multiple Listing Services (MLSs) that opted into the NAR Settlement have until September 16, 2024, to implement these practice changes to be considered “released parties” by the court.

One of the key allegations raised in the class action lawsuits against NAR revolves around “cooperative compensation” between the seller’s and buyer’s brokers. Specifically, it is based upon a commission procedure where the seller’s commission—typically 5% to 6% in the U.S.—is split between the seller’s broker and the buyer’s broker. According to the lawsuits, NAR’s operating rules and policies prohibited disclosing the buyer’s broker commission to prospective buyers and potentially mislead buyers into believing their broker’s services were free. The MLS platform, which is the most widely used residential real estate marketplace governed by NAR guidelines, currently allows listings to be filtered based on the commission offered to the buyer’s broker. Critics argue that these rules incentivized buyer’s brokers to prioritize homes offering higher commissions, driving up overall fees to the transacting parties. NAR also allegedly limited lockbox access to only its members, thereby leaving non-NAR affiliated brokers, who may have been willing to take lower commissions, at a material market disadvantage. The result of these practices, as plead in the lawsuits, was inflated broker commissions that fell solely on the sellers and were arguably nonnegotiable.

Under the NAR Settlement, while denying any wrongdoing, NAR agreed to implement two key policy changes (among others) aimed at fostering a more competitive residential real estate market:

1. Elimination of Broker Compensation Offers on MLS: MLS platforms will no longer include fields or information related to broker compensation, and home listings cannot be filtered based on these commissions. MLS is also prohibited from using its data to establish or maintain any platform for offering compensation to buyer’s brokers.
2. Mandatory Disclosure of Compensation and Buyer Representation Agreement: MLS participants must disclose compensation to both sellers and buyers. Before a buyer tours a home, the buyer and the buyer’s representative must enter into a written Buyer Representation Agreement outlining the services provided and the compensation rate to be received from any source. This agreement must also prohibit the broker from receiving compensation exceeding the agreed amount and include a statement that broker fees are not set by law and are fully negotiable.

While these proposed changes are a shift from historical NAR precedent, it remains uncertain whether the intended competitive market will materialize. Even with the prohibition of cooperative compensation offers on MLS, a potential work around is still present where brokers are permitted to negotiate compensation “off MLS through negotiation and consultation with real estate professionals.” Through such off-MLS negotiations, it is possible that Sellers may opt to cover only their portion of the commission, or they may continue to offer full or partial commission payment structures to buyer’s brokers. In other words, the buyer’s brokers may continue to steer their clients towards larger brokerages known for sharing commissions in manners consistent with past practices (as long as those were formalized through off-MLS negotiations). Other potential consequences include market consolidation within large national brokerages and sellers being pressured or feeling compelled to reduce purchase prices in order to assist buyers in covering the buyer’s broker’s commission. However, in a “seller’s market” where demand exceeds supply, it is also possible that we could see a reduction in seller’s broker fees, and buyers being more willing to cover their broker’s fee in order to secure a property. In theory, this would move the market closer to the competitive structure envisioned by the NAR Settlement. Of course, this is all speculative, and it remains to be seen how the new policy changes will be implemented.

Despite the uncertainties, the reaction to these developments has been significant. Shares of real estate firms Zillow and Compass both fell by more than 13%, while homebuilder stocks rose during the week of the NAR Settlement announcement. Some experts estimate that residential real estate commissions could fall between 25% to 50%. Assuming this market shift actually occurs, new opportunities may arise for alternative models of selling real estate, such as flat-fee and discount brokerages—features that have lagged or been discouraged in the past. Although home prices could be driven down overall by the new policies, many housing experts remain skeptical of any meaningful decrease, noting that the market sets the home prices.

Until the future impact of these changes on the residential real estate industry becomes apparent, consumers and real estate professionals alike will need to navigate the industry carefully, keeping in close touch with their legal advisors.