The following article has been reprinted with permission from Law360, © 2024, Portfolio Media, Inc.
On March 15, the National Association of Realtors reached a $418 million joint settlement agreement with a nationwide class of home sellers that filed four antitrust lawsuits against the NAR and individual brokerage firms.
The home sellers alleged that the NAR participated in a conspiracy to raise, fix, maintain or stabilize real estate commissions in violation of Section 1 of the Sherman Act and corresponding state laws.
If the settlement agreement is approved by the U.S. District Court for the Western District of Missouri, the new NAR rules will become effective mid-July.
The standard practice of setting real estate commissions between 5%-6% has long been seen as an untouchable cornerstone of the real estate industry in the U.S.
This customary practice has historically dwarfed commissions earned by real estate agents in other countries where rates typically range from anywhere between 1%-3%.
In the U.S., the seller of a home typically pays a 5%-6% commission to their listing agent, who in turn pays a negotiable portion of their commission to the buyer's agent. Commissions are completely negotiable and there is no law entitling a cooperating broker to a percentage of the commission received by a listing broker.
However, the structure behind real estate commissions has come under the microscope in the last few years due to a string of lawsuits filed against the National Association of Realtors, a powerful trade association formed more than a century ago, and individual brokerage firms regarding what is known as the cooperative compensation rule.
The rule requires listing agents to specify the amount of compensation, if any, that will be paid to the buyer's agent. In theory, listing brokers can offer that the buyer's agent will receive no portion of the commission, though in practice the buyer's agent's share of the commission is typically 2%-3% of the sale price.
For reference, the NAR's cooperative compensation rule provides as follows:
In filing property with the multiple listing service, participants make blanket unilateral offers of compensation to the other MLS participants and shall therefore specify on each listing filed with the service the compensation being offered by the listing broker to the other MLS participants. This is necessary because cooperating participants have the right to know what their compensation will be prior to commencing their efforts to sell. The listing broker retains the right to determine the amount of compensation offered to subagents, buyer agents, or to brokers acting in other agency or nonagency capacities, which may be the same or different.
While membership in the NAR and adherence to its rules is not mandatory for real estate agents, it has long been incentivized by agents' desire to advertise themselves under the NAR's trademarked title, "REALTOR®."
It has also been incentivized by the benefit of access to the data stored on the multiple listing sites where sellers' homes are listed, commonly referred to as the MLS, which are operated and overseen by local real estate boards or associations of realtors who are all members of the NAR.
So, while the majority of U.S. states, including Florida, do not require buyers to hire an agent, buyers typically engage an agent even when not required by law to help them navigate the potentially largest purchase of their lives: the purchase of a home. [1]
Together, the law, nationwide NAR rules and market forces essentially guarantee the standard commission of 5%-6%, significantly increasing costs for home sellers by coaxing them to compensate the buyer's agent in addition to their own.
In 2019, frustrated by these inflexible rules and the opaque opportunity to negotiate, home sellers in numerous states filed class actions against the NAR and individual brokerage firms. [2]
The lawsuits allege that the NAR and brokerage firms unlawfully conspired to raise, fix or maximize the commissions earned by real estate agents — in particular, by requiring that all listing brokers communicate an offer of compensation pursuant to the cooperative compensation rule.
In October 2023, a federal jury in Kansas City, Missouri, agreed with the home sellers and issued a verdict against the NAR and individual brokerage firms to the tune of $1.8 billion in damages, which ultimately could have been subject to treble damages due to the antitrust violations.
To avoid the specter of treble damages, in March the NAR agreed to a negotiated settlement, subject to court approval, which would reduce the damages to $418 million paid over approximately four years to the tens of millions of eligible class members.
In exchange for the reduced damages, the NAR waived its right to appeal the judgment and agreed to modify the rules governing cooperative compensation. If approved by the court, this settlement will take effect mid-July and will represent a paradigm shift in the U.S. real estate industry.
Under the new framework imposed by the settlement, offers of compensation on the MLS will be prohibited. Listing brokers and sellers can continue to offer compensation for buyer broker services; however, these offers will no longer be communicated via the MLS.
Under this new rule, home buyers may be required to compensate their agents directly unless the seller separately agrees to pay the buyer's commission. Furthermore, the settlement provides that MLS participants working with buyers must enter into written representation agreements with those buyers, which will help consumers understand what specific services they are receiving and what the costs will be.
Buyers will need to exercise caution when entering into written agreements with their agent to ensure they are not obligating themselves to pay commissions even if the closing does not occur.
These new rules will significantly affect the real estate industry and all parties to a transaction, albeit differently depending on whether you are the seller, buyer, listing agent or buyer's agent.
Now engaged in a competitive market, agents may seek to distinguish themselves from their peers by offering services that might have previously been seen as going above and beyond. Alternatively, some agents may negotiate lower commissions in exchange for a reduction in the services they offer.
There will likely be a decline on home prices as sellers will no longer need to factor the buyer's commission — a previously unavoidable externality — into the sale price of their home.
First-time home buyers may face a new barrier to entry into the ranks of homeowners if they will be responsible for paying their agent's commission. This will be a significant cost that cannot be applied toward the down payment and may not be financeable.
Sellers may choose to continue to offer to pay the buyer's agent because they want the buyer's agent to continue to be incentivized to show their property to prospective buyers. However, these negotiations will have to take place outside the MLS.
The Florida Association of Realtors and Florida Bar form contracts may need to be revised to reflect the new reality, and if systemic issues arise, the state Legislature may go as far as creating statutory lien rights for residential real estate agents where none currently exist.
In sum, the new rules will take the onus off the seller to communicate an offer of compensation to a buyer's agent, which in turn may result in the seller no longer paying for the buyer's agent's commission if the seller so chooses.
As discussed above, there are still reasons why a seller may continue to pay a buyer's agent. However, any negotiations relating to the commission for a buyer's agent will take place off the MLS, prompting agents to engage in more transparent and fair negotiations.
It is important to remember that despite the new rules that may take place, the types of compensation available to a buyer's agent will continue to exist and take multiple forms, including but not limited to (1) concession from the seller; (2) fixed-fee commissions paid directly by consumers; or (3) a portion of the listing broker's commission.
John Campo and Carlee Mattison are associates, and L. Ben Alexander Jr. is a shareholder, at Jones Foster PA.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of their employer, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] Conversely, as of 2023, at least 18 states do require buyers to hire a real estate agent.
[2] See, e.g., Moehrl v. The National Association of Realtors (filed in the Northern District of Illinois) and Burnett v. The National Association of Realtors (filed in the Western District of Missouri)
John Campo, a member of Jones Foster’s Real Estate team, represents clients in transactions concerning acquisitions and dispositions as well as commercial leasing projects. He is actively involved with the Literacy Coalition of Palm Beach County as a volunteer for its Adult Essay Initiative and as a member of the Literacy Links Golf Tournament Committee. John is also a member of the Palm Beach County Bar Association’s Young Lawyers Section. He was recognized in Palm Beach Illustrated's 2023 "Top Lawyers" list for Real Estate Law.
Carlee Mattison is a member of Jones Foster’s Real Estate team and focuses her practice in the areas of acquisitions, dispositions, and commercial leasing. Carlee’s additional experience includes probate and trust litigation, as well as fiduciary litigation. She has served as trusted counsel to individuals, families, trustees, personal representatives, and beneficiaries in trust and estate administration matters. She was recognized on The Best Lawyers in America 2024 "Ones to Watch" list for Real Estate Law.
Jones Foster Shareholder Ben Alexander is a Board Member and head of the firm’s Palm Beach office. A Florida Bar Board Certified Real Estate specialist, Ben performs sophisticated real estate transactions for local and national developers, equity investors, business entities, entrepreneurs, financial institutions, and high-end residential purchasers and sellers. As a result of his extensive experience in the real estate industry and community, Ben has cultivated long-lasting relationships that he leverages to further his clients’ business interests. He is uniquely positioned to handle a broad range of matters, including advising on traditional real estate transactions, negotiating complex real estate development deals, and facilitating partnerships between equity funds and developers. Ben is consistently selected by his peers for inclusion in Best Lawyers in America and Palm Beach Illustrated's "Top Lawyers", and he holds an AV Preeminent® Rating from Martindale-Hubbell, the highest peer rating based upon legal ability and ethical standards.
Jones Foster is celebrating its Centennial year as a commercial and private client law firm headquartered in West Palm Beach, Florida, with offices in Palm Beach and Jupiter. Tracing its roots back to 1924, the firm has served as an integral part of South Florida’s growth and prosperity. Through a relentless pursuit of excellence, Jones Foster delivers original legal solutions that help clients, colleagues, and the community to move forward. A significant number of shareholders have received the designation of Board-Certified Specialist by The Florida Bar in their specific practice area. The firm’s practice groups include Complex Litigation & Dispute Resolution, Corporate & Tax, Land Use & Governmental, Private Wealth, Wills, Trusts & Estates, Real Estate, and Trust & Estate Litigation. For more information, please visit www.jonesfoster.com.
