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What the big realtors settlement means for home buyers and sellers

(NerdWallet) – A landmark legal settlement between home sellers and the real estate industry could cause a shakeup in the way homes are bought and sold, beginning this summer.

The National Association of Realtors announced Friday that it had agreed to pay $418 million to settle more than a dozen antitrust lawsuits that accused NAR of imposing rules that inflated real estate commissions. NAR admitted to no wrongdoing, according to the news release.

Under the settlement’s terms, negotiations between buyers and sellers might become gnarlier. Home sellers would pay smaller commissions, allowing them to keep more of the proceeds from sales. And buyers, not sellers, would decide how much buyer’s agents are paid.

The settlement would mark a significant change for buyers, sellers and real estate agents. It’s uncertain how real estate markets will make the transition between now and mid-July, when the settlement is due to go into effect.

What the lawsuits are about

The settlement stems from a federal class-action antitrust lawsuit, Burnett v. National Association of Realtors et al., filed in Kansas City, Missouri. Last October, a jury sided with the plaintiffs, agreeing that NAR and large brokerages conspired to inflate commissions paid by sellers.

It’s one of more than 20 similar cases filed in federal courts nationwide, not all of them involving NAR, and the only one that went to trial all the way to a verdict. NAR said the proposed settlement in the Burnett case would resolve all of the lawsuits against the association, and will go into effect in mid-July if the court approves it.

NAR is a trade association with more than 1.5 million members working in the real estate industry. The association said the revised rules would affect anyone who uses a multiple listing service — a database of properties for sale in a geographic area — regardless of whether they are licensed Realtors, which is the designation for real estate agents who are members of NAR.

The lawsuits challenge NAR’s cooperative compensation rule, which requires seller’s agents to make “blanket unilateral offers of compensation” to buyer’s agents. To list a home on an MLS, the seller must make this “blanket unilateral” offer to pay buyer’s agents, who influence which houses their clients consider.

Plaintiffs contend that the cooperative compensation rule extorts sellers into paying inflated commissions to buyer’s agents. “Home sellers have been compelled to set a high buyer broker commission to induce buyer brokers to show their homes to the buyer brokers’ clients,” according to the plaintiffs in a lawsuit in Chicago — Moehrl v. National Association of Realtors et al.

Buyers would set their agents’ pay

With the elimination of cooperative compensation, sellers would no longer have to specify the size of the commission they’ll pay buyer’s agents. In fact, sellers would be banned under the new agreement from setting commissions for buyer’s agents in MLS listings.

Instead, it would be up to buyers to set their own agents’ pay. Some buyer’s agents might charge flat fees, or an hourly rate, or they might charge a fee for each time they accompany a buyer to a showing. Those business models would exemplify the innovation in the industry that the Department of Justice wants to encourage, according to a filing in yet another court case — Nosalek v. MLS Property Information Network et al, in Boston.

Negotiations would be more complex

Some observers worry that the new rule would make it even more difficult for buyers who are short on cash.

“If home buyers have to pay their buyers agent outside of settlement, it will increase their financial burden,” said Victoria Ray Henderson via email. Henderson works exclusively as a buyer’s agent and owns HomeBuyer Brokerage, operating in Washington, D.C., and its suburbs in Maryland and Virginia. Settlement is another term for a real estate closing.

Buyers wouldn’t necessarily have to pay their agents out of pocket. The new rule would allow buyers to ask sellers to pay the buyer’s agents at closing. This means that agent compensation might become part of the negotiation.

“Hopefully they’d negotiate the buyer agent compensation and then that would just be included in the mortgage loan,” says Stephen Brobeck, senior fellow for the Consumer Federation of America.

What it means for buyers and sellers this spring

Sometime between now and when the settlement goes into effect in July, buyer’s agents might start asking buyers to sign contracts that spell out how much the agents will be paid and at what point in the process. Over the same period, home sellers should consult their listing agents to make sure they’re complying with the new rules. This settlement would likely apply to real estate agents whether or not they are members of NAR.

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