Changes to agent fees following the NAR® lawsuit

Like many licensed real estate agents and brokers, you might still be reeling from news of the November 2023 verdict against the National Association of Realtors (NAR®).

The lawsuit, filed in Missouri, requires NAR® to pay a minimum $1.8 billion in losses suffered by buyers and sellers of homes in that state. However, the decision has nationwide consequences.

In review, the lawsuit targeted industry-wide cooperative compensation rules which violate anti-trust law, namely:

• preventing multiple listing services (MLSs) from disclosing fee rates to consumers;
• misleading buyers into thinking the buyers broker’s services are free;
• bundling the buyers and sellers brokers fees, essentially positioning the sellers broker to always control both fees;
• allowing buyers brokers to filter MLS listings based on the sellers’ fee rates offered to buyers agents; and
• limiting lockbox access to NAR® members only, not all MLS participants in general.

In addition to the $1.8 billion payment, NAR® and its members will be wise to look at how fees are structured, to avoid more lawsuits by heading in a different direction.

This may include:

• actually disclosing the buyers agents’ fee in a written buyer’s listing agreement at time the agency is undertaken; [See RPI Form 103]
• openly advising the fee amount is negotiable; and
• allowing the local MLS to open participation, fully and without restrictions, for equal access by non-trade union members licensed by the DRE.

Editor’s note — While it may come as a surprise to some, disclosure of all fees — whether it be on the buy side or sell side — has long been required by law. [California Business and Professions Code 10176(g); See RPI Form 102]

Also, for five decades, access to any MLS supersedes any requirement to be a member of NAR® or a local AOR — despite what you may have been led to believe.

Related article:

Brokerage Reminder: CAR membership NOT required for MLS access

The immoveable fixed-fee structure, also commonly called a “fat-fee, not a flat fee” that got NAR® into trouble:

• decreases production, or houses-sold-per-agent, resulting in a greater number of part-time agents subjected to under-employment and inefficiencies;
• artificially inflates the number of agents in the profession, making it increasingly difficult for full-time agents to make a living wage without excessive fees per transaction; and
• increases the hours-worked-per-transaction reducing efficiency and requiring more agents, according to a study by the Massachusetts Institute of Technology (MIT).

As a result of the ruling, one estimate has agent fees falling 30% annually, as reported in the New York Times.

With significantly less income to go around, many agents will be forced out — or drop out, when they realize how much work it will take to make a living. That will bring about efficiencies in brokerage offices and enhanced agent conduct with clients.

The same report estimates up to 80% of the current agent workforce will be eliminated by the change.  Ultimately, efficiency of client representation is a good thing for full-time agents enabling them to weather the change, but bad for part-timers and big office brokers with cubbies to fill to make a quick buck.

Buyers have options

When shopping for an agent, most homebuyers will look for someone who they connect with or who comes with the recommendation of a trusted friend or family member. But the fee collected by that agent is rarely discussed beyond a statement of: “we cooperate with the sellers broker.” Use of the word “cooperate” simply means the sellers broker fee splits in some ratio with the buyers broker — jargon the buyer does not get.

Thus, buyers are assured the agent’s fee, whatever amount it may be, is covered by the seller. Here, this cooperation is the problem as it brings about the non-disclosure of the actual amount of the fee required to be disclosed to the client buyer.

Wrong conduct.

The lawsuit found the NAR® membership and compensation requirements violate anti-trust laws and amounts to a full-blown conspiracy to inflate broker fees and stifle competitive fee negotiations.

In fact, the buyers agent’s fee is always included in the cost of buying, as is the sellers agents fees no matter who pays the fees. Without the buyer’s cash, no matter the source, to fund all costs of acquiring a property, no agent gets any fees as the seller only pays when a transaction is closed.

Sure, the buyer’s fee comes out of the seller’s costs. But those costs are always bundled into the price, effectively including the price-fixing 6% fee — or whatever percentage rate is the “local norm.”

Related article:

Disclosure of buy-side fees: a compliance blindspot for some real estate brokers

Buyers agents who want to stay ahead of the tide need to consider offering alternative fee structures to attract buyers in today shifting economic environment.

Further, agents can use RPI Form 151 Purchase Agreement to document a separate fee for the buyers agent paid by the buyer as part of their cost of acquisition. Granting the buyer greater control over their agent’s fee written into the Purchase Agreement will lead to reduced brokerage fees paid on the seller’s side — and, in turn, a lower total cost of acquisition by the buyer – the purchase price financed by the mortgage lender.

The main alternatives to the traditional 5%-6% listing fee model are to charge a(n):

1. Hourly fee. Charging an hourly fee is a sound way to ensure agents get paid even for work they do for buyers and sellers who ultimately never close. You will run into reluctance from clients who do not wish to agree to pay when they never buy or when their listing expires. But clients who are not serious about their real estate goals are best avoided anyway. Asking your buyer or seller client to sign an agreement for hourly wage payment — when they do not end up closing — will weed out the looky-loos and ensure your time is valued no matter the ultimate fee negotiated. [See RPI Form 520]
2. Flat fee. Flat fees are most common on “hot deals” when the price of the property sold is too cheap to justify a full fee, or when the fee is not split with a buyers agent, competitively promoted as “a flat fee, not a fat fee.”
3. Smaller fee, base salary. Brokers who are efficient and handle a large volume of transactions as individual brokers or by employing a large number of agents at a base salary can often competitively charge lower fees on a sales transaction, supplemented by bonuses for good customer feedback. This has been tried by brokerages with varying success in major metros, evidence of a market for this type of service in spite of the persistent anti-trust fee-fixing arrangements.

What’s next

What’s next for the beleaguered trade union?

While NAR® remains confident it will ultimately swim against the tide of public opinion and win through the appeals process, buyers are quickly catching on that they have options to cut costs when they find the right brokerage office.
Watch for more lawsuits to follow. The U.S. Department of Justice continues to look into NAR® practices and is likely to file another lawsuit following a 2020 lawsuit which was withdrawn “to permit a broader investigation of NAR’s rules and conduct.” Their digging turned up more than they bargained for.

Stay tuned for the results of that investigation — subscribe to our weekly newsletter, Quilix, for updates.

Related article:

NAR® members jump ship following sexual harassment allegations and more anti-trust lawsuits