NAR’s long-established compensation model finally evolves

Cooperative compensation is how the National Association of Realtors® (NAR) describes its “no fee disclosure, no problem” policy.

Now, after years of lawsuits, NAR® has finally agreed to a settlement relegating cooperative compensation to the history books.

This latest settlement is the result of NAR’s® long-term violation of anti-trust laws, including:

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 fee rates offered to buyers agents and paid by seller; and
limiting lockbox access to NAR® members only, locking out other MLS participants.

In addition to paying $418 million over the next four years under the settlement, NAR® may no longer:

allow its member sellers brokers to set the compensation for any buyers agents;
require agents to subscribe to any MLS*; and
include any search or list fields which display broker compensation amounts or rates on any MLS listing.

*Editor’s note — Requiring NAR® or local AOR membership for MLS access has long been prohibited here in California, and in other select states. With this settlement, NAR® will no longer allow any local MLS to require NAR or local AOR membership for agents to access the MLS. [Marin County Board of Realtors, Inc. v. Palsson (1976) 16 C3d 920]

The settlement also compels NAR® to require all MLS participants representing buyers to enter into written employment agreements with their buyer clients. This change will clarify and disclose upfront the amount the buyer’s broker earns and whether the seller or the buyer pays the fee. [See RPI Form 103]

NAR expects to implement these MLS-related changes by July 2024.

Changes ahead

The agent complaints are quickly rolling in, with many claiming this will simply lead to “more complicated” deals and limit access to homeownership for first-time homebuyers with insufficient cash saved to pay for the buyers broker’s services, according to the New York Times.

In contrast, under today’s structure, the seller covers the buyers broker’s fee. However, the seller ends up including both the buyers and sellers broker fees in the final selling price, passing the cost directly onto the buyer. In the case of a cash-strapped first-time homebuyer, this simply means, as has always been the case, both broker fees are wrapped into the buyer’s mortgage.

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

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

At the same time, proponents of the settlement believe the new requirements will result in homebuyers being able to negotiate their fees, rather than being stuck with the fixed pricing model to which brokers currently subscribe. The result will be lower home prices for homebuyers, helping to cool off an overheated market.

More disclosures ultimately open the doors wider to homeownership since disclosures assure buyers — and sellers — of the conditions for paying a fee.

Related article:

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

NAR’s long history of price fixing continues

NAR® was officially outlawed from price fixing in 1981 as a violation of anti-trust laws. [People v. National Association of Realtors (1981) 120 CA3d 465]

Here in California, the practice was outlawed yet again in 2003, when local associations of Realtors® attempted to sidestep the rules by banning brokerages offering fee discounts from participating in the MLS. [Freeman v. San Diego Association of Realtors (9th Cir. 2003) 322 F3d 1133]

While the actual fee rate charged by brokers often varies by price tier and region, the “fixed rate” for each of these variables persists.

In other words, while NAR/CAR can no longer be prohibited from “discounting” fees as improper competition, advertising a lower fee to increase a broker’s competitiveness is majorly frowned upon by brokers and their agents. This attitude will not change quickly as it has not done so under court orders for decades in the past

A buyers broker has their reputation with other local brokers and agents to consider. Peer pressure to conscientiously maintain parallel rates in the brokerage community is the result, part of the DNA imbedded in the industry.

The problem for consumers is: when each agent charges the same rate, it’s impossible for clients to discern between a trustworthy, experienced agent and one with less knowledge or competency.

Editor’s note — this difference is present at the employing brokerage’s fee-split level with their agents. A broker will grant an agent or broker-associate they hire a higher fee split in exchange for their years of experience and higher sales volume. But this is an information level inaccessible and above the heads of most all buyers and sellers.

Related article:

Changes to agent fees following the NAR® lawsuit

However, the practice has persisted, ultimately resulting in this, another lawsuit. Now, a sellers broker is prohibited from offering compensation to a buyers broker by publishing fee information on any MLS service, thus clearing the playing field of this game that has worked primarily to steer buyers to fee arrangements most beneficial to the buyers broker.

But NAR® is quick to point out the settlement does not prohibit offers of “cooperative compensation” (the seller paying both brokers’ fees) that take place off the MLS. Their hope is for the practice to continue offline (under the table), as this would be “easiest” for buyers and sellers.

Of course, the sellers broker will continue to set the fee arrangements in all of its aspects. The purchase agreements in use by all brokers, with one minor forty-year-old exception (See RPI Form 151), call for all brokerage fees to be paid by the seller.

Thus, an offer prepared by a buyers broker and signed by a buyer has the boilerplate fee provision calling for the total of the brokerage fees to be paid by the seller as part of the sales price. The buyer’s mortgage financing in this provision always covers the fees as it is a percentage of the price the buyers pay.

The exception is RPI’s purchase agreement. The problem for using such a formatted form is the innate compulsion of MLS member brokers to use CAR forms, whether or not they are CAR members. CAR does not publish such a form — it does not comply with their fee setting structures. [See RPI Form 151]

What’s next for fees

The rigid fixed-fee structure championed by NAR®:

decreases production, or houses-sold-per-agent (Orange County being the most inefficient of California’s eight largest counties);
inflates the number of agents in the profession, and thus CAR and MLS membership; and
decreases the effort of agents, or hours-worked-per-transaction, according to a study by the Massachusetts Institute of Technology (MIT).

Offering clients more fee options without sacrificing service helps brokerages stand out from the crowd and attract “jaded sellers” considering a for-sale-by-owner (FSBO) listing. Further, cost-of-selling options help brokers appeal to sellers who have already tried and failed to locate a buyer with their FSBO listing.

The three main alternatives to the traditional 6% listing fee model are:

Hourly fee. Charging an hourly fee is a sound way to ensure agents get paid in a professional manner, 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]
Flat fee. Flat fees are most common on “hot deals” when the property sold is too cheap to justify a full fee, or when the fee is not intended to be split with a buyers agent, competitively promoted as “a flat fee, not a fat fee.”
Smaller fee, base salary. Brokers who are efficient and handle a larger volume of transactions as individual brokers or by employing a large number of agents at a base salary can consider charging sellers lower fees, 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.

Related article:

Alternative fee structures to attract clients when home prices are falling

Broker access to forms

With NAR®’s dirty laundry now out in the open for the public to witness, many brokers are calling the need for trade union membership into question.

But ending a long-term relationship can be hard — what about access to forms?

Ditching NAR® and its subsidiary, the California Association of Realtors® (CAR), is probably easier than you think.

RPI forms are free to download and use (no membership required). Further, the Department of Real Estate (DRE) requires agents to present all legitimate offers to their clients, no matter whether the form publisher is RPI, CAR®, another independent publisher — or even written up on scrap paper. Initials or signatures will do.

Agents who fail to submit all offers commit a reportable offense, as reiterated by the DRE again and again.

Editor’s note – Connor Wallmark, firsttuesday President and Production Manager, was subpoenaed in a trademark and copyright infringement lawsuit and countersuit between CAR and PDFiller overuse of CAR forms to testify in 2018. firsttuesday was not a party to the litigation, but as a competitor, does publish real estate forms used for the same general purpose as CAR forms.

But the biggest takeaway from this lawsuit is: always be upfront with the disclosure of your fee and cost-of-transaction disclosures with both buyer and seller clients. [See RPI Form 150 §16]

Disclosing all fees upfront helps you maintain trust among consumers of your services when it comes to their reliance on your brokerage practice.

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