Thoughts on the Recent NAR Settlement

Recent headlines regarding the National Association of Realtors (NAR) settlement may have left many feeling uncertain and confused about the future of real estate.  Understandably so, as many articles claiming to explain the issue are wildly inaccurate and misleading.  

In essence, the settlement addressed concerns about the manner in which real estate companies and their agents are compensated -- specifically as it relates to the sharing of commissions between listing and buying brokers through something called "cooperative compensation".  At the core of the lawsuit is the allegation that "forced" buyer broker compensation on the part of the seller was artificially inflating commissions, thereby inflating home values.  Let's set the record straight: this claim is simply not true.  In order to understand this better, let's dive back into exactly how real estate representation as we know it today came to be.  

Prior to the creation of the Multiple Listing Service (MLS) in the 1960s, sellers had limited exposure to the market and buyers had to go from office to office to preview the homes for sale under each brokerage.  The MLS allowed brokerages to share their listings with one another to increase listing exposure for sellers.  This sharing, at the time, came in the form of a regularly delivered paper book to each brokerage office.  Furthermore, the MLS allowed for brokerages to voluntarily share their commission with the brokerage who brought a ready, willing, and able buyer -- seen at the time as a reasonable way to incentivize cooperation in order to deliver on the promise of getting the seller's home sold.  The problem was that these secondary agents at the time were known as "sub-agents" who, unbeknownst to many homebuyers, were actually legally representing the seller and therefore owed their fiduciary duties to that seller; not the buyer.  

As crazy as that may sound, a study by the Federal Trade Commission nearly forty years ago revealed that nearly 75 percent of homebuyers incorrectly believed that the agent showing them homes represented their interests, when in fact, that agent represented the seller's interest exclusively.  As a result, laws requiring agents to disclose whom they actually represent began to get passed all across the country, such that in the late 1990s, independent buyer agency representation was born (as opposed to sub-agency) as a way to protect the buyer with their own fiduciary.   

Fast forward to today, and the origins and purposes of these decades-old laws have admittedly been blurred and even forgotten about.  No longer are we having extensive conversations with our clients about how our compensation works.  Much worse, we are rarely having extensive conversations around what representation in real estate actually means.  We even got to the point where unskilled (or perhaps just naive) agents were marketing themselves as "free" -- simply because they were catering to buyers and relying on the listing broker's offer of compensation.  An undeniably low point in our industry likely the result of an oversaturation of agents due to low barriers of entry and little training. But I digress. 

With all of this said, this settlement presents an opportunity for much needed increased transparency in our industry.  Consumers deserve to know exactly how they are being represented, the cost of that representation, and how that cost is being covered.  This is not a "slashing" of commission rates as many headlines would lead you to believe; these have always been negotiable.  Instead, this is a "decoupling" of the shared compensation model that became common practice since the inception of the Multiple Listing Service.      

More information still needs to come down the pipeline, particularly since this recent verdict still needs to clear the courts and overcome any appeals.  But, expect sellers and buyers to soon have to "pay their own way" for their respective representation, except in instances in which sellers opt to contribute towards the buyer's commission expense in order to remain competitive in an already historically unaffordable market. 

In the meantime, if you have any questions or concerns about how this settlement may impact you, please don't hesitate to reach out.  We're here to provide the clarity and support you need to navigate the complexities of the real estate market with confidence.

Let's work together to build a real estate industry that prioritizes honesty, integrity, and transparency.  Your trust means everything to us, and we're here to earn it every step of the way.

Jorge Gil, Managing Broker

Ki Property Group

Post a Comment