Dispelling Myths and Embracing Truth: Understanding the National Association of REALTORS Settlement Agreement

In recent weeks, the real estate world was abuzz with the announcement of a settlement agreement in the Sitzer/Burnett class action lawsuit against the National Association of REALTORS (NAR). Amidst the media hype and inaccurate reporting surrounding this development, there have been misconceptions and misunderstandings about what this settlement entails and its potential impact on the real estate landscape.

smoke out of the ears

This agreement has been called a "seismic shift in how real estate commissions" are structured, potentially altering the dynamics of buying and selling homes for the first time in decades. With implications reaching both sellers and buyers, it's crucial to delve into the details of this transformative development.  As far as the public is concerned, they all think they've won - both buyers and sellers alike.  However, the day that the buyers realize that the seismic shift is all to their disadvantage will be the true 'shitty day', and the realization that just reading the headlines and bullet points duped them.  In all actuality, I feel like I watching a real-life episode of "Are You Smarter Than A Third Grader".  Yes, I know that's not the name of the show, duh!

In real estate, there is a delicate balance between the buyer side and the seller side.  Both sides need each other and thinking that they don't is the same thought process that causes so many divorces.  Without home buyers, sellers are stuck with properties that do not sell, and without homes to buy, buyers have no place to go.  It seems pretty simple, however many times the simple things escape the masses and many times we can label that as 'common sense'.

Let's delve into the facts and dispel the myths surrounding this significant agreement.

Myth: The settlement forces brokers to reduce their compensation. (That is FALSE)

Here is the truth:  Contrary to popular belief, the settlement does not establish any standard or limitation on what REALTORS may charge for their services. Real estate fees have always been negotiable, and there has never been collective bargaining in this regard.  Fees vary widely across different markets, reflecting variations in marketing, service levels, and expertise.

Consumers have always had the right to negotiate their fees.  At the same time, so have the individual real estate practitioners as well.  Just because you have the right to negotiate, does not mean that you are always going to get the number you want.  At the same time good luck trying to "force" someone to do anything.  

Many have said that there are too many real estate agents across the nation.  Great!  Pick another agent to work with as that works in the favor of the consumer affording plenty of options.  However, if you want to work with a particular agent you are going to have to understand that you may not get what you want because they believe they command a certain rate because of the results they deliver.  Why did you want them in the first place?  Oh yeah, this is the reason you wanted them in the first place.  It is important to remember, that you cannot force someone to deliver results at your price... it's a negotiation.

Myth: The settlement will allow sellers to no longer pay compensation for a buyer's agent. (That is TRUE)

NAR Code of Ethics Standard of Practice 3-1

Here is more on that:  Although this one is true, you have to remember that sellers have never been forced to pay compensation to a buyer's agent. While there was a past rule requiring in the NAR Code of Ethics that an offer of compensation on a Realtor-owned MLS, this requirement was removed in 1999 only a mere 24 years ago.  Sellers retain the flexibility to choose whether to pay buyer agent compensation, but this does not relieve them of the economic implications, as buyers may include contingencies in their offers to cover these costs.

Myth: The settlement prohibits sellers from paying a commission to a buyer’s agent.  (That is FALSE)

Here is the truth:  The settlement does impose restrictions on properties with offers of buyer agent compensation on association-owned MLS platforms. However, sellers can still choose to pay buyer agent compensation as a means of differentiating their properties. The decision not to pay compensation does not absolve sellers of potential economic consequences, as buyers may negotiate alternative arrangements.

For years, the framework for real estate transactions has revolved around the Multiple Listing Service, where listing agents "determined" the commissions paid to buyer's agents should their sellers desire to offer a cooperative commission to the buyer's side of the transaction. This standardized practice (not commission), that sellers have long been shouldered by sellers and to their benefit I might remind you. 

Now consumers from potentially both sides of the fence have hopped on the same wagon (ill-advised as well) thinking this is a good thing while throwing critical thinking right out of the window.

Under the new agreement, listing agents can still offer commissions to buyer's agents, albeit without public disclosure on the MLS.  Remember, the MLS is a marketing platform and a benefit of the offer of covering cooperative compensation is part of the marketing of the home.  Consequently, the unfounded claims that sellers will no longer be automatically responsible for covering commissions ranging from five to six percent bears no weight with an educated mind.  It bears no weight because there was no mandate nor standard set. With that said, could two or more professionals charge similar fees for their services?  Absolutely!  That is the same principle as "market value" because the price you charge for your services has to be in line with "the market" (what everyone else charges) for people to use your services. 

In every aspect of life, every vocation, and every product or service offered in a free and open market.  If you charge too much, no one will hire you and if you charge to little people will think there is something wrong with your services and that you cannot command a higher price.  Every business, every professional, everything is about finding "the sweet spot" of what to charge for your product(s) or service(s). (Economics 101)

Myth: The settlement will meaningfully lower prices and make homeownership affordable again. (That is FALSE)

Here is the truth:  And, may I say categorically false and free from critical thinking principles.  Real estate values are primarily driven by supply and demand dynamics, not transaction fees. While reduced commissions may represent marginal savings, they are unlikely to have a significant impact on overall housing affordability. Rising home prices are primarily attributable to market forces rather than transaction costs.

TREC Rule 535.17

However, a legal verdict rendered last year found the MLS structure "to artificially inflate commission rates" is beyond me.  I have never known that the market value has ever been tied to commissions and I've never known a third-party appraiser who is licensed and whose license is on the line with every appraisal to ever allow the appraised value to be manipulated and inflated by agents. 

Fannie Mae's own seller's guide defines market value as "the most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: buyer and seller are typically motivated; both parties are well informed or well advised, and each acting in what they consider to be in their own best interest; a reasonable time is allowed for exposure in the open market; payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale."

Fannie Mae Seller Guidline Market Value Definitition

Now let's look at a couple of phrases (1) each acting prudently and knowledgeably (hello!!!!  informed by the market knowledge of a real estate agent). (2) both parties are well informed or well advised (hello!!!! informed and advice by a real estate agent). Nothing makes sense with many of the statements made by the media or general public regarding the fact that this settlement is good for everyone... it is if you're a seller.  It's brilliant if you are wealthy or affluent because you can easily afford an agent.  It's horrible for cash-strapped consumers, the lower, and middle classes.  Considering that these individuals are already paying for down payment, closing costs, and various other set and percentage-based fees, in many cases raising the fees that a buyer has to pay means they can't buy the house while being informed and making a prudent decision as in Fannie Mae's own definition of market value.  This might indicate that market value might not be achieved if the settlement goes through.  Not typically having a surplus of money to throw around to pay an agent or will be forced to shop for houses of lower price to be able to cover the fees and costs.  

Myth: The settlement is a win for buyers who can negotiate representation fees. (That is FALSE and TRUE)

Here is the truth:  Overall, the settlement only benefits the seller by providing them with the feeling that they aren't forced to pay commissions for buyers when they never have been before (if you did not like how someone works find someone that works the way you want) and puts more on the shoulders of the buyer overall.  Here is why: Buyers have traditionally benefited from seller-paid commissions, which allow them to finance representation costs over time rather than upfront. Negotiating representation fees may introduce additional complexities for buyers, potentially impacting their financial arrangements and closing expenses.

Conversely, the burden of commission payments may now fall on buyers with some and not all sellers, significantly impacting their financial obligations for the buyer to purchase a property not offering cooperative compensation.  I do not think this will be mainstream, I think there will be a few that are going to play that card and are going to reap the results that are setting themselves up for. Home buyers could face unexpected costs totaling tens of thousands of dollars more than they were already having to come to the table with should they choose to purchase a home where the seller is not offering cooperative compensation and the buyer wants the benefit of representation in what is typically the largest financial investment in their life.  

You see, it was just in 1992 that buyer agency was even ever created.  Before then, all the agents worked for the sellers, and the buyers were not represented until the creation of the buyers' agency.  Now some 32 years later somebody didn't learn from history and thought this was a good idea again. Oh yeah, you can have representation - you just have to figure out how to pay in some cases.

Myth: REALTORS can sort property listings by cooperative commission offered in the MLS (That is FALSE)

Here is the truth:  REALTORS who are participants of a local Multiple Listing Service (MLS) have never been able to sort listings by offers of commission and the mere inference is simply ludicrous.  We could see what the compensation offered is BECAUSE we have an agreement with our buyer to pay a certain amount and if they are going to have "come to closing with money for our fees" the buyer deserves to know this before they are shown the home.  It is called transparency.

NAR MLS Policy Statement 8.8

In 2021 in a settlement agreement with the DOJ (Department of Justice), the National Association of REALTORS, NAR agreed to publically publish buyer agent commission numbers for the public to see on every website to increase the level of transparency.  Now, just 3 years later the Sitzer/Burnet settlement calls for removing the fields altogether and placing the burden on sellers who offer cooperative compensation to find other means to advertise the benefit of choosing their home to purchase.  Seems like another lawsuit waiting to happen... limiting incentives that are legal to be marketed.  

Myth: REALTORS will now have to have signed buyer representation agreements before showing a home. (That is TRUE)

Here is more on that:  The settlement mandates upfront agreements between agents and buyers regarding commission payments, emphasizing transparency and clarity from the outset of the transaction.  Now, I get the fact that agents need to use a written buyer representation agreement.  However, why was the government not sued?  Because express agreements (in both oral and written forms at least in Texas) are valid.  (You know, I'm a buyer, you're an agent, will you represent me? Yes, kind of deal).  And, we can not forget implied agency where an agent is deemed to represent a client by virtue of their actions.  Neither one of these types of agency (express oral or implied [at least here in Texas]) guarantees that a buyer has at the very least read a document and signed it about agency and how a customer becomes a client through representation). 

Where are the lawsuits against the states?  Oh, wait.  That wouldn't work, right?  They are the ones who enacted the laws that allowed agency to take place in the current forms - not agents.  Oh, wait, what?  It's about commissions.  That's right... go after the low-hanging fruit and not affect change based on agency law.

Myth: The settlement will result in significant consumer restitution. (That is TRUE. Lawyers are consumers, right?)

Here is the truth:  While the settlement is QUITE substantial, the actual per-person benefit is relatively modest (an estimated $10-$15 per plaintiff.) The primary beneficiaries are the attorneys involved, who stand to gain significant fees from the settlement.

In addition to understanding the implications of the Sitzer/Burnett settlement, it's essential to recognize ongoing legal developments within the real estate industry. The Gibson vs. National Association of REALTORS class action lawsuit, is scheduled for September 2027.  This case represents another significant legal challenge that could shape the future of real estate practices because it is the same suit as Sitzer/Burnett, just nationally -- and of which none of this makes sense when one critically thinks of the arguments being made.

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