NAR Settlement Update — A Parachute or a Bombshell?

The big news the morning of March 15 surprisingly appeared in a NY Times Bombshell  article that NAR had settled the $5 Billion Buyer Broker Commission lawsuits brought by class action attorneys.

Was this really a Bombshell settlement or was it more of a soft-landing Parachute? 

Actually, it is a  bit of both, that we hope to unravel with the following summary of the lengthy NAR Settlement document (100+ pages).

First, here’s a capsule view:

  • Plaintiffs and National Association of REALTORS® intend this Settlement Agreement to provide for a nationwide class with a nationwide settlement and release.
  • “Total Monetary Settlement Amount” for NAR means $418 Million (payable over 4 years). That covers NAR and about 1,000,000 REALTOR® Members and REALTOR Associations and REALTOR-owned MLSs as the “Released Party,” and they are the recipients of what we term as the rescue PARACHUTE. This group of the REALTOR Family must comply with the “Practice Changes” in the Settlement Paragraph 58.
  • Also released are any SMALL (our word) real estate brokerages with a calendar year 2022 Total Transaction Volume for residential home sales of $2 Billion or less, provided they agree to the critical Practice Changes.
  • Who’s not released? The brokerage and REALTORS from HomeServices of America,  BHH Affiliates, LLC, and HSF Affiliates, LLC who are still defendants in the current lawsuits (Benett and Moehrl). Also not covered are certain non-REALTOR MLSs (separately incorporated and not operated by a member board/association).
  • Real estate brokerages with residential sales exceeding $2 Billion  have the option to settle if they agree to the Practice Changes and pay into the Settlement Fund an amount equal to 0.0025 multiplied by its average annual Total Transaction Volume over the most recent four calendar years (“Total Monetary Settlement Amount”).
  • For any transactions in which a real estate broker represented both the buyer and the seller, that transaction shall be counted twice for purposes of calculating the “Total Transaction Volume.”
  • The non-REALTOR MLSs have the option to settle if they stipulate to deposit into an Escrow Account a lump sum dollar amount equal to 100 multiplied by the number of its subscribers in calendar year 2023, plus agree to the Practice Changes.

Parachute (soft landing) for these “Released Parties”

  • National Association of REALTORS® (NAR);
  • Any REALTORS® (members of the National Association of REALTORS®), REALTOR-Associate® Members, and REALTOR® Member Boards (state and local);
  • Any REALTOR® MLS (including a REALTOR® Member Board that operates an unincorporated multiple listing service) and signs APPENDIX B – REALTOR® MLS “OPT IN” AGREEMENT;
  • Any real estate brokerage with a calendar year 2022 Total Transaction Volume for residential home sales of $2 billion or less — these are part of the estimated 1,000,000 REALTORS covered/released.
  • All Released Parties are subject to the “Practice Changes” found in Paragraph 58 of the NAR Settlement agreement.

KEY PROVISIONS IMPACTING OFFERS OF COMPENSATION are found in the “practice changes” in Paragraph 58 of Settlement Agreement (reference the precise language in the Nar_Settlement_Agreement)

  • Offers of compensation are permitted outside of MLS, just cannot be a requirement to list a property in the MLS.
  • No mandatory MLS requirement that listing brokers or sellers make blanket, unconditional, or unilateral offers of compensation to buyer representatives.
  • Prohibit disclosure on MLS of the total broker compensation (i.e., the combined compensation of both listing brokers and cooperating brokers).
  • Eliminate and prohibit conditioning MLS participation on offering or accepting offers of compensation to buyer brokers.
  • Agree not to create, facilitate, or support any non-MLS mechanism …however, this provision is not violated by (a) an MLS providing data or data feeds to a MLS Participant, or third party unless the MLS knows those data or data feeds are being used directly or indirectly to establish or maintain a platform for offers of compensation from multiple brokers (i.e., the MLS cannot intentionally circumvent this requirement); or (b) a REALTOR® or REALTOR® MLS Participant displaying both (1) data or data feeds from a REALTOR® MLS and (2) offers of compensation to buyer brokers or other buyer representatives but only on listings from their own brokerage;
  • Require that all REALTOR® MLS Participants working with a Buyer enter into a written agreement before the buyer tours any home with the following: to the extent that such a REALTOR® or Participant will receive compensation from any source, the agreement must specify and conspicuously disclose the amount or rate of compensation it will receive or how this amount will be determined;
  • the amount of compensation reflected must be objectively ascertainable and may not be open-ended (e.g., “buyer broker compensation shall be whatever amount the seller is offering to the buyer”); such a REALTOR® or Participant may not receive compensation for brokerage services from any source that exceeds the amount or rate agreed to in the agreement with the buyer;
  • Require REALTORS® and REALTOR® MLS Participants acting for sellers to conspicuously disclose to sellers and obtain seller approval for any payment or offer of payment that the listing broker or seller will make to another broker, agent, or other representative (e.g., a real estate attorney) acting for buyers; and such disclosure must be in writing, provided in advance of any payment or agreement to pay to another broker acting for buyers, and specify the amount or rate of any such payment;
  • Require that REALTORS® and REALTOR® MLS Participants and subscribers must not filter out or restrict MLS listings communicated to their customers or clients based on the existence or level of compensation offered to the buyer broker or other buyer representative assisting the buyer;
  • The “practice changes” in Paragraph 58 of this Settlement Agreement shall not (a) prevent offers of compensation to buyer brokers or other buyer representatives of the multiple listing service; or (b) sellers from offering buyer concessions on a REALTOR® MLS (e.g., for buyer closing costs), so long as such concessions are not limited to or conditioned on the retention of or payment to a cooperating broker, buyer broker, or other buyer representative
  • The obligations set forth in Paragraph 58 of this Settlement Agreement will terminate 7 years after the Class Notice date
  • Cooperation: agree not to provide greater assistance in discovery or trial to any defendant or other non-Released Party in the Actions than to the Plaintiffs, unless required by subpoena or other compulsory process

What about the BIG brokerages, the so-called $2 Billion Club?

That is where the real Bombshells fell. There was no Parachute for them. Quite a shock when the owners read in Friday’s NY Times that the deal was done behind closed doors. No chance for input into the confidential negotiations. All the owners  did was quickly look at their financials for residential sales averaged over the past four years, and then multiply that $2 Billion figure times 0.0025.

Simple math, big numbers, perhaps another 2+Billion into the Settlement Fund (along with the previous settlement amounts collected from Anywhere ($85M, RE/MAX $55M, and Keller Williams $70M).

Now we are talking BIG dollars on the table for the class action legal teams to salivate at the prospect of more Billions to target. Makes sense for the attorney strategy of taking a meager amount ($418M) of settlement from NAR in light of the bigger target now in the attornies’ crosshairs.

Bombs Away!

If you are one of the $2 Billion Clubbers, what do you do now? Do you stipulate for a quick settlement at this point or do you take the risk of a long and expensive trial?

Will the class action guys deal fairly with you now?

My contracts law professor, after posing such questions and asking “Well, students, who wins?”, would utter his classic response: Who Knows! Depends on the facts, the judge, the attorney, the jury, if any.

When we look at the industry giants involved and targeted, we are talking about the likes of  The Agency, Baird & Warner, Compass, Hanna Holdings, John L. Scott, eXp Realty, @properties, Crye-Leike, Real Estate One, etc.

Wow, I’ve seen written that Compass alone is estimated at over half-billion dollars based on the 0.0025 formula.

Finally, what about some of the big brokerages, the so-called $2 Billion Club, who decide it is best to stipulate and settle?  They would have the option to obtain a Release if they sign the proposed “OPT IN” Agreement:

APPENDIX C – BROKERAGE “OPT IN” AGREEMENT  — we apologize for the excess publishing of legalize, but for this kind of money, precise words count. 

  • WHEREAS, Stipulating Party believes that it is not liable for the claims and allegations asserted and has good defenses, but nevertheless has decided to enter into this Appendix C to avoid further expense, inconvenience, and the distraction of burdensome and protracted litigation, to obtain the nationwide releases, orders, and judgment contemplated by this Appendix C, and to put to rest with finality all claims and allegations that Plaintiffs and Settlement Class Members have or could have asserted against the Stipulating Party; and
  • WHEREAS, Stipulating Party has agreed to cooperate with Plaintiffs and to implement certain “Practice Changes,” each as set forth in this Appendix C, including the following:.
  • Require that company owned brokerages and their agents disclose, at the earliest moment possible, any offer of compensation made in connection with each active listing shared with prospective buyers in any format;
  • Prohibit company owned brokerages and their agents (and recommend and encourage that any franchisees and their agents) refrain from utilizing any technology or taking manual actions to filter out or restrict listings that are searchable by and displayed to consumers based on the level of compensation offered to any cooperating broker unless directed to do so by the client (and eliminate any internal systems or technological processes that may currently facilitate such practices);
  • Advise and periodically remind company owned brokerages and their agents of their obligation to (and recommend and encourage that any franchisees and their agents) show properties regardless of the existence or amount of compensation offered to buyer brokers or other buyer representatives provided that each such property meets the buyer’s articulated purchasing priorities.
  • Regarding each of the above points, for company owned brokerages, franchisees, and their agents, develop training materials consistent with the above relief and eliminate any contrary training materials currently.
  • If not automatically terminated earlier by their own terms, the obligations set forth in the immediately preceding paragraph will sunset 5 years after the Effective date.

If a $2 Billion Clubber decides to settle under Option 1 below, it takes 120 days to deposit the full amount; there is no 4 year installment period as in the NAR settlement.

Option 1: Plaintiffs will open a special interest-bearing settlement escrow account or accounts, established for that purpose as a qualified settlement fund as defined in Section l .468B- 1(a) of the United States Treasury Regulations (the “Escrow Account”). Within 120 days following preliminary approval of the Settlement Agreement by the Court, Stipulating Party will deposit into the Escrow Account an amount equal to 0.0025 multiplied by its average annual Total Transaction Volume over the most recent four calendar years (“Total Monetary Settlement Amount”). “Total Transaction Volume” is defined as the aggregate value of all residential home sales and purchases in which the Stipulating Entity and its direct and indirect parents (including holding companies), subsidiaries, affiliates, associates (all as defined in SEC rule 12b-2 promulgated pursuant to the Securities Exchange Act of 1934), and any of their franchisees represented in a real estate brokerage capacity either the buyer, the seller, or both.   For any transactions in which  a real estate broker represented both the buyer and the seller, that transaction shall be counted twice for purposes of calculating the “Total Transaction Volume.” By way of example, a Stipulating Party with a $2 billion average annual Total Transaction Volume would be required under this agreement to deposit $5 million in the Escrow Account.

  • Option 2 is to ask for mediation if the Stipulating Party has a good faith belief that it lacks the ability to pay the amount required under Option 1.

What about the non-REALTOR MLSs?

Another Bombshell landed on the non-REALTOR MLSs who were given their own Option 1 with acceptance of “Practice Changes” and a lump sum payment based on $100 per member in 2023. Some of this group are NWMLS (Northwest), GSMLS (Garden State), FMLS (First), MRED (Midwest Real Estate Data).

Conclusion

Takeaways based on multiple readings of the entire NAR Settlement Agreement:

  • The real “Bombshell” of the Settlement is the anticipated huge dollar settlements the class action lawyers will pursue against the big brokerages – the $2 Billion Club.
  • As for the REALTOR Family, they received Releases simply by practicing within a new set of workable “Practice Changes” — definitely a soft landing Parachute, from whatever rule was initially feared.
  • The Offer of Compensation will remain part of real estate practice — outside of MLS.
  • In retrospect, the earlier settlements by Anywhere, RE/MAX, and KW (including their agents) seems a good move.
  • The main winners are the lawyers (not their seller clients), the losers are the Big Brokerages and non-REALTOR MLSs.
  • Next, we will see whether – and to what extent — the DOJ intervenes in the preliminary court approval process. I don’t think the DOJ got the full extent of what they may have wanted, with respect to eliminating “steering” and “concessions.”
  • What the DOJ will like, however, is the prevalance of  consumer NEGOTIATION…NEGOTIATION…NEGOTIATION  with the Negotiation between the Buyer and the Buyer-Broker and the Negotiation between the Seller and the Buyer.

Final Note: NAR and the real estate industry is being blasted in the press with negative articles about the “Bombshell” settlement. Read this well-articulated response to the Wall Street Journal. The response is from our friend Melanie McLane, a distinguished real estate educator and appraiser in Pennsylvania.

Melanie’s  Response: “It is sad that a publication generally as knowledgeable as the WSJ has given into hype and half-truths, as you have done here. Commissions are negotiable by law, and many agents, including me, a broker for over 40 years, have and DO negotiate commissions. Within the industry, there are various business models which exist which allow consumers a variety of choices, from limited service to full service. Comparing real estate agents to those in other countries is not a fair comparison, as the requirements to be in real estate in other countries vary considerably, with most of them being much less stringent to enter the business, or to stay in the business, let alone the duties that they owe to clients, customers and consumers. The majority of real estate agents work on a commission basis. They don’t pick up that commission check at the closing, and head to the mall. They pay social security, federal taxes, local taxes, health insurance, and any retirements savings out of that—not to mention their business expenses, which includes everything from vehicle expenses to insurance. The median gross income for an agent in 2022, per NAR was $56,400. After 16 years in the business, the median income is $80,700. Before you characterize us as ‘overpaid’, ask yourself if you would do what we do for that kind of money?”

 

 

 

 

 

 

 

 

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9 Responses

  1. When you compare agent commission to say the UK – the systems are largely not comparable. The sale commission is significantly lower; there also is no RESPA & market expectations are very different (marketing of properties is extremely different & more limited.) Compensation is common beyond the direct services provided – for instance, every consumers (buyer & vendor) pay for attorneys (1300-1500 per side) to prepare, review & write the contract (agents only negotiate the terms) – those attorneys also handle the due diligence. Those attorneys typically pay the Agent a referral. Mortgage Brokers & Insurance Brokers – they typically pay the agent a referral (on lender policies, property policies, goods & belonging policies, vehicle, etc…even life policies) The estate agents make a spiff on almost all of the associated services. The transactional volume is widely different, as are the prices, rate of home ownership,.. etc. The entire search, touring, etc is set completely differently than in the US.

    1. Thanks Robert. Very helpful in any Apples to Oranges analysis. Likely comparable in other countries, like Australia. As you note, the seller often pays for marketing as well.

  2. Only 18 states have a buyer representation agreement. That is the minority. How do you enforce a provision like that in a state where that type of agreement does not exist.

    1. Good question Annalisa. Likely, most states will have to consider changes to standard forms in light of possible antitrust threats. I’m not an antitrust attorney, although I understand that the Proposed NAR Settlement is based on the Benett/Sitzer and Moehrl cases — once approved by the Court, it could have an effect on federal antitrust cases nationwide under rules of federal Multi-District Litigation (MDL). The Settlement document itself conditions the Stipulating Party Release on withdrawing responses in any current MDL motions. The complex MDL rules apply when “civil actions involving one or more common questions of fact are pending in different districts, such actions may be transferred to any district for coordinated or consolidated pretrial proceedings. Such transfers shall be made by the judicial panel on multidistrict litigation authorized by this section upon its determination that transfers for such proceedings will be for the convenience of parties and witnesses and will promote the just and efficient conduct of such actions.” Similar to prior precedent “stare decises” which holds that courts and judges should honor “precedent” for the decisions, rulings, and opinions from prior cases. See https://www.law.cornell.edu/uscode/text/28/1407

  3. Does NAR expect MLSs to monitor the required buyer representation agreements that need to be signed before touring a home? If so, how?? Sounds more like an issue for the state, or agent to agent self-policing, or professional standards.

    1. Mike, enforcement is usually a local association role, sometimes state licensing. We’ll have to wait and see whether the federal or state regulators create any special rules on enforcement or arbitration.

  4. John, this is quite honestly the best summary I have read so far. Thanks for putting in the time and effort to clear up the hype and present the facts as they are currently known. I sent this to my whole team as required reading.

    1. Thanks Brent, this was a combined effort of The Data Advocate team — Saul, Terri, and myself. Hope your team and others subscribe to TDA and receive future updates.

  5. MLS is a miracle, and creates real estate opportunities that other countries do not come close to matching. Real estate is the next best thing to liquid assets in the US, thanks to MLS. More properties are listed and sold with greater transparency. due in large part to MLS. License law, Code of Ethics, rules and regulations, exclusive contracts, and bringing the greatest number of agents working to bring the greatest number of buyers (offers of compensation) have given us a real estate marketplace in the US that is unmatched. These lawsuits miss the mark when it comes to consumerism.

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