What is NAR?
NAR stands for the National Association of Realtors, essentially a large national lobbying organization that real estate brokers pay annual dues to be members of. A broker must be a member of NAR to call themselves a “Realtor” otherwise they are referred to as a Real Estate Broker or Broker Associate.
NAR has a bunch of rules and regulations on how Realtors should behave ethically since we have a fiduciary duty to act in the best interest of our clients while also having an ethical duty to other members of NAR to treat each other with respect and to cooperate with each other to serve our clients best interests.
In a lot of other states NAR runs the show in real estate. There are many states that don’t have a Department of Regulatory Affairs regulating real estate transactions or brokers, and the licensure and contracts and forms used in real estate transactions are all provided by NAR. NAR-affiliated Realtor boards also own and operate a ton of Multiple Listing Services (MLS) which is where consumer apps like Zillow and Redfin pull listing data from to display listings.
Brokers join NAR for a number of reasons - some brokerages require all their brokers to also be Realtors (like the first brokerage I hung my license at), some states only have Realtors selling homes, and sometimes you’re forced to join a Realtor board even when you don’t want to (looking at you, Summit County Association of Realtors) because it’s insanely expensive and you’re already a member of another NAR-affiliated Realtor board (Denver Metro Association of Realtors) but the Summit County MLS is a NAR-affiliated MLS that requires for you to be a member of their Realtor board in order to get broker access to property listings in their area. True story.
NAR offers its members access to a complimentary legal hotline where Realtors can speak with a real estate attorney free of charge. Having a NAR membership also gets you discounts on products and services often associated with the real estate industry.
Why was NAR Sued?
There was a large class-action lawsuit against NAR as well as several large national brokerages in Missouri claiming that they engaged in anti-competitive behavior by requiring sellers to pay buyer broker commissions as part of their listing agreement. This has been standard operating protocol in the real estate industry for decades which was largely pushed as the norm by NAR.
The brokerage firms came under fire for requiring sellers of all listings at their firm to pay a buyer broker commission and literally not allowing their brokers to list properties at their firms with buyer broker commissions set below 2.8%. I worked at one of these brokerages for a very brief period several years ago and this rule was spelled out in the office policy manual.
NAR affiliated Realtor boards also own and operate a number of Multiple Listing Services (MLS) throughout the country that require a buyer’s broker compensation to be paid by a seller in order for a listing to be configured in the MLS.
The lawsuit alleged that requiring sellers to pay buyer’s brokers artificially drove up the price of real estate and led to buyer’s brokers being overpaid for their services. Whether or not that’s true remains to be seen, but were these practices anti-competitive and collusive? Absolutely.
The main terms of the settlement are twofold:
NAR agreed to create a new MLS rule prohibiting offers of compensation on the MLS. This would mean that offers of compensation could not be communicated via an MLS, but they could continue to be an option consumers could pursue off-MLS through negotiation and consultation with real estate professionals.
NAR also agreed to create a new rule requiring MLS participants working with buyers to enter into written agreements with their buyers before the buyer tours a home.
How does it work in Colorado?
Colorado is not a state where NAR runs the show. In the Denver Metro area our primary MLS is ReColorado which does not currently require a buyer’s co-operative compensation amount to be input in order to put a listing in the MLS. Nor do they require brokers to be a member of a Realtor board in order to be a member of their MLS. In other words, ReColorado is cool.
The contracts and forms that we use in Colorado were created by the Department of Regulatory Affairs (DORA) with input from state lawmakers. Our listing forms already had the buyer’s broker compensation field as an optional section that can be edited and changed however a seller wants in the contract to list their home with a broker.
Put simply, a lot of the things that were commonplace in Missouri transactions aren’t commonplace in Colorado. Until the settlement has been approved by the courts there isn’t much of an update for how it will change things in our state. We attended multiple webinars with ReColorado and a real estate attorney about the settlement and they all said essentially the same thing - we have our own contracts in Colorado that are not NAR contracts and forms and real estate commissions have always been negotiable on both sides of the transaction.
ReColorado will likely be removing the fields from their MLS that show if a listing is offering a buyer’s agent commission. Listing brokerage firms may display this information on their own websites but the field will no longer be an input option in the MLS.
My guess is we’ll see some changes to the standard Colorado State Contract to Buy and Sell Real Estate that more cleanly and clearly define commission splits in the contract itself, but that remains to be seen. Currently commission language and rates are defined in the Exclusive Right contracts that clients sign with their brokers which are property agnostic.
What does this mean for Sellers?
Real Estate Agent Commissions for both listing and buyer’s agents have traditionally been paid by the seller out of the net proceeds from a seller’s settlement at closing. As a seller you are not required to pay a buyer’s broker commission as a condition of listing your home, but we strongly recommend offering a buyer’s broker co-operative compensation of some sort.
If you do NOT offer a buyer’s broker commission we can still list your home in the MLS, but it could dramatically decrease the pool of buyers who are interested in touring and buying your home. Buyers who are working with agents have signed an Exclusive Right to Buy contract with an agent that states that if the broker’s commission is not paid by the seller then it must be paid by the buyer themself.
Currently buyer’s agent commissions cannot be baked into the loan a buyer takes out. Paying an agent commission out of cash that a buyer was planning on bringing to closing could reduce their pre-approval amount, push them below the required loan-to-value ratio for avoiding having to pay mortgage insurance, and eliminate eligibility for buyers who would otherwise be eligible to buy your home. There are ways to get around this in the way an offer is written on a property, but not without inflating the purchase price on a home in exchange for seller concessions off of closing costs on the chance that you think it could appraise for more than the list price.
Offering a buyer’s agent commission on your listing when selling your home is absolutely still allowed in the wake of this ruling and it is a really good way to get a pool of qualified and serious buyers in the door on the day your home hits the market.
What does this mean for Buyers?
From where we’re sitting today it looks like buyers are the ones who actually get the short end of the stick in all of this. It is incredibly expensive to buy a home to begin with, many listings are competitive due to low inventory, and if you approach a listing agent directly to have them write an offer on their listing for you they must either:
cease their agency relationship with their sellers (if it’s appropriate to do so) and serve as a Transaction Broker who essentially sits in the middle of the 2 parties and facilitates the transaction while refraining from advocating for either party
maintain their agency relationship with the sellers and continue to advocate for their best interest while treating the buyer as a “customer,” which means that come inspection negotiations it could be inexperienced first-time homebuyers going up against industry professionals and sellers who are much more familiar with home ownership.
In a competitive market like the one in Denver being an unrepresented homebuyer is difficult and can even be scary. Many homes receive multiple offers in their first week on the market and good buyer agents are able to build rapport with a listing agent to find out what a truly competitive offer looks like on a property. I tell my buyers that I can usually get a listing agent to tell me what needs to be done to win in a multiple offer situation if they’ve found their dream home, but buyers may not always be willing to write offers on those terms. Unrepresented buyers may have the benefit of not having a buyer’s agent to pay but that’s a moot point if you never actually win a contract on a home.
First time homebuyers usually don’t know much about homeownership and home maintenance. They don’t understand what remodel projects are possible nor do they understand the costs to fix or change various items in the home. Touring properties with a buyer’s agent is extremely helpful for buyers to actually realize what is and is not possible with a property and to help identify any potential inspection issues or things to follow up with the listing agent on. I think that unrepresented buyers are at huge risk of getting in over their heads on a property whether it be from wanting to do something to it that is not possible because of construction costs or zoning rules, or getting through inspection negotiation without getting taken advantage of.
If the status quo moving forward is for buyers to pay their own brokers Fannie Mae and Freddie Mac need to find a way to make this more affordable to homebuyers as part of the lending process. A good buyer’s agent is worth their weight in gold, and you get what you pay for.
What does this mean for Brokers?
Brokers need to be better about clearly communicating the fact that broker commission amounts are negotiable on both sides of the transaction to prospective clients. While this has always been the case it is not always made clear to the consumers involved in the transaction that they have options for negotiation before they sign a contract. We live in a country that likes to squeeze consumers, so more transparency is always a good thing in my book.
I do not think this is the end of real estate commissions for buyers, nor do I think that it should be categorized as a “seismic shift” in how we get paid. At the end of the day we render valuable services for our clients in exchange for pay, just like any other profession. Brokers who bring value to their clients will continue to do so. Brokers who are already struggling may churn out of the industry. Good brokers will adapt to this new environment. It’s our job.
