A Q&A about the NAR lawsuit settlement
Happy start of the season of longer, warmer days, more sunshine, and what real estate sellers everywhere refer to as: GO TIME!!!
It's also an appropriate time to talk about something I've shared a lot about recently:
C H A N G E
There's been no shortage of it in my newsletter topics, that's for sure.
So let's build on the theme a bit and discuss a topic I'm CERTAIN you've read or listened to news about recently:
The National Association of Realtors' (NAR) settlement in the Sitzer-Burnett Lawsuit.
The potential $1.78 billion in damages the NAR was initially facing...
...has been settled for $418 million.
And a list of conditions, agreed-to by NAR, which I will report on below -- along with some of the questions many are asking.
Depending on what news outlet you subscribe to, you may have heard any of a dozen or more different slants on the subject.
There is a lot of hyperbole circulating.
I will do my best at this early stage to stick to the facts.
Let's get into it, and see what questions pop up along the way.
An important economic term to understand before we get into the weeds
There is a relevant term in economics that I'd like you to consider in this NAR lawsuit / changes to the real estate industry situation:
Embedded costs
Embedded costs means that the things you buy have other costs embeded (included) in the price you pay at the checkout stand.
Let's take a gallon of milk at the grocery store as an example.
You rush into the store, grab a jug by the handle, hustle to the check-out stand, pay the clerk $4.38, and then rush out.
You've got your milk, the process was efficient, your kids can have their cereal for breakfast.
You think of that $4.38 as being for the milk, but that price had a lot of embedded costs basked into it.
You're paying part of the grocery store's:
building rent
payroll
utility bills
janitorial
B&O tax
profit
HR
L&I
shipping
marketing
refrigeration
maintenance
the farmer
etc.
etc.
etc.
Is the embedded cost of those things a conspiracy?
And by learning about them just now, if you haven't heard of embedded costs before, are you feeling something like, "I've been had!"
I'm guessing "no."
Embedded costs are efficient to the point of being critical to the flow of the economy in every possible sector and product.
Imagine instead of your rush in and out of the grocery store, that each of those items above had a representative standing at the exit, and before you were allowed to leave with your milk, you had to settle up with each of them.
Preposterous!
Why am I explaining this?
Because, although I am fully on board with some level of reform in the real estate agent industry -- which I am happy to get into in detail in a future newsletter -- the uncoupling of customary expenses (embedded costs) in a real estate transaction, as a way of "protecting consumers", is an inefficient, troublesome approach that is also a distraction from or distortion of the real matters trying to be addressed.
The terms agreed to by NAR, and soon to become required standards around the US, are going to cause a level of unnecessary harm and confusion to both buyers and sellers.
With my opinion put squarely on the table, let's now look at the facts.
Q: What did NAR just agree to?
On March 15th, NAR and many co-defendants in the Sitzer-Burnett Lawsuit and all the follow-up suits brought on a national level by the original lawfirm owned by Michael Ketchmark, settled out of court.
NAR agreed to pay $418 million over 3 years, and agreed to a number of changes in how its MLS organizations operate.
Note that the NWMLS that we operate within here in Whatcom County and throughout Washington, is NOT owned by the NAR -- but is predicted to likely follow suit with the changes, since so many Washington real estate professionals are Realtors (members of NAR).
These changes, effective July 2024, stem from the antitrust lawsuits concerning NAR’s Cooperative Compensation Rule, or "Buyer Broker Compensation" that has historically and customarily been an embedded cost in the price of a home and shows on the settlement statement as paid by the Seller at closing.
Let’s delve into what these developments mean for Buyers, Sellers, Realtors, and the broader industry.
Q: What is the biggest change that will affect MLS listings of homes for sale?
The biggest change is that Buyer Broker Compensation as an embedded cost can no longer be advertised on the MLS.
Multiple Listing Services owned by NAR will be required to remove any mention or offer of Buyer Broker Compensation from all listings, by July this year.
Right now, if we look at all 60 of the Active listings of single family homes in Bellingham, we see the Buyer Broker Compensation published, embedded into the price of the home, paid by the seller at closing.
Let me show you. Here's a $625K listing:
Here's one listed at $1.6 million:
And here's one listed at $2.4 million:
If the changes NAR agreed to are ratified, and if the NWMLS agrees to follow suit, then beginning in July, listing agents will not be able to publish the Buyer Broker Compensation anywhere in the listing, including the agent-only remarks section.
Q: So how will a Buyer Broker know what the embedded compensation is, or if there is any at all?
There are still many allowed ways, as long as they are "off-MLS."
A phone call, text, or email to the listing agent is the dominant theory right now.
Other potential ways are:
Social media
Agent website or web page about the listing
A sign rider hanging from the For Sale sign in front of the house
Paper / print fliers
Video
All the other ways we advertise homes for sale, just not the MLS.
Q: What CAN a Seller and their listing agent choose to publish in the MLS?
Sellers MAY publish, in the MLS listing about their home, an offer of a Buyer Concession (a credit or subsidy, if you will, from Seller's proceeds, paid through Escrow to the Buyer at closing).
That Concession can legally be used for -- you guessed it -- paying your Buyer Broker the compensation.
(It just can't state in writing in the MLS that the Concession can or should or must be used for paying a Buyer Broker.
And it must be offered to all Buyers, even those not working with a Buyer Broker, and could potentially be used in those cases to help pay other closing costs like lender fees, prepaid taxes, insurance, etc.)
Q: Wait... is a Buyer REQUIRED to pay their Buyer Broker any compensation at all?
No, if you can find one who can afford to work for free.
But here's the rub:
NAR agreed to, on a national level, and WA State already had a state law that requires Buyers and Buyer Brokers to agree up front, in writing, exactly how much and by what means the Buyer Broker will be paid when that Buyer's eventual purchase closes.
And that written agreement must be in place before a single house is toured, or any "material service" is provided by the Buyer Broker.
Q: How else can a Buyer pay their Buyer Broker if the compensation is not embedded into the price of the home, and therefore embedded into the loan (in financed sales, which are most sales).
A Buyer can also write a check to the Buyer Broker at closing -- which some Buyers are capable of doing, but many Buyers are not going to have saved for or have the means to do.
It also means that, if a Seller has not embedded a Buyer Broker Compensation into their list price -- which no Seller has to now, nor has ever "had to" -- and the Buyer must then tack into their offer price the Compensation amount of, say, 2.5% -- to use the example shown above -- the house must then appraise for 2.5% over list price to avoid creating a "Low appraisal" situation with the lender.
The entire financing and appraisal industries have factored embedded costs of Broker Compensation (and excise tax, and title and escrow fees) into their work as an industry standard practice.
That will now need to be uncoupled and figured out in a new format, the exact look and feel of which is unknown at this point.
Q: What are some good things that this settlement and the new practices will bring about?
More meaningful, transparent conversations between both Listing and Buyer Brokers and their clients, to more fully set out how Brokers are paid, by whom, when, by what means, and the reasonable and fair negotiation of that compensation.
I am all for that. All of it.
If you've been a long-time reader of my newsletter, you know that one of my primary goals is to help readers stand on the edge of the coin and look over both sides, take in the whole picture, and see things for what they are.
The spin that many news outlets are publishing right now is positively ludicrous.
Here's a direct quote from the New York Times podcast, The Daily:
"What this NAR change means is that the entire US housing market is about to be discounted. It’s about to go on sale."
That's just.... Wow.
OK. I'll certainly be watching for that here in Bellingham.
Let's talk about this
Change is inevitable, and that will never change.
I'm certainly not the final word and there are thousands of various conversations to be had around this fascinating topic.
Reach out to me and let's discuss.
I'd love to hear your thoughts and questions.
Til then, Happy Spring, and I'll see you in two weeks!
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