The real estate industry is currently buzzing with discussions about the recent settlement announcement by the National Association of Realtors (NAR) in the Sitzer-Burnett class action case. As the founder of Berkshire Hathaway HomeServices Warren Residential, I want to demystify the settlement details and share our perspective on how it may shape our industry moving forward.

Changes in Business Practices

Two major proposed changes to how real estate agents do business are the focus of this settlement.  I’ve outlined both of them below, explaining what they actually mean, and what impacts they could have on buyers and sellers.

1. Buyer Representation Agreements Will Be Required

A pivotal change coming from the NAR settlement is the mandatory implementation of written buyer agency agreements before any home tours. This shift aims to foster transparency and accountability in the buyer-representative relationship, ensuring both parties are clear on the terms of their engagement from the outset. Here’s what you need to know:

What is a Buyer Agency Agreement?

A buyer agency agreement is a contract between a potential homebuyer and a real estate agent or broker. This agreement serves as the foundation for the relationship, detailing the agent's duties to the buyer, the terms of the agency, and, most crucially, under the new requirements, the compensation structure for the buyer's representative.

Key Components of a Buyer Agency Agreement

• Compensation Details: The agreement must explicitly state how the buyer’s representative will be compensated. This could be a fixed fee, a percentage of the home purchase price, or another agreed-upon compensation structure. The critical aspect is that the agreement clearly lays out the compensation amount or formula.

• Maximum Compensation: Under no circumstances can a buyer’s representative collect more than what is specified in the written agreement. This clause is designed to prevent any unexpected fees or charges, providing the buyer with peace of mind and financial clarity.

• Duties of the Buyer and Buyer’s Agent: The buyer agency agreement will outline the duties and responsibilities of both the buyer and the buyer’s agent.  

• Period of Time: It will also outline how long the buyer and the buyer’s agent contract will last.

Why This Matters

The introduction of mandatory buyer agency agreements marks a significant shift toward enhancing the transparency and professionalism of the home-buying process. For buyers, it means a clearer understanding of their rights and what they can expect from their agent. For agents, it represents an opportunity to define their value proposition and build trust from the very beginning of the buyer relationship.

2. Offers of Compensation will be Prohibited on MLS

In a significant departure from longstanding practices, the recent NAR settlement has paved the way for a rule change that moves offers of compensation for buyer agents off the MLS system. This decision marks a notable shift in how buyer agency compensation is communicated and negotiated in the real estate industry. Here’s what this change means and how it might impact the market:

Understanding the Change

Historically, the MLS has been a central hub for not only listing properties but also for detailing the compensation amount offered to buyer's agents by listing brokers. This facilitated a straightforward, if not always transparent, system where buyer agents knew the commission structure upfront. The new rule will remove these offers of compensation from the MLS listings, necessitating a more direct negotiation and consultation process between the parties involved.

Key Points of the New Rule

• Prohibition on Offers of Compensation on MLS: Starting mid-July 2024, NAR will prohibit listing agents from including how much, if any, compensation is being offered to buyer agents on the MLS. This change aims to foster a more open negotiation process, potentially leading to more tailored compensation agreements that reflect the actual value and services provided.

• Continuation of Offers of Compensation Off-MLS: While the MLS will no longer serve as a medium for these offers, they remain a viable component of real estate transactions. Agents and their clients will need to engage in more direct discussions about compensation, making these conversations an integral part of the buyer representation agreement.  Buyer’s agents will now need to communicate directly with listing agents and ask them what compensation is being offered before showing the property.  

• Seller Concessions: Sellers can still offer concessions to buyers on the MLS, such as contributions towards closing costs. This maintains flexibility and negotiation potential in transactions, focusing more on the buyer's benefits rather than on agent compensation.

Impact on the Industry

This shift is poised to transform several aspects of real estate transactions:

• Enhanced Transparency: By moving compensation discussions off the MLS, the hope is to increase transparency between buyers and their agents, making compensation a clear part of their direct agreement.

• Encourages Dialogue: Agents must articulate their value and services more clearly to buyers and sellers, as compensation becomes a topic of direct conversation rather than a standard listing detail.

• Potential for Customization: This change opens the door for compensation agreements that better reflect the services provided by the buyer’s agent, potentially leading to more customized arrangements that suit buyers' and sellers' specific needs and expectations.

What Happens Next?

Currently, the settlement awaits preliminary court approval. After this stage, class members and other parties can object. Additionally, the Department of Justice (DOJ) may provide input on the settlement terms, leaving us anticipating the final outcome over the next few months.

Confused?  We are here to help!

We understand that the changes being proposed can be confusing, especially to those who aren’t familiar with the process of buying or selling a home.  We encourage you to reach out to us and ask questions in order to ensure that you have the information you need to make the right decisions for you and your family.