By Eoin Gubbins, Partner
In early July, the National Association of Realtors agreed to a settlement of a major class action lawsuit that changes some of the rules governing real estate commissions in residential sales. In Rhonda Burnett et al. v. The National Association of Realtors (W.D. Mo. Apr. 22, 2022), the plaintiffs representing thousands of home sellers sued a number of residential brokerage firms claiming that the prevailing practice by which the brokers receive commissions constitutes price-fixing – and are therefore in violation of federal antitrust laws.
The settlement agreement that the parties negotiated includes important requirements as to how many realtors must do business going forward. While the settlement also contains provisions designed to protect sellers, the following is a look at the changes applicable to homebuyers and their options for engaging realtors to assist them in purchasing a residential property.
Settlement Agreement Provisions Relevant to Homebuyers
- Written Agreement with Buyer Client Required. Starting August 17, 2024, a realtor will now generally be required to obtain a buyer's written agreement before touring a home. This agreement, which specifies the services that the realtor is to perform, must have the buyer's signature and is an important instrument in the deal, as it sets expectations from the outset.
- The New Buyer Contract Compensation Requirements. The agreement between the buyer and realtor must "conspicuously disclose the amount or rate of compensation [the buyer's realtor] will receive or how this amount will be determined [emphasis added]." The compensation must be in a specific amount or ascertainable by calculation. An indeterminate statement, such as "compensation shall be whatever amount the seller is offering to the buyer," is prohibited.
- A Realtor Is Prohibited from Representing Services Are Available at No Cost. Arealtor is prohibited from representing to a buyer that the realtor's services are available at no cost – unless the realtor does not receive compensation from any other source. The implication is that the buyer may be required to pay for the cost of its own realtor if neither the seller nor the seller's listing agent agrees to pay.
- Settlement Agreement Ostensibly Prohibits an End Run Around Buyer. The realtor is prohibited from receiving compensation for services that exceed the amount or rate agreed to in the buyer's written agreement. This restriction is intended to prevent a realtor from negotiating a low fee with the buyer while expecting to receive additional compensation from the seller.
- Conspicuous Notice That Realtor Fees Are Negotiable. Except where government-specified forms are used, both prospective sellers and buyers must be informed via conspicuous language in their contracts that realtor commissions are not set by law and are fully negotiable.
How Might Homebuyers' Approach Change with These New Protections?
The full impact of the settlement agreement will take time to become apparent. However, it already seems clear that the savvy buyer will be far more circumspect: even if the seller agrees to pay the realtor's fee, the buyer is indirectly paying it through a higher sales price and is likely to become much more aware of that fact. If nothing else, this settlement has shone a light on the issue of realtor compensation and a buyer's potential obligation for compensating whichever realtor the buyer has engaged.
Those buyers weighing whether to engage a realtor might decide to proceed without a realtor, as is the case in several countries in Europe. One choice that may be attractive to a buyer is to engage a real estate attorney instead of a realtor. Real estate lawyers possess expertise many realtors do not – including analyzing the terms of purchase and sale agreements, negotiating the legal nuances of specific provisions, guiding due diligence (e.g., title and survey, permits, entitlements and government records and environmental matters), and advising on disputes (e.g., with respect to title defects, defective and/or unpermitted construction). Real estate lawyers can also provide oversight and guidance on the closing process.
In response to the new rules, some realtors might decide to offer a menu of services so that would-be buyers just pay for the services they want (as opposed to the full-service approach that has been commonplace up to this point). For example, some buyers may prefer to tour homes themselves, but wish to have a realtor negotiate the business terms. Once the business terms have been hammered out, the buyer may wish to turn the transaction over to an attorney to close the deal.
Future Developments
The settlement in the Burnett case may be the tip of the iceberg for realtors. Depending on the outcome of the 2024 presidential election, the Department of Justice could decide to aggressively investigate potentially anticompetitive conduct by the National Association of Realtors on a much larger scale. On April 5, 2024, the U.S. Court of Appeals for the District of Columbia Circuit removed restrictions imposed by a lower court preventing the DOJ from proceeding with such an investigation. The scope, extent and ramifications of any such future investigation are unclear. But with the high cost of housing becoming an issue both political parties are pledging to tackle, the outcome of any such investigation could be far reaching and truly transformative for the real estate industry.