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What Will Be the Impact of the NAR Settlement on Colorado Real Estate Transactions?

Posted May 03, 2024 in Real Estate

Real Estate Contracts

We have been receiving questions from Colorado real estate brokers and property owners regarding the NAR Settlement. On April 24, 2024, a federal judge approved the settlement approved the settlement agreement between the National Association of Realtors (“NAR”) and a group of homebuyers who filed suit in 2019. The homeowners alleged that the NAR conspired to keep commissions high by requiring sellers to pay for the commission of a buyer’s agent. Many media headlines have brushed aside the resolution as inconsequential, as commissions have always been negotiable. NAR was a voluntary member association and has no authority over the industry to set commission rates. As with many groundbreaking legal cases, the devil is in the details. This article will explore the differences that will take effect and how it will change residential real estate.

The Old Ways

The allegations at the heart of the lawsuit centered around Multiple Listing Services (MLS). Under the old ways, still in place until July 2024, the seller would sign a listing agreement with a listing agent. This agreement specified a total commission that the seller would pay that listing agent in exchange for their services. The agreement would also provide a percentage of the total commission that would be paid to an agent who represented the buyer. It was a unilateral offer of compensation. This made being a real estate agent unique, as it would, in theory, compensate a new agent on the same level as an agent with decades of experience who sold multiple properties per year.

NAR’s regulations required a subscription to MLS to access property listings and as a condition of offering or accepting compensation. This arguably restricted access to those who would otherwise choose to buy or sell property without a realtor. Both requirements had far-reaching implications as more than 90% of all homes are listed through MLS.[1]

The old system came about because buyers felt they had no independent representation in the buying process. This system gave buyer’s agents guaranteed compensation to alleviate the potential for disloyal representation. The settlement arguably gives buyers more power by encouraging flexibility in the structuring of commissions.  But with great power comes great responsibility.

The New System

Key changes from the old system are:

  • Prohibition on rules allowing seller agents to establish compensation for buyer’s agent;
  • No prerequisite subscription to MLS as a condition of offering or accepting compensation;
  • Professionals who utilize the MLS must complete a written buyer-broker agreement;
  • The 6% commission rule is no longer the standard; and
  • Cooperative compensation remains a choice for consumers when buyer or selling a home.

By mid-July, access to property listings will no longer be restricted. Sellers and buyers will have more access to information about their potential transactions. This will lead to increased competition in the industry as agents find ways to differentiate themselves. Buyer-side representation will especially become more volatile. Sellers can still offer compensation to a buyer’s agent as a means of differentiating themselves. Note that this settlement does not prohibit brokerages from offering cooperative compensation on their website listings. The old way can still be used, but the information is widely available, and sellers cannot make unilateral offers to buyers’ agents.

Realtors still offer invaluable services despite some stereotypes. Maybe you are purchasing in a new area. A local realtor typically knows the local market and can make recommendations based on your goals. Many of the responsibilities once the transaction enters escrow fall to the buyer’s agent. Who will attend your inspections? Many headlines have correctly noted that the standard commission of 6% has not been recognized in practice for some time. Homebuyers have always been able to negotiate commissions. The complication for all homebuyers now is that they have to make a major decision on contracts with agents at the beginning of the process.

The new system will require buyers to enter into a written buyer-broker agreement at the outset of their journey to purchase a home. Also called a representation agreement, it is a contract between the home buyer and a real estate agent. Typically, the home buyer agrees to work with the real estate agent until a successful purchase or until the term expires. If there is a successful transaction within the term, then the real estate agent receives the agreed-upon compensation. This adds more complication to the process of buying a home for those who engage an agent. There is the potential for flexibility in between depending upon the terms of the representation agreement. Regardless, the terms must be in writing. Realtors and parties alike should speak to an attorney about these important terms and conditions to ensure clarity in agent responsibilities and compensation.

Proponents will argue that the increased information and competition will result in more individuals who choose not to engage an agent. More savvy buyers and sellers will be empowered by the flexibility this settlement provides, but it will not be the right route for all. Many people do not realize that the most essential things you need from a real estate transaction is a strong buy/sell contract and clear title. An experienced law firm can guide you through this process.

In theory, sellers could pocket more money in their transaction that would otherwise go to a buyer’s agent or offer less cash to the buyer’s agent. Offering buyer agent compensation that can rolled up into a mortgage could make properties stand apart for reasons other than the value of the property. The market will speak for itself if home prices are affected. While cooperative compensation will still have its attractive traits, negotiating commissions and service packages will be more commonplace.

Conclusion

If you need legal representation or contract review involving real estate transactions, call the experienced lawyers at Volpe Law, LLC, or contact us online to request a free consultation. For more information, visit our practice area page on real estate contracts.

DISCLAIMER

The information contained on this website is provided for informational purposes only. It is not legal advice and should not be construed as providing legal advice on any subject matter. Laws frequently change and therefore this content is not necessarily up to date, nor comprehensive. Contact us or another attorney with any legal questions specific to your matter. You may request a consultation by completing our consultation request form.

[1] https://www.nar.realtor/research-and-statistics/quick-real-estate-statistics#

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