The Future of Real Estate Commissions in California Post-NAR Settlement

For decades the norm in the country for a person selling a home was to pay both her own agent and the buyers agent. In addition, the buyers share of that commission had to be listed in order to advertise the home on the large regional or state Multiple Listing Service sites (MLS). Realtors claimed that this industry practice never amounted to “fix” these commissions. However, as a practical matter the notice in the MLS did serve to set a standard offer of compensation in the range of 5% to 6% split between the listing agent and the buyer’s agent. In March 2024, the National Association of Realtors (NAR) reached a settlement in litigation that raised these issues. The settlement has resulted in changes in how commissions are paid in California. In this article we examine the class action lawsuit which resulted in the NAR settlement, the new rules governing commissions in California and its affect on how commissions are negotiated and paid.

The NAR Lawsuit and Its Settlement

The lawsuit involved a class action antitrust filed in federal court in Missouri. The Plaintiff class were home sellers in Missouri who sold properties between 2015 and 2022 using one of four Multiple Listing Services where the commission was offered from the listing agent to the buyer’s agent. In 2019, the Plaintiff sued NAR and four large brokerage firms (Keller Williams, Anywhere, RE/MAX and Home Services of America) alleging they conspired to keep real estate commissions rates high in violation of antitrust laws. They also claimed NAR’s cooperative compensation rule requiring listing brokers to offer compensation to the buyer’s agent through the MLS caused the sellers to overpay commissions because of the fear that if the seller did not offer a certain amount, the buyer’s agent would refuse to show the property. Brokerage firms Anywhere and RE/MAX settled before trial. The lawsuit went to trial in October 2023 and a jury found the remaining defendants liable for payment of $1.8 billion to home sellers. In March 2024, NAR settled the case after trial for payment of $418 million. The agreement covers all claims against NAR, over one million of its members, all state and local REALTOR organizations and all multiple listing services which REALTOR associations own.

The New Rules Governing Commissions in California After the NAR Settlement

The NAR settlement also required two new changes on how commissions are paid. First, the NAR agreed to drop its requirement in its national policy handbook that sellers post offers of compensation on the MLS. Under the new rule which was effective in August, buyers agents will no longer see fees on any MLS listing and commissions must be negotiated outside the MLS. The fees, the split and who pays what can all be negotiated (which was possible before the settlement). The difference is nothing can be predetermined in the MLS.

Second, buyers and their agents will be required to enter into a written agreement before they can tour homes. This contract must specify the amount or rate of the agent’s compensation. This means that for the first time, buyers and their agents are going to be subject to an agreement for the entirety of their relationship and the compensation discussion is going to occur at the start of the relationship.

How the New Rules Affect Broker Compensation

How will these new rules affect how real estate commissions are negotiated and paid?  It depends on who is answering the question. According to real estate industry professionals, the rules won’t affect their practices since their mantra has always been “commissions are negotiable” which suggests that sellers and buyers are in the driver’s seat when it comes to how much compensation is paid. However, consumer advocates disagree. They claim that in practice, consumers on average buy or sell a home once every five to 10 years, and many are not knowledgeable about the process to negotiate the rate down.

Since the NAR settlement does not dictate how buyers agents get paid, it is possible that sellers will continue to pay buyer’s commissions, that only some sellers will pay them or buyers will pay their own fees. Although the settlement bars offers of buyers agent compensation on the MLS, sellers will still be able to use the MLS to make offers to pay closing costs, pay for repairs or other concession terms.

Sellers agents can also still make offers of compensation outside of the MLS such as on their marketing information or website. A purchase agreement can also include a term requesting the seller pay buyers agent fees.

Under the terms of the NAR settlement agreement, buyers agents will be required to have a signed buyers representation agreement prior to taking a buyer on a home tour effective August 17, 2024. Currently the California Association of Realtors (CAR) is preparing a standard form for its members use but its publication may be delayed due to a formal inquiry from the Department of Justice to ensure it complies with the NAR settlement.

Conclusion

Real estate commissions total about $1 billion a year in the United States. In the rising California home market, California real estate professionals earn a significant share of this income. The NAR lawsuit and its settlement have resulted in changes to how California agents are compensated which is beneficial to both real estate professionals and sellers and buyers since there is now more transparency in the process.