My Response to the NAR Lawsuit (Real Estate Is Changing Forever)

What's up, you guys? It's Graham here.

So this is something I wasn't sure I wanted to address or even if there'd be enough interest for me to talk about this. But after repeatedly being asked to comment on the recent class action lawsuit against the National Association of Realtors, I will now. For anybody confused or just unaware of how significant this is, without exaggeration, this recent settlement is going to shake up the entire real estate industry. It'll affect everybody from buyers to sellers to existing homeowners and especially, in this case, real estate agents.

This is why I'm going to be completely honest and tell you exactly what's going on, the implications this is realistically going to have throughout the entire real estate market, if this is going to lower prices, and what this means for you the next time you go to buy or sell a home. Because unlike a lot of the other people speaking about this, I have no skin in the game. I have not been an active real estate agent for years; I'm just a third party looking in. But I do have significant experience throughout the entire industry, so I'll tell it like it is.

And of course, as usual, if you appreciate videos like this that are just the facts, I would appreciate it if you hit the like button or subscribed. Doing that is totally free, it takes you a split second, it helps up the entire channel tremendously, and as a thank you for doing that, I'll do my best to respond to as many of your comments as possible. So thank you guys so much! And also, a big thank you to Seeking Alpha for sponsoring today's video, but more on that later.

All right, so in terms of where all this starts, look no further than the National Association of Realtors. This is a trade organization that real estate agents can pay into if they want to receive the designation of becoming a realtor. I know it might sound like random mumbo jumbo to people who are not in the industry, but generally becoming a realtor means you're pledged to a higher code of ethics, you adopt additional industry standards, and you get access to everything here.

Now, as somebody who used to be in the industry, when I first started out, becoming a realtor was mandatory. As in, if you didn't do it, no major brokerage was going to hire you. To complicate the matters even further, if you wanted access to all the pre-approved statewide forms like a purchase agreement, disclosures, and hundreds of other documents that everybody used, you needed to also have access to the local realtors association.

And in my case, it went something like this: You become a real estate agent, then you pay to join the National Association of Realtors, which allows you to pay to join the California Association of Realtors, and after an orientation with free snacks, you're good to go. Now, of course, to be fair, technically you don't have to join the National Association of Realtors if you want to actively work as a real estate agent, but in reality, more than a decade of working in the business across more than $100 million of sales, coming across a real estate agent who's not also a realtor was really rare.

Most of the time, those agents would work in very specific industries, like representing a bank offloading foreclosures. So for the most part, this membership was somewhat required. Now, even though the National Association of Realtors never did anything to help my own business and I don't think I utilized any of their services, they did open the door to one website that every agent uses on a daily basis, and that would be the MLS, otherwise known as the Multiple Listing Service.

This was the holy grail of real estate websites that would allow you to openly look through public records, active listings, expired listings, sales history, past agents, current agents. It was basically like a Zillow, but no joke, 100 times better. And in that website was something that almost no other place had, and that would be the selling agent commission.

See, here's the thing: when you buy or sell a home, the payment structure typically works something like this. As a seller, if you want to list your home on the market for sale, you'll usually interview multiple real estate agents. You'll pick the one who you feel is most qualified for the job, and then you'll sign a listing appointment that gives the agent a specified amount of time to sell the home, of which, if they're successful, they'll earn a commission.

Now, this commission is and always has been completely negotiable. Like, back in Los Angeles, where I used to work, most commissions would range anywhere between 5 and 6%, and that would be split evenly between the agent who brings the buyer and the listing agent. Sometimes the seller would ask for a discount; sometimes they wouldn't. Sometimes the seller would offer an amount that's too low to take on; sometimes there's a middle ground.

But no matter what, the listing agent would get paid; the vast majority of buyer agents' commissions were displayed across the entire industry on the MLS as usually between 2 and 1/2 to 3%. This meant that even though commissions were always completely negotiable, buyer agents' commissions rarely ever deviated from 2.5% since the thinking was that there should be an even playing field no matter which house their client decides to buy.

Now, it's important to mention that buyer agents like this weren't always a thing, and in some ways they're relatively still new. Like, originally, before the internet, it was customary that a real estate brokerage would represent everybody in the transaction from the buyer and the seller, so all commissions would go to the same place. But there was a problem. Lawsuits throughout the 1990s drew attention to the fact that some buyers were not being properly represented and were being taken advantage of. So laws were passed that made it a requirement for buyers to acknowledge their own representation and have a neutral third party guiding them through the process.

It was also customary that the seller would pay for these expenses since that would lower the barrier of entry to home ownership for new buyers. Well, I guess that was until recently. This brings us to the topic that you've been waiting for: the class action lawsuit.

The lawsuit, which was filed in 2019, alleges the existence of an anti-competitive agreement that resulted in home sellers paying inflated commissions to real estate brokers or agents in violation of antitrust law. Essentially, the lawsuit alleges that real estate commissions have remained artificially high because the MLS requires that sellers offer a compensation to the buyer agent. Again, this amount has always been completely negotiable, but the MLS does require that you put something there, even if it's just $1.

So this complaint alleges that if a seller's agent offers less than the standard 2 and a half to 3%, buyer agents would have a financial incentive to steer their clients away from those listings and onto something else that pays more. Because of that, boom, the grounds of the lawsuit were created. Their entire argument relies on the belief that if buyers had the ability to directly negotiate their own commissions with their own agent for their own services, commissions would begin to go down as agents compete for business, and that should, in theory, lower the cost of purchasing a home.

Of course, the question of who actually pays the buyer's agent commissions is a bit of a debate because technically it is paid by the seller. But the seller would never have that money if the buyer didn't pay it, so the commissions are rolled into the selling price, which the buyer ends up paying. But does this mean that sellers will voluntarily take less money to save the buyer? And what changes are realistically going to take place in the future?

Well, that brings us to the settlement. On March 15th, after 4 years of navigating the lawsuit, the National Association of Realtors made the decision to settle for $418 million, and in turn, they would revamp entire commission structures. They would promote more competition between agents and that hopefully would lower prices. In fact, according to the settlement, the NAR agreed to no longer require a broker advertising a home for sale on the MLS to offer any upfront compensation to a buyer agent.

In addition to that, they're also requiring that agents have a signed buyer's agreement before touring any properties that are listed on the MLS. That way, buyers can negotiate ahead of time for how much they want to pay for specific services. Some analysts believe that this rule change will lead to lower agent commissions and could persuade some homeowners to skip using an agent altogether.

They even go so far to mention that home buyers could still ask a prospective home seller for a concession that includes money to help cover the buyer agent's compensation, although a home seller with multiple offers, for example, could refuse such a request or opt to go with a bid from a different buyer who isn't asking for such a concession. Of course, full disclosure, the court still has not approved the terms of the settlement, and all of these changes aren't proposed to go into effect until July of this year.

But regardless, there are some huge changes about to take place throughout the entire real estate industry. So what does this mean for you? But before we go into that, look, I think it's no surprise that I spend a lot of time researching every video that I make. Like, even though you might only see 15 minutes, there's usually about 8 to 10 hours' worth of research for everything that I talk about.

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Thank you so much, and now let's get back to the video. All right, so in terms of what this means for all of you watching, as far as the National Association of Realtors is concerned, I have no idea. Even though they technically offer legal counsel, statewide contracts, unmatched networking opportunities, and realtor brand consumer awareness, they've had just a little too much controversy lately.

For example, in 2023, their president resigned over allegations of inappropriate behavior and he was replaced by Tracy Casper. But not even a year later, she resigned over threats of personal blackmail that would be released if she didn't step down. So she did. Point being, the National Association of Realtors has recently been very tumultuous and as it stands right now, their $418 million settlement is proposed to be paid out over the next four years.

Now, in terms of how they could afford to pay this out, especially when they only made a net profit of $22 million in 2022, time will tell. They'll find a way. But one thing is certain: sellers are unlikely to see a lot of that money. According to the OC Register, given how there are 21 million Americans part of the settlement class, after deducting attorney's fees, the payout could be as low as $13.

Although the practical changes are going to be much more significant potentially. See, if you're a seller, the only confirmed change is that you're no longer required to offer compensation to the buyer's agent. Now, sure, technically this was always negotiable, and you could have always just offered a dollar and been totally fine. But now, since commissions won't even be displayed on the MLS, this could theoretically save sellers some money because they could offer nothing to the buyer and still get the same level of exposure as they did before.

Now for buyers, on the other hand, things get a bit tricky. According to the settlement, it's now going to be a requirement to sign a buyer's representation agreement before touring any MLS-listed properties that specifically states the amount or rate of the agent's compensation. This is meant to encourage active negotiation between the buyers and their agents, but in doing so, the buyer's agent is no longer free.

For example, in the past if a seller agreed to a 5% commission split evenly between the listing and selling agent, that amount would be paid no matter what. So in theory, a buyer may as well have their own representation going into the deal because that amount is going to be deducted from the seller's proceeds regardless. But now, it's not so black and white. Even though it's unclear exactly what's going to happen or how this is going to play out in the real world under these conditions, a buyer's likely going to have more flexibility to make bigger asks of the real estate agent.

This could be requesting a 1% commission instead of 2, 2 and a half, it might be paying a flat rate regardless of what the home sells for, or it could be paying by the hour similar to an accountant or a lawyer. From there, agents could simply present this in their offer, and the sellers would be able to negotiate based on the net amount that they would receive.

But here's where things get a little uncertain. One, I believe that buyers probably wouldn't want to pay a cost like this out of pocket, especially when so many buyers are cash strapped to begin with. This means that any commissions simply get written into the offer and then baked into the selling price that they ultimately pay.

However, this could get difficult because some mortgage options, like with VA loans, prohibit buyers from paying their own real estate agent commissions. Because of this, it's said that in situations where no offer of compensation is offered from the seller, VA buyers are immediately at a disadvantage, potentially forcing them to forgo professional representation or lose a property entirely.

This suggests that some buyers who could afford to pay their agents directly are going to have a significant advantage because that winds up netting the seller more money. Second, I wouldn't be surprised if some buyers just forego representation entirely as a way to save money or make their offer more competitive, to which I will admit is a bit risky.

I know there's the stereotype that real estate agents are glorified door openers, but I will say, as someone who's bought and sold seven properties myself and represented over $100 million worth of transactions, it's a very delicate process. A competent agent is there to properly value what a home is worth, point anything out a buyer might miss, put together a convincing offer that the seller will accept, do as many inspections as possible, navigate and negotiate any potential issues, and then hopefully have a smooth closing.

Sure, some deals are certainly easier than others, but having knowledgeable representation can save you a lot of money or help you avoid some significant mistakes if you aren't careful. Now, it's usually around this time that I'll hear, "But Graham, why would a buyer's agent negotiate the price down when they're paid more money the more the buyer spends? Isn't that a conflict of interest?" Well, I'll tell you firsthand, most buyers' agents only get their business from word of mouth and referrals.

That a single bad experience could either lose them a lot of money or completely wipe them out of the business. That is why buyer agents are more concerned about making their clients happy and getting them the best deal than they are about making a little bit more money short term. It just doesn't financially make sense to do that.

Finally, as far as real estate agents are concerned, just like any other business, you have to do your research to find someone who actually knows what they're doing. I've seen some really, really bad agents, and I hate to make generalizations here, but usually, those are the people who already have another full-time job. They got their real estate license on the side; they dabble with it here and there and they usually only sell to friends and family.

However, I've also met and worked with incredible agents who know the intricacies of every single home. They built relationships with every other agent, they pick up their phone 24/7, they are expert negotiators, and they can navigate a deal better than anyone else to the point where they have a competitive advantage.

That's why I believe that this entire settlement will bifurcate the market into two categories: one, a buyer who decides to pursue a discount service for the sake of saving as much money as possible up front, or two, a buyer who needs to be very selective in terms of the person they work with and understand completely what they're getting for the money that they're offering.

This means that the vast majority of real estate agents are going to have to get very good at demonstrating their value. They're no longer going to be able to skirt by doing the bare minimum, collecting 2 and 1/2 to 3%. And if they can't show a buyer why they're worth what they're worth, they're probably not going to last.

Now, objectively I do not think real estate agents are useless, but there's a lot of incompetence in the entire industry that makes everybody look bad. Plus, let's face it— we'll be honest here, identifying the home is the easy part. It's everything else in the back end that takes a lot of work, like writing up an offer, understanding the fine print, knowing how to get just as much leverage on the seller as possible to get them to agree to a price reduction, and navigating a very emotional process to the point where agents can earn their money.

So in terms of what this means throughout the entire real estate industry, the honest answer is it's yet to be seen. One possibility is that sellers offer no compensation to the buyer agent offers, then include buyer agent's compensation to be baked into the selling price, and then sellers could accept whether or not they want to take the offer based on the net amount that they'd receive.

For example, if a home is listed for $500,000, a buyer's agent could offer $500,000 with a 1.5% commission; then a seller could counter back at $507,500 to take that into consideration. Or I guess the seller could just pick the highest offer that nets them the highest amount. This is how it typically works in commercial real estate, like shopping centers or warehouses or office space, and that industry has been doing well for decades.

Another possibility is that the buyer agrees to pay their agent a fixed dollar amount and that's treated as a separate contract in escrow. This way, an offer a seller receives is not going to have any additional amounts to be deducted. Or a third possibility is that nothing much changes; sellers continue to offer 2 and 1/2 to 3% to the buying agents, it's not explicitly stated on the MLS, and this whole thing is a big nothing burger.

Unfortunately, no, I don't think this is going to do anything to bring down housing prices, but I do think it's going to promote a lot more competition between buyer agents who previously could skirt away doing the bare minimum. Not so much anymore. For all the other agents out there, I have a feeling they could actually spend this to their advantage and do better than before if they're able to properly convey their value.

But the hard part is going to be for first-time home buyers. They could look at the service that they're paying for, question whether or not it's worth it, and then go and pay a discount brokerage or a lawyer to draft some initial paperwork and think they could do it themselves. In doing so, sure, some will wind up saving a lot of money and make a great choice; for others, they could get screwed over.

But I don't think this is going to do anything about bringing down actual housing prices. Also, just for clarification, all of this is in my opinion; the settlement has yet to be approved and all of this is purely just speculation. I could be totally wrong, but let me know what you guys think down below in the comments section. I'll do my best to read as many of them as I can.

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Thank you so much, and until next time.