We previously provided an update on the NAR settlement in the Sitzer/Burnett case, specifically as it related to the concerns the Department of Justice raised with respect to the buyer brokerage agreement requirements contained in the proposed settlement.
Below is a summary of some key developments and some of my opinions as to what may lie ahead.
SETTLEMENT APPROVED
On Tuesday November 26th, the U.S. District Court for the Western District of Missouri orally approved the settlement, generally as follows:
- Final settlement amount totaling $418 million;
- Approving the practice changes, generally including the following:
- Removal of offers of compensation from multiple listing services;
- Requirement that buyer agents sign written agreements with buyers before touring the property.
PRACTICE CHANGE – BUYER AGENCY AGREEMENTS
If you recall, the DOJ’s Statement of Interest cited the practice change proposed in the settlement which requires all REALTOR MLS Participants working with a buyer to enter into a written agreement before the buyer tours any home. Further, the written agreement must include the following:
- To the extent that such a REALTOR or Participant will receive compensation from any source, the agreement must specify and conspicuously disclose the amount or rate of compensation it will receive or how this amount will be determined;
- The amount of compensation reflected must be objectively ascertainable and may not be open-ended (e.g., buyer broker compensation shall be whatever amount the seller is offering to the buyer); and
- Such a REALTOR or Participant may not receive compensation for brokerage services from any source that exceeds the amount or rate agreed to in the agreement with the buyer.
SUMMARY OF DOJ CONCERNS
In its Statement of Interest, the DOJ highlights its concern with the practice change that requires buyer brokers to first obtain a buyer brokerage agreement prior to showing a house, even if it is a non-obligation showing. The DOJ posits that this conduct is (i) detrimental to buyers (insofar as it potentially impedes on their ability to conduct real estate searches and select the broker(s) they wish to work with) and (ii) anticompetitive (insofar as it restricts a broker’s ability to compete in a market).
SUMMARY OF NAR RESPONSE
NAR responded to the DOJ’s concerns in its own Statement of Interest, expressing its position that the settlement provisions, including the practice change requiring buyer agency agreements, are and will remain to be contingent on compliance with federal and state laws and regulations and therefore the provision did not need to be removed. Further, NAR cited that this requirement “protects consumers from incurring compensation obligations that are not clearly expressed in writing, in advance.”
The NAR believes that with these practice changes, “buyers are free to hire a broker (or not) whenever they want; buyers who want to engage a broker are free to hire whatever type of broker they want…if a buyer wants to work with a broker, the buyer and broker must put their negotiated and agreed upon compensation in writing before the broker brings the buyer to a home. There is nothing anticompetitive about that.“
WHAT MAY LIE AHEAD
The following is an opinion as to the potential avenues that may be taken by the industry or the DOJ in the future:
Increase of Limited Service Representation: The DOJ, from my perspective, fails to take into account the practical reality of how brokers and their agents operate. You as real estate agents take time out of your schedule to show houses and to build your business pipeline and the expectation should not be that you work for no compensation. As a way to serve both sides, one consideration could entail revising (or in some instances, further revising) existing buyer brokerage agreements to include specifications as to what services the agent will offer and the cost to the buyer for such services, e.g.:
- If I (the agent) show you a house, that is a flat fee of $X or there is no obligation for showing a property*;
- If I (the agent) assist you in a writing an offer, then I am entitled to compensation of Y%, etc.
*As a reminder, brokerages cannot market or advertise that their services are “free.”
Limited service representation arguably provides potential buyers with an opportunity to “shop” the compensation and services offered before real estate agents are asked to provide said services and/or commit their time. On the downside, this may lead to increased confusion in the marketplace.
From my discussions with agents, potential buyers are already weary and confused when being asked to sign a brokerage agreement in advance of a showing. Buyers are hesitant to being contractually bound to a particular agent, even where the written agreement is drafted specifically for one property or for a short time period.
In the end, I think the buyer brokerage agreement model is in the best interests of both parties as it conspicuously discloses to buyers the amount of the compensation and the fact they are required to pay that amount, which in the end also protects real estate agents from potential disputes.
Limited Service Agency is expressly provided for in Virginia and requires that the limited service agent: (i) disclose that the licensee is acting as a limited service representative; (ii) provide a list of the specific services that the licensee will provide to the client; and (iii) provide a list of the specific duties of a standard agent that the limited service representative will not provide to the client. Va. Code § 54.1-2138.1.
Increase in Unrepresented Buyers. If potential buyers are adverse to the written brokerage agreement requirement or are concerned about the possibility of having to pay their agent’s compensation if the seller will not, they will seek to contract as unrepresented parties.
Anecdotally, I have been seeing an increase in unrepresented buyers and/or requests being made of me to prepare offers on behalf of buyers in my capacity as an attorney with Ridgway Law Group, LLC.
I believe that all buyers should have some form of representation – especially first time homebuyers (maybe with the exception of seasoned real estate investors). Even if an attorney prepares a contract for a buyer, that attorney will not perform any of the other functions that a real estate agent would typically perform on their behalf.
This potential outcome seems to have been contemplated by the associations with their recent contract changes. For example, the NVAR listing agreement provides a section for negotiated additional compensation due to a listing agent where the buyer is unrepresented. For those that have experienced this scenario, you may be aware of the fact that you may be asked to perform additional ministerial and clerical activities in the contract.
What do you think of the DOJs response and the future of buyer brokerage?
Please reach out to Josh Wirth with any questions, comments, or for more information!
Josh Wirth, Esq.
Managing Attorney
703-584-9828