Looking Ahead To 2025
By David Hamerslough and Victoria B. Naidorf
December 11, 2024
For our last article of the year, we decided to spotlight several industry issues we are going to be monitoring next year.
1. Issues Relating To The NAR Settlement
A. On November 26th, the NAR settlement in the Sitzer/Burnett case was judicially approved. Several days prior to the hearing confirming that settlement, the Department of Justice (“DOJ”) filed a Statement Of Interest in that case. The DOJ’s filing raised the following issues:
(1) whether requiring brokers and buyers to enter into “written agreements” before any buyer can tour homes listed for sale complies with antitrust laws. The DOJ reserved the right to continue its investigation of potential antitrust issues because this requirement “may harm buyers and limit how brokers compete for clients,” which the DOJ believes will result in limiting rather than enhancing competition for buyers among buyer brokers;
(2) the settlement does not preclude any future enforcement actions by the DOJ on any antitrust issues; and
(3) the settlement does not resolve current or future claims filed by buyers (as opposed to sellers) regarding, among other issues, offers of compensation and buyer representation agreements.
Will the DOJ move forward on their antitrust claim, and/or will the DOJ review the potential claims of buyers? We do not know the answers to those relevant questions, nor do we know to what degree the DOJ’s future actions will be impacted by the new President’s administration.
B. Statistically, the practice changes that went into effect on August 17th do not appear to have had a significant impact on the amount of compensation being paid over the last few months. Many sellers are still offering compensation outside of the MLS, and there do not appear to have been significant reductions in the amount of compensation being paid to buyers’ brokers. One reason for this result may be that many of the sellers and buyers who have closed transactions since the practice changes went into effect, were likely in the sell-buy pipeline for months prior to August 17th. Many of them started that process under the MLS rules in effect prior to the NAR settlement. Whether sellers and buyers entering the market next year approach compensation issues with the same mindset remains to be seen.
We intend to watch what happens to commission practices in 2025. From the seller’s side, will a seller who fails to specify a specific amount of compensation in their marketing (off the MLS) instead indicate that they will (1) “consider” paying compensation to the buyer’s broker without specifying any amount, (2) consider concessions, and/or (3) wait until the terms and conditions of the buyer’s offer have been reviewed to address the issue of compensation?
From the buyer’s side, how will the amount of any loan and/or allowable credit be impacted by who pays the commission? Will buyers start asking their mortgage broker/lender about these issues before making their offers? Finally, to what extent will the negotiation of the buyer’s broker’s commission be impacted by any of the foregoing issues? To what degree will a discussion about the broker’s value impact this negotiation?
As always, the needs/wants/motivations of the seller and buyer, how long the property has been on the market, the lender issues identified above, and other marketing factors will potentially have an impact on how these compensation practices are handled.
C. Another issue next year will be the viability of “workarounds.” Workarounds are practices that some brokers may take to sidestep the practice changes required by the settlement. Examples of workarounds that have been flagged by some commentators include (1) amending the buyer representation agreement to enable the broker to receive additional compensation other than the original amount specified in the buyer representation agreement, (2) using “touring” or “showing” agreements that are later replaced by a full buyer representation agreement or (3) buyer brokers purportedly waiving their commission
Do any of the practices above violate the terms of the settlement? Do these workarounds violate the terms of an existing buyer representation agreement? If not, was any workaround supported by new consideration? Do these workarounds violate any fiduciary duties and/or ethical obligations? These questions can only be answered based upon the facts of the transaction and other considerations.
Due to the specific language in the NAR settlement, there is a strong likelihood of someone challenging the following workarounds: (1) specifying that the buyer representation agreement will match any seller-offered compensation, (2) tailoring the buyer representation agreement so that the broker will accept any compensation offered by the cooperating broker, or (3) stating an open-ended amount of compensation in the buyer representation agreement or one based upon a sliding scale rather than upon an objectively ascertainable standard.
D. One outstanding issue is who will enforce any of these claims (e.g., the DOJ, plaintiffs’ attorneys such as the law firms that brought the initial claims in Sitzer, or the MLS)? Will we see claims against a broker by a buyer or seller who discovers that a workaround resulted in their paying more compensation or their agent receiving more compensation than was contractually required? Will such claims be made even when the workaround did not cost the buyer or seller any money?
E. What will be the impact, if any, of the anticipated revision of the C.A.R. RPA that requires the buyer to affirmatively represent that they have a written agreement with the buyer’s broker that is valid, covers the Property, and provides for compensation for no less than the amount indicated in the purchase agreement? This new language was added to the RPA rather than requiring that the buyer and/or their broker provide a copy of the buyer representation agreement or the essential terms of that agreement so that the seller and seller’s broker can confirm that the buyer representation agreement is valid on these issues.
Our concern with C.A.R.’s approach is that it requires the seller to simply rely on the veracity of buyers and their brokers without any requirement for buyers or their brokers to prove that their representations are true. One remedy for an untrue representation may be that the seller does not have the obligation to pay anything to the buyer’s broker. Another potential remedy is for the seller to claim that the purchase contract was induced by fraudulent representations regarding broker compensation. How either remedy is going to be enforced if the seller has no way of confirming the accuracy of the representation is also an issue.
One way to overcome this problem with the revised RPA is to request that all offers be accompanied by a copy of the signed buyer representation agreement or that the copy only show the pertinent information from a signed buyer representation agreement so that any “confidential information” is hidden or redacted. Alternatively, a similar requirement can be included in a seller’s counteroffer.
F. Effective January 1, 2025, California law will require that a buyer-broker representation agreement be executed between a buyer and a buyer’s agent “as soon as practicable, but no later than the execution of the buyer’s offer to purchase real property.” Under the California law, the term of the buyer representation agreement shall not exceed three months from the date the agreement is made. This limitation does not apply to any buyer-broker representation agreement entered into between a broker and a corporation, limited liability company, or partnership.
Questions have already arisen regarding the interaction of this new law with the practice changes required by the NAR settlement. Please remember that the practice changes apply to MLS participants conducting residential 1-4 unit property transactions. In that circumstance, a buyer representation agreement must be signed by the broker and buyer prior to the buyer “touring” a residential property. In contrast, the California statute applies to all licensees, not just MLS participants. It also applies to commercial and land transactions. Also, the timing of when the representation agreement is to be signed is different than under the practice changes, as noted in the preceding paragraph.
2. Issues Relating To The Clear Cooperation Policy
The industry is divided over this policy. On the one hand, some argue that the policy stifles competition and forces agents into using the MLS, thereby limiting the ability to use alternative marketing platforms. They also argue that it eliminates choices for both consumers and agents by mandating MLS participation. Those in support of the policy argue that it ensures a fair market, creates an even playing field, and avoids potential fair housing issues.
There are lawsuits already pending over the policy, and the DOJ has also raised antitrust concerns over the policy. 2025 may be the year that the lawsuits are decided and/or the DOJ decides to move forward on this issue.
3. Lawsuits Challenging The Requirement That Brokers Join NAR, C.A.R., And A Local Association In Order To Gain Access To The MLS
We are aware of two lawsuits (one in Pennsylvania and one in California) challenging the NAR requirement for membership in NAR, C.A.R., and a local association in order for licensees to gain access to MLS services. The suit in California was filed in early November and claims that this rule establishes an “exclusionary practice” and “constitutes an unlawful tying arrangement” to the extent that brokers and agents must purchase these memberships. The claim in the California lawsuit is that this violates antitrust law by limiting the market’s ability to support alternative trade organizations, thereby stifling competition.
We will continue to monitor these issues and update you on them over the course of next year.
Happy holidays from Dave and Vickie.